Rejection of books of account for failure to file confirmation from parties not justified – ITAT

Rejection of books of account for failure to file confirmation from parties not justified. Rejection of a particular expenditure no reason for treating books of account them defective u/s 145(3)

ABCAUS Case Law Citation:
ABCAUS 2562 (2018) (10) ITAT

Important Case Laws Cited/relied upon by the parties:
CIT Vs. Padamchand Ramgopal (1970) 76 ITR 719 (SC)
Telelinks Vs. CIT, Bhatinda order dated 20/11/2014 in ITA No. 269/2014

In the instant case, the appellant assessee had filed the appeal against the order of the CIT(A) in upholding rejection of book results u/s. 145(3) of Income Tax Act, 1961 (the Act)

The assessee was a private limited company and engaged in providing transportation work of different parties through the third party vehicles. The assessee was not having any vehicle or lorry but only working as a intermediary in providing transportation service to the clients by hiring the vehicles from third owners.

In the scrutiny assessment, the Assessing Officer observed that the assessee had paid freight to number of voluminous truck/trailer owners and most of the freight have been paid in cash by self made vouchers.

The Assessing Officer issued notice U/s 133(6) of the Act to 11 parties to whom the assessee paid the freight charges. Only two response were received by the Assessing Officer out of 11 parties and therefore, the Assessing Officer rejected the books of account of the assessee U/s 145(3) of the Act.

The Assessing Officer then applied a N.P. rate of 2.5% to estimate the income of the assessee and consequently assessed the total income of the assessee accordingly.

The CIT(A), though, confirmed the rejection of books of account, partly granted relief to the assessee on the quantum  of the addition.

Before the Tribunal the assessee has submitted that the assessee had been maintainable proper and regular books of account which has been audited by the qualified auditors and therefore, when no defect was pointed out by the auditor in the books of account as well as no specific defect was pointed out by the Assessing Officer in the books of account then the rejection of the same was not warranted as per provisions of Section 145(3) of the Act.

It was further submitted that even regarding the freight payment, the assessee produced the details of the vehicle owners together with PAN of each and every owner and on the basis of those details, the Assessing Officer issued notice to the vehicle owners at the address taken from the PAN details from the official record without asking the assessee to furnish the present address of these.

The assesse pointed out that the truck owners/drivers were illiterate persons and could not reply the notices issued by the Assessing Officer U/s 133(6) of the Act. Though, most of these parties have filed their reply after the assessment order was passed which was not considered by the Assessing Officer. The Assessing Officer had completed the assessment in a hurried manner without giving sufficient time to the assessee as well as these parties to file the reply.

The Tribunal opined that once the assessee established the fact with the entries recorded in the books of account particularly in the ledger account of the parties to show that each payment of freight was linked to the freight income booked by the assessed in respect of a particular trip then the claim of the assessee of payment of freight cannot be rejected or disallowed merely on the ground that the assessee has made some payment in cash for which the self made vouchers were produced by the assessee.

The Tribunal observed that the Assessing Officer had not doubted the business activity of the assessee of providing transportation to various clients by hiring the vehicles from the vehicle owners. The bills were raised by the vehicle owners to the clients and the assessee was only charging some margin/commission in the transaction for providing the services of transportation. Once this business activity of the assessee was not doubted and the freight income and freight payment which were matching to each other with the transaction by transaction of each trip then the freight charges payment could not be disallowed or held as bogus ignoring the fact that the corresponding freight receipt is accepted on the basis of the same bills.

Rejection of books of account for failure to file confirmation from parties not justified

The Tribunal opined that even if the Assessing Officer was not satisfied with the claim of freight payment for want of supporting evidence and confirmation from the recipient of the freight then the claim of the freight payment can be examined and disallowed to the extent of not found to be proved by the assessee.

The non-acceptance of a particular claim of expenditure could not be a reason to hold that the books of account of the assessee are defective and suffering from deficiency or discrepancies warranting rejection U/s 145(3) of the Act.

The Tribunal opined that in case, the Assessing Officer was not satisfied with the claim of freight charges then that particular claim could have been examined and disallowed to the extent of not proved by the assessee instead of resorting to the provisions of Section 145(3) of the Act. Even otherwise some other expenditure which was not substantiated by the assessee by filing a supporting evidence, the same can be disallowed but these disallowances cannot be a reason for rejection of books of account.

The ITAT opined that when the assessee had been maintaining regular books of account duly audited by the qualified auditor then in absence of specific discrepancy or deficiency in the books of account, the provisions f Section 145(3) of the Act cannot be invoked.

Accordingly, it was held that the Assessing Officer was not justified in rejecting the books of account merely because the assessee could not file the confirmation from the parties to whom the freight charges were paid. Hence, the ground of assessee was allowed.

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