Rejecting books of accounts audited by CA u/s 44AB on presumptions is erroneous

Rejecting books of accounts duly audited by CA u/s 44AB on the basis of presumptions without making any investigation is erroneous – ITAT

ABCAUS Case Law Citation:
ABCAUS 3054 (2019) (07) ITAT

The instant appeal was filed by the assessee against the order of the CIT(A) in inter alia in upholding the order of the Assessing Officer (AO) who had rejected the books of account maintained by the assessee and estimated the income of the assessee as percentage of the turnover.

The assessee was an individual engaged in the business of selling crushed stones to one buyer company. The assessee filed his return of income for the relevant assessment year  which was initially processed u/s 143(1) of the Income Tax Act, 1961 (the Act).

Subsequently the case was selected for scrutiny. The AO observed that the assessee had entered into an agreement with the buyer according to which the total value of the materials that was to be purchased from the assessee was much higher than the sales disclosed by the assessee.

Therefore the AO opined that the difference turnover had escaped from the assessment. On query it was explained by the assessee that in the agreement overall quantum of material to be supplied was set however, however they buyer had restricted the purchases to the amount disclosed by the assessee in his statement of accounts.  

But the AO refused to accept the explanation of the assessee and rejected the books maintained by the assessee and estimated his income @ 5% of the turnover.

The Tribunal observed that it was apparent that the AO had estimated the income just because the financial transactions disclosed in the books of accounts of the assessee was not in parity with the agreement entered between the assessee and the buyer.

The Tribunal opined that in such situation, the AO ought to have sought further information from the buyer company to ascertain whether any receipts / receivables from it was omitted to be recorded by the assessee in his books. Such exercise was not carried out by the AO.

The Tribunal noted that the AO had simply presumed that the activities of the assessee ought to have been carried out ipso ditto as stated in the agreement entered by the assessee and the buyer. However, in dynamic business scenario such presumptions will be erroneous.

The Tribunal opined that though several clauses had been made in the agreement only the actual financial transactions that had taken place during the relevant AY has to be mandatorily recorded. When no actual financial transaction has taken place though such transactions finds a place in the agreement, those transactions cannot be recorded in the books of accounts.

The Tribunal opined that the AO had rejected the books of accounts maintained by the assessee which was duly audited and certified by the Chartered Accountant in compliance of section 44AB of the Act on the basis of presumptions without making any further investigation was erroneous and not appreciable.

The Tribunal held that rejection of books of accounts of the assessee was erroneous and the addition made was deleted.

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