2023 (1) TMI 1012 - AT - Income Tax

Rejection of books of accounts - estimation of profits consequent upon rejection of books - HELD THAT - It is the case of the Revenue that the assessee has failed to produce original invoices/vouchers to prove the completeness of the books of account and therefore, books of account have been rightly rejected u/s 145(3) - In the factual set up, we straightaway take note of the assertions made on behalf of the assessee that net profit rate declared by the assessee is 6.15% as compared to 6.52% in the earlier year. Thus, there is no striking discrepancy in the net profit ratio. Incidentally, it is the case of the assessee that the gross profit declared during the year compares higher than the gross profit in the earlier year whereas some marginal drop in the net profit has happened on account of higher depreciation and interest on loan for acquisition of fixed assets. Hon ble Delhi High Court in the case of Paradise Holidays 2010 (4) TMI 111 - DELHI HIGH COURT has enunciated the circumstances where invocation of Section 145(3) would not be justified. AO in the present case has not shown as to how audited the books of account maintained by the assessee are incorrect or otherwise incomplete which is likely to vitiate the true profits of the assessee. It is also not the case of the AO that entries in respect of certain transaction are altogether omitted or found incorrect. No inherent lacuna in the system of accounting is shown either. AO in our view is not justified in taking drastic action of rejection of books of account which are audited and are without any qualification solely on the basis of general remarks that photocopy of the bills have been produced instead of original bills. No specific instance has been provided in the order to appreciate as to how such delinquency on the part of the assessee has resulted in unreliability of books per se. Admittedly, the photocopies of bills and vouchers were duly produced, AO has not made any independent inquiry on the correctness of the bills from third parties. The profits declared in the instant case being in the vicinity of the profits declared in the earlier years, we see no apparent justification whatsoever in the action of the Revenue. We find traction in the plea of the assessee that no justifiable reasons are available to reject the books and embark upon estimations. We thus set aside the action of the CIT(A) and direct the AO to restore the position taken by the assessee in this regard. Appeal of the assessee is allowed.

Summary

Issues:
Challenge to additions on account of fall in net profits under Section 145(3) of the Act.

Analysis:
The appeal was filed by the Assessee to contest additions of Rs.33,11,185/- confirmed by the CIT(A) due to a decrease in net profits. The Assessee, engaged in manufacturing, had a survey under Section 133A revealing certain disclosures. The Assessing Officer made additions under Section 145(3) based on lower net profits percentage, later revised under Section 154 to retain an addition of Rs.33,11,182/-. The CIT(A) upheld the additions, leading the Assessee to appeal to the Tribunal.

During the hearing, the Assessee's counsel argued that the additions lacked basis, as the net profit difference was marginal, and the Assessing Officer rejected books under Section 145(3) without showing defects. The Assessee's accounts were audited, with no abnormal expense variations highlighted. The counsel cited the Hon'ble Delhi High Court's judgment in a similar case favoring the Assessee, emphasizing that Section 145(3) cannot be invoked without proving incompleteness in records. The Revenue's DR supported the Assessing Officer's actions, stating the Assessee failed to provide original documents, justifying the estimated additions.

The Tribunal noted the marginal net profit difference and higher gross profit, indicating no significant discrepancy. Citing the Paradise Holidays case, it found the Assessing Officer unjustified in rejecting audited books solely based on photocopies of bills. Lack of inquiry on bill correctness and proximity of profits to previous years further weakened the Revenue's case. The Tribunal deemed the net profit ratio variance insufficient for book rejection, setting aside the CIT(A)'s decision and instructing the Assessing Officer to accept the Assessee's position.

In conclusion, the Tribunal allowed the Assessee's appeal, emphasizing the lack of valid reasons for rejecting audited books and making estimations solely based on minor profit variations.