2024 (12) TMI 1388 - AT - Income Tax

Addition by rejecting books of accounts u/s. 145A - estimating the gross profit at the rate 20.97 percent - assessee has been consistently seeking adjournment - HELD THAT - CIT(Appeals) has taken a reasonable approach in the matter and has correctly concluded that the assessee has not been able to establish the genuineness of expenses and therefore, the AO was correct in rejecting books of account of the assessee, since the assessee s accounts completely failed in giving a correct picture of the true state of affairs of the assessee s business expenses and thereby making it difficult to verify the genuineness of expenses. Accordingly, we find no infirmity in the order of Ld. CIT(Appeals) so as to call for any interference.- Decided against assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the Assessing Officer (AO) was justified in rejecting the books of accounts of the assessee under Section 145A of the Income Tax Act due to discrepancies and lack of adequate documentation.
Whether the estimation of gross profit at 20.97% by the AO, based on the previous year's gross profit rate, was appropriate under the circumstances.
Whether the additions made by the AO, amounting to Rs. 40,44,977/-, to the total income of the assessee were justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Rejection of Books of Accounts under Section 145A

Relevant legal framework and precedents: Section 145A of the Income Tax Act allows the AO to reject books of accounts if they do not provide a true and fair view of the income. The precedents cited include cases where the absence of proper documentation justified the rejection of books.
Court's interpretation and reasoning: The court agreed with the AO's assessment that the books of accounts were unreliable due to significant cash transactions without adequate documentation and discrepancies in reported income.
Key evidence and findings: The AO identified major discrepancies such as cash payments to numerous individuals without sufficient narrative descriptions and a mismatch in total contract income reported.
Application of law to facts: The court applied Section 145A, emphasizing the lack of documentation and the inability to verify expenses, which justified the rejection of the books.
Treatment of competing arguments: The assessee argued that cash payments were necessary due to the nature of their business and provided some documentation, but the court found these explanations insufficient.
Conclusions: The court upheld the AO's decision to reject the books of accounts due to the failure to maintain proper documentation.

Issue 2: Estimation of Gross Profit at 20.97%

Relevant legal framework and precedents: The AO has the authority to estimate profits when books are rejected. Precedents support estimation based on past performance when current records are unreliable.
Court's interpretation and reasoning: The court found the AO's application of the previous year's gross profit rate reasonable given the lack of reliable current year data.
Key evidence and findings: The AO noted a discrepancy between the reported gross profit rate of 18.91% and the estimated rate of 20.97% based on past performance.
Application of law to facts: The court agreed that the estimation was justified due to the absence of verifiable records.
Treatment of competing arguments: The assessee did not provide sufficient evidence to contest the estimated rate, and the court found the AO's reliance on past data appropriate.
Conclusions: The court upheld the AO's estimation of gross profit at 20.97%.

Issue 3: Justification of Additions to Income

Relevant legal framework and precedents: The AO can make additions to income if discrepancies in accounts suggest underreporting of income.
Court's interpretation and reasoning: The court found the additions justified due to the discrepancies and lack of credible explanations from the assessee.
Key evidence and findings: The AO identified discrepancies in reported income and expenses, leading to the addition of Rs. 40,44,977/- to the income.
Application of law to facts: The court supported the AO's decision to add the discrepancy amount to the income due to unreliable accounts.
Treatment of competing arguments: The assessee's explanations were deemed inadequate, and the court found no reason to interfere with the AO's decision.
Conclusions: The court upheld the additions made by the AO.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The assessee has not been able to establish the genuineness of expenses and therefore, the Assessing Officer was correct in rejecting books of account of the assessee, since the assessee's accounts completely failed in giving a correct picture of the true state of affairs of the assessee's business expenses."
Core principles established: The necessity of maintaining adequate documentation to substantiate business expenses and income; the authority of the AO to reject books and estimate profits when records are unreliable.
Final determinations on each issue: The court upheld the rejection of books under Section 145A, the estimation of gross profit at 20.97%, and the addition of Rs. 40,44,977/- to the assessee's income.

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