2024 (12) TMI 1382 - AT - Income Tax

Rejecting the books of accounts - estimating the total income of the assessee - HELD THAT - Once the books of account are rejected by invoking the provisions of section 145 of the Act and the income is estimated to the best of judgment as per the provisions of section 144 of the Act, the said estimate is made in substitution of the business income that is to be computed in accordance with the provisions contained in sections 30 to 43D as laid down in section 29 of the Act. Consequently, all the deductions which are referred to in sections 30 to 43D of the Act are deemed to have been taken into account while making such an estimate. Useful reference in this regard may be made to the decision of Indwell Constructions 1998 (3) TMI 121 - ANDHRA PRADESH HIGH COURT and Banwari Lal Banshidhar 1997 (5) TMI 37 - ALLAHABAD HIGH COURT . For these reasons, we do not agree with this plea of the Revenue. No infirmity in the order of the Ld. CIT(A) in rejecting the books of accounts and estimating the total income of the assessee. We accordingly uphold the same.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the maintenance of parallel sets of accounts by the assessee justifies the rejection of the books of accounts under Section 145(3) of the Income-tax Act, 1961.
What should be the appropriate estimation of profits for the assessment years in question, given the discrepancies in the books of accounts?
Whether the disallowance of expenses should be separately adjudicated upon even after rejecting the books of accounts and estimating income?
Whether the assessee's objection to the jurisdiction assumed by the AO under Section 153A for want of incriminating material is valid?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Rejection of Books of Accounts

Relevant legal framework and precedents: Section 145(3) of the Income-tax Act allows the rejection of books of accounts if they are not reliable. Precedents include the decisions in Indwell Constructions Vs. CIT and CIT vs Banwari Lal Banshidhar.
Court's interpretation and reasoning: The court found that the maintenance of two sets of books, one for actual transactions and another for tax purposes, indicated unreliability. The discrepancies and lack of supporting documentation justified the rejection of the books.
Key evidence and findings: The search revealed two sets of accounts, confirmed by the accounts manager's statement. The "IT" accounts showed inflated expenses compared to the "ori" accounts.
Application of law to facts: The court applied Section 145(3) to reject the books due to the unreliability demonstrated by the discrepancies.
Treatment of competing arguments: The assessee argued that the discrepancies were due to accounting anomalies, but the court found the books unreliable regardless of these explanations.
Conclusions: The books of accounts were rightly rejected under Section 145(3).

Issue 2: Estimation of Profits

Relevant legal framework and precedents: The estimation of profits is guided by the best judgment assessment under Section 144, following the rejection of books under Section 145(3).
Court's interpretation and reasoning: The court followed the precedent set in the case of the assessee's sister concern, estimating profits at 2.21% of turnover, which was deemed reasonable given the industry context.
Key evidence and findings: The CIT(A) found that disallowing all expenses would result in abnormally high profits, inconsistent with industry standards.
Application of law to facts: The court applied the estimation method used in the sister concern's case, considering the similarities in business operations and discrepancies.
Treatment of competing arguments: The Revenue's argument for a higher profit estimation based on a different entity was rejected due to lack of comparability.
Conclusions: The profits were estimated at 2.21% of turnover, consistent with industry standards and prior cases.

Issue 3: Disallowance of Expenses

Relevant legal framework and precedents: Once books are rejected and income is estimated, specific disallowances are generally not considered separately, as per the precedents set by Indwell Constructions Vs. CIT and CIT vs Banwari Lal Banshidhar.
Court's interpretation and reasoning: The court held that the estimation of income subsumes the consideration of expenses, thus separate adjudication of disallowances was unnecessary.
Key evidence and findings: The CIT(A) did not separately adjudicate disallowances after rejecting books and estimating profits.
Application of law to facts: The court applied the principle that estimated income includes considerations of expenses.
Treatment of competing arguments: The Revenue's plea for separate adjudication was rejected based on established legal principles.
Conclusions: Separate disallowance of expenses was not required post-estimation.

Issue 4: Jurisdiction Under Section 153A

Relevant legal framework and precedents: Section 153A allows for reassessment if incriminating material is found during a search.
Court's interpretation and reasoning: The court found that the maintenance of two sets of accounts constituted incriminating material, validating the jurisdiction under Section 153A.
Key evidence and findings: The accounts manager's statement and the seized electronic data were considered incriminating.
Application of law to facts: The court upheld the AO's jurisdiction under Section 153A based on the evidence.
Treatment of competing arguments: The assessee's objection was rejected as the court found sufficient incriminating evidence.
Conclusions: The jurisdiction under Section 153A was validly assumed.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The books of accounts of the Appellant Firm, which are inaccurate, do not facilitate arriving at true and correct profits of the Appellant Firm and they are required to be rejected by invoking the provisions of Section 145(3) of the Act."
Core principles established: The rejection of books under Section 145(3) is justified by unreliability due to discrepancies. Estimated profits should reflect industry standards and prior similar cases.
Final determinations on each issue: The books of accounts were rightly rejected; profits were correctly estimated at 2.21%; separate disallowance of expenses was unnecessary; jurisdiction under Section 153A was valid.

The judgment underscores the importance of maintaining accurate and reliable books of accounts and the implications of discrepancies found during tax assessments.

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