2024 (11) TMI 1154 - AT - Income Tax

Rejection of books of accounts - Addition u/s 68 - assessee had deposited cash during demonetization period - case of the assessee was selected for scrutiny under Computer Assisted Scrutiny Selection (CASS) - AO rejected the books of accounts of the assessee noting huge anomaly and differences in the financial figures of sales and cash in hand available with the assessee in the impugned year as compared to in the preceding year - HELD THAT - In terms of the provisions of section 145(3) AO can reject the Books of accounts of the assessee and make a best judgement assessment u/s 144 of the Act, if he is not satisfied with the correctness or completeness of the Books of accounts of the assessee. This dissatisfaction of the AO has to be vis a vis the correctness and completeness of the Books of the assessee for rejecting the same. And this power cannot be exercised in a subjective manner. The reason being that serious consequences follow the rejection of the Books of accounts of the assessee since it gives power to the AO to make a best judgement assessment. The AO surely cannot reject the Books on his own whims and fancies. As pointed out by the in terms of provisions of Section 145(3) the Assessing Officer is duty bound to find patent, latent and glaring defects in the books of accounts while rejecting the Books of the assessee. The reliance placed on the decision of Vikram Plastics 1998 (8) TMI 43 - GUJARAT HIGH COURT clearly holds that for the purpose of rejecting the books of accounts of the assessee, discrepancies and defects in the same need to be pointed out. In the facts of the present case, admittedly no defects or discrepancies have been pointed out. The rejection of books of accounts is merely on the basis of surmises and conjectures of the AO which he has based on a mere financial analysis of the sales and cash data of the assessee for the impugned year and the immediately preceding year. Admittedly, no discrepancy in the books of accounts maintained by the assessee was pointed out before rejecting the books of accounts, and since it is settled law that the rejection of books of accounts can take place only when the books are found to be maintained in such a manner that true profits cannot be ascertained therefrom, for which it is necessary for the Revenue Authorities to pinpoint the defects in the maintenance of the same. Addition made to the income of the assessee of the cash found deposited in its bank after rejecting books of accounts of the assessee - Since we have held that the rejection of books of accounts was not correct, the additions made do not survive and therefore are directed to be deleted. Assessee appeal allowed.

Summary

Issues:
Rejection of books of accounts under Section 145(3) of the Income-tax Act, 1961.
Validity of addition made under Section 68 of the Act for cash deposits in bank account.
Applicability of Section 115BBE of the Act.
Judicial review of the Commissioner of Income-tax (Appeals) order.

Rejection of Books of Accounts:
The case involved an appeal by the assessee against the rejection of books of accounts by the Assessing Officer under Section 145(3) of the Income-tax Act, 1961. The Assessing Officer rejected the books of accounts based on anomalies in financial figures and abnormal increase in cash sales prior to demonetization. The Commissioner of Income-tax (Appeals) upheld the rejection. The Tribunal analyzed the provisions of Section 145(3) and emphasized that the rejection must be based on specific defects or discrepancies in the books. The Tribunal found that no concrete evidence or investigation supported the rejection, leading to the conclusion that the rejection was not in accordance with the law. Consequently, the rejection of books was set aside, and the ground of the assessee's appeal was allowed.

Validity of Addition under Section 68:
The addition made under Section 68 of the Act for cash deposits in the bank account was challenged by the assessee. Since the rejection of books of accounts was deemed incorrect, the Tribunal directed the deletion of the additions made under Section 68. All grounds raised by the assessee were allowed, resulting in the appeal being allowed in favor of the assessee.

Applicability of Section 115BBE:
One of the grounds raised by the assessee challenged the invocation of Section 115BBE of the Act. The Tribunal did not delve into this issue as the rejection of books of accounts and subsequent additions were found to be incorrect, rendering the applicability of Section 115BBE moot in this context.

Judicial Review of CIT(A) Order:
The Tribunal conducted a thorough analysis of the rejection of books of accounts by the Assessing Officer and subsequent affirmation by the Commissioner of Income-tax (Appeals). The Tribunal highlighted the necessity for concrete defects or discrepancies to justify rejection. The Tribunal's decision to set aside the rejection and delete the additions made showcased the importance of adherence to legal requirements in such matters. Ultimately, the Tribunal allowed all grounds raised by the assessee and granted relief in favor of the assessee.