Books non-rejection and making additions than estimating income wrong when there were defects in accounts produced and many accounts not produced – ITAT
ABCAUS Case Law Citation:
992 2016 (08) ITAT
Assessment Year: 2006-07
Date/Month of Judgment: August 2016
Brief Facts of the Case:
The assessee was a partnership firm engaged in the business of construction as promoter and developer of real estate. The assessee was selling the residential flats and commercial units by constructing a multi-storied building. The case was selected for scrutiny and notice was issued u/s 143(2) r.w.s 142(1) of the Income Tax Act, 1961.
The assessee failed to produce the necessary books of account before Assessing Officer in connection with the assessment proceedings except cash book, bank book and journal ledger. The AO during assessment proceedings observed certain facts as under:
(1) No purchase register, stock register and sale register and journal register was maintained by assessee;
(2) Assessee has claimed building and construction expense for cement, iron, doors, windows and electrical fittings expenses but no vouchers in support with these expenses were made available;
(3) Money receipt book was maintained for advance received from flat owners;
(4) Assessee failed to furnish the complete set of the bills against the purchase shown in the profit & loss a/c and the names of the creditors were not matching with the list of purchases furnished by assessee.
(5) There was no outstanding balance against the sundry creditors for the year ending on 31st Mach, 2006 but there was a loan creditors of ₹ 23 lakhs out of which ₹ 7.80 lakh is seen to have been paid in the financial year 2005-06.
(6) The investigation and examination of books of account submitted by assessee were conflicting and self-contradictory in nature.
In view of above, the AO noticed several discrepancies in the figures of sale, expenses, purchases, non-compliance of the provisions of section 40A(3) of the Act, non-maintenance of party wise ledgers and differences in the creditors viz a viz purchases.
The AO added to the returned income, a sum of Rs. 29,99,083.00 on account of several disallowances and additions.
Aggrieved with the order of the AO, the assessee preferred an appeal to CIT(A) who partly allowed the relief to the assessee. Not satisfied with the part relief awarded by CIT(A), the assessee went in second appeal before ITAT.
Contentions of the Assessee:
The assessee submitted that the lower authorities should have rejected the books of accounts for making the assessment on estimation basis due to the fact that there were lot of defects in the accounts produced and many accounts were not produced before the lower authorities.
Observations made by ITAT:
The Tribunal noted that in the similar facts and circumstances the various Courts had rejected the books of accounts for bringing the actual amount of profit to tax. In particular, the Tribunal placed reliance on the following judgments:
(a) High Court of Allahabad in the case of Awadhesh Pratap Singh Abdul Rehman & Bros. vs.CIT (1994) 119 CTR 0001 : (1994) 210 ITR 0406 : (1994) 76 TAXMAN 0106
The relevant extract of the above judgment:
“The account books were rejected because admittedly no stock register was maintained nor the sales were found verifiable in absence of the cash memos. The vouchers of expenses were also not forthcoming and the income returned was ridiculously low as compared to the exorbitant turnover and the extent of the business carried on by the assessee. It is difficult to catalogue the various types of defects in the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct from which the correct profit cannot be deduced. Whether presence or absence of stock register is material or not, would depend upon the type of the business. It is true that absence of stock register or cash memos in a given situation may not per se lead to an inference that accounts are false or incomplete. However, where absence of a stock register, cash memos, etc., if coupled with other factors like vouchers in support of the expenses and purchases made are not forthcoming and the profits are low, may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income profits or gains of an assessee. In such a situation the authorities would be justified to reject the account books under s. 145(2) and to make the assessment in the manner contemplated in those provisions. Taking all these aspects and the material into consideration, the Tribunal has found as a fact that the claim of the assessee for acceptance of the account books was not sustainable. On the findings of fact recorded by the Tribunal, its order does not give rise to any question of law.
Finding of Tribunal that book result shown by assessee was rightly rejected being arrived at after taking into consideration facts of case and factors leading to rejection of accounts, is a finding of fact.
Where absence of stock register, cash memos, etc., if coupled with other factors like vouchers of expenses are not forthcoming and profits are low, authorities would be justified in rejecting account books under s. 145(2) and in making best judgment assessment.”
(b) High Court of Rajasthan in the case of Commissioner of Income Tax vs. Ram Singh (2014) 266 CTR 0122 (Raj) : (2014) 99 DTR 0217 (Raj) : (2014) 363 ITR 0417 (Raj)
The relevant extract of the above judgment:
“Appeal (Tribunal)? Non speaking order? Rejection of books of accounts? Validity? Assessees were liquor contractors and were awarded license by State of Rajasthan for sale of Indian made country liquor (IMCL) under Rule 67(1) and 67(kk) of Rajasthan Excise Rules, 1956 so also retail sale of beer and Indian made foreign liquor (IMFL) under Rule 3-A of Rajasthan Foreign Liquor (Grant of Wholesale and Retail) Sale License, Rules, 1982 under exclusive privilege system for different places? In some of cases, assessees had formed Association Of Persons (AOP) and obtained license/contract to sell liquor as aforesaid exclusively? Licenses were obtained by successful bidders and other than those licensees, no other person was permitted to sale liquor which was prohibited commodity? During course of assessment proceedings, assessee were specifically asked to furnish shop-wise & brand-wise details of all receipts and sale of IMCL, IMFL and Beer which were admittedly not produced? Vouchers for expenses were required to be produced? In some cases some vouchers were produced but, by and large, in majority of cases even vouchers were not produced? However, AO rejected books of account and trading results u/s 145 by holding that non-maintenance of sale vouchers was major defect since sale was not open to verification? AO also estimated gross profit rate and in some of cases net profit rate and in some of cases ad hoc estimated addition had been made? CIT(A) upheld finding of AO about rejection of books of accounts u/s. 145(3) but gave relief by reducing trading addition? Held, Recording of reasons is part of fair procedure? As observed in Alexander Machinery (Dudley) Ltd. Crabtree, 1974 L.C.R. 120, failure to give reasons amounts to denial of justice as also observed by Apex Court in 2005 (2) SC 329 Mangalore Ganesh Beedi Works Vs. CIT & Anr? Impugned judgments of ITAT was stereo typed, non-speaking, unreasoned, arbitrary and whimsical? Hence quashed and set aside to be decided afresh and de-novo in accordance with law.”
The Tribunal noted that the lower income tax authorities are empowered under the provisions of section 145 of the Income Tax Act to reject the books of accounts where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee.
The Tribunal also noted that there was a clear cut findings in the order of the AO itself which stated that assessee had not maintained any party wise ledger account, no bills or payment vouchers were produced against the purchase expenses, all the necessary books were not made available, the creditors details were submitted without their opening balance.
The Tribunal also cited few case laws to highlight the principles governing Best Judgment Assessments as under:
“……….. in making a best judgment assessment the Assessing Officer does not possess absolutely arbitrary authority to assess at any figure he likes and that although he is not bound by strict judicial principles he should be guided by rules of justice, equity and good conscience [Abdul Qayum & Co. v. CIT, (1993) 1 ITR 375, 378 (Oudh). A best judgment assessment is not by way of penalty for non-compliance [Jot Ram Sher Singh v. CIT, (1934) 2 ITR 129 (All)] and it cannot be made capriciously in utter disregard to the material on record [Gunda Subbayya v. CIT (1939) 7 ITR 21, 26-27 (Mad-FB); CIT v. S.Sen (1949) 17 ITR 355 (Ori).”
ITAT opined that the lower authorities should have rejected the books of accounts. Accordingly, it restore the issue to the file of the AO for fresh adjudication as per law and to frame the assessment de-novo after rejecting the books of accounts.