Fall in GP ratio or non-incurring basic business expenditure like travelling, telephone salary etc. not reasons for rejecting books of accounts us 145

The marginal fall in GP ratio compared to preceding year and non-incurring of expenditure like travelling, telephone, salary, etc. are not the relevant reasons for rejecting of books of accounts under section 145 of the Income Tax Act – ITAT

ABCAUS Case Law Citation:
1010 2016 (09) ITAT

Brief Facts of the Case:
The present appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)opposing the deletion of the addition made by the Assessing Officer (AO) on account of low Gross Profit after rejecting the books of account u/s 145.

During the course of the assessment proceedings u/s 143(3), the AO noticed that the assessee had not claimed any expenses in the Profit & Loss Account other than audit fees and bank charges despite having a turnover of Rs.27.97 crores. According to the AO such magnitude of business could not be done without incurring any expenses. The assessee was asked to explain as to why the books results should not be rejected and Gross Profit should be estimated at the rate of 2.5%.

However, the reply of the assessee was not accepted. The AO while making the assessment u/s 143(3) had stated that in the case of the assessee the Gross Profit (GP) has decreased marginally in the relevant Financial Year (FY) as compared to the GP in the immediately preceding FY. The AO also objected to non incurring of basic business expenditure by the assessee and stated that a business could not be run without incurring mandatory expenditures like travelling, telephone, salary, etc. Accordingly, the AO had rejected the books of accounts of the assessee.

Aggrieved by the order of the the AO, the assessee carried the matter before the CIT(A). CIT(A) observed that the appellant had submitted books of accounts which were audited u/s 44AB and no discrepancy had been pointed out by the auditor in the books of account and it were maintained in accordance with the normally accepted accounting policy and practice. Also there was no expenditure as the appellant was acting as a mediator and whatever expenses were incurred same were claimed. The G.P. rate shown by the appellant was low as the appellant was acting was mediator between supplier and purchaser.  Following the decision of his predecessor , CIT(A) allowed the appeal of the assessee on the reasoning that the AO was not justified in rejecting the books of accounts and applying the GP rate without pointing out any specific defects in the books of accounts.

Observations made by the Tribunal:
The ITAT observed that the Coordinate Bench of the Tribunal on identical facts of a case, had decided the issue in favour of assessee where the ITAT opined that if the assessee had a meager capital,  did not have any business premises and any employees, it only supported the contention of the assessee that she was simply working as an intermediator between the buyer and the seller.

In the said case also the books were rejected by the AO on similar grounds that it was not acceptable principally that, the assessee had taken so much risk to gain the nominal profit by doing such a huge turnover and also that the assessee was not using any Business premises for trading activities was next to impossible in view of the huge turnover.

The tribunal opined that under the provisions of section 145 of the Act, the AO can reject the books of accounts if he is not satisfied about the correctness and completeness of accounts or where the method of accounting or accounting standards as prescribed has not been regularly followed.

The ITAT noted that in the instant case, the AO had not pointed out that the books of accounts of the assessee were incorrect or incomplete. He had also not stated that the assessee had not followed the method of accounting according to the provisions of section 145.

Held:
It was held that the marginal fall in GP ratio compared to preceding year and non-incurring of expenditure like travelling, telephone, salary, etc. were not the relevant reasons for rejecting of books of accounts under section 145 and AO was not justified in rejecting the book result without pointing out any specific defects but purely on the basis of surmises and conjectures.