Loading judgment…
Facts
A search under Section 132 of the Income Tax Act was conducted on the assessee. Incriminating material was found, leading to a notice under Section 153C. The AO made additions on five counts, which the CIT(A) partly deleted.
Held
The Tribunal held that the AO erred in rejecting the assessee's books of account based on a small period of alleged unaccounted sales. The GP rate disclosed by the assessee in their audited books was not disturbed.
Key Issues
Whether the AO was justified in rejecting the assessee's books of account and making additions based on a short period of alleged unaccounted sales, and whether the GP rate should be disturbed.
Sections Cited
132, 153C, 145, 144
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DIVISION BENCH, ‘B’ CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI KRINWANT SAHAY
The assessee is in appeal against the order of the Commissioner of Income Tax (Appeals) [in short ‘the CIT (A)’] dated 16.01.2023 passed for assessment year 2017-18.
Though the assessee has taken six grounds of appeal
, but its grievance revolves around a single issue namely; that ld. CIT(A) has erred in confirming the addition of A.Y.2017-18
2. Rs.95,24,734/- which contains estimated GP of Rs.47,34,266/- on the declared GP and estimated GP on extrapolated sales of Rs.3,98,17,216/-.
2. The brief facts of the case are that a search under Section 132 of the Income Tax Act was conducted in the group cases of AFI Group of companies. This search was conducted on 25.04.2018 and a survey was conducted on the premises of the assessee. During the course of search, certain incriminating material pertaining to the assessee was found and seized. Ultimately, a notice under Section 153C was issued upon the assessee and in response to that, assessee has filed a return of income on 22.09.2021 declaring total income of Rs.26,12,660/-. After hearing the assessee, ld. AO has passed an assessment order on 30.09.2021. He has made additions on five counts. The ld. Counsel for the assessee has tabulated the details exhibiting the additions made by the AO and how CIT(A) has deleted those additions, which read as under :
A.Y.2017-18 3 Particulars Amount of Amount of Addition by AO addition confirmed by CIT(A) Undisclosed GP @ 10.10% on sales 4734266 4734266 Unexplained cash capital for 2463027 0 unaccounted turnover Suppressed GP rate 4790468 4790468 Valuation difference in respect of 534217 0 factory building Valuation difference in respect of 90993 0 plant and machinery
Since tax effect is less than the monetary limit on the relief given by the CIT(A), therefore, Revenue is not in appeal. The assessee alone is challenging confirming of addition at Rs.47,34,266/- and Rs.47,90,468/-.
A perusal of the record would reveal that during the course of search, certain details were found which demonstrate that assessee has an undisclosed sales. These details pertain to only 8 days i.e. in July, 2016 (19,20, 21 and 22, October,2016 ( 14,15,16 & 17). The Cash Book detailing cash sales for these periods which are not reflected in the books of account was found. The AO has worked out total sales which are not recorded by the assessee at Rs.12,44,290/-. He formed an opinion that if average daily sales is being worked out, then it is Rs.1,55,536/-. The ld. AO has multiplied this average daily sales with 256 days which give rise to an alleged unaccounted sale of A.Y.2017-18 4 Rs.3,98,17,216/-. Apart from the above, the assessee has recorded sales in the books of account amounting to Rs.31,29,31,447/-. The AO was of the view that books of account of the assessee are not reliable therefore, deserve to be rejected. He applied a GP rate of 11.89% on the alleged undisclosed sales and since assessee has disclosed GP of 10.36%, he enhanced this GP further by 1.53%. In other words, total sales were taken together, GP was estimated at 11.89%. Thereafter, he reduced the GP disclosed by the assessee at 10.36% from the alleged gross GP worked out by him. In this way, he has made addition of Rs.95,24,734/-.
This addition has been confirmed by the ld. First Appellate Authority.
With the assistance of ld. Representative, we have gone through the record carefully. The ld. Counsel for the assessee has agitated the rejection of books of account and submitted that only on the basis of 8 days alleged unaccounted sale, the books can not be rejected, which are otherwise duly audited. The books reflect the recorded sales of Rs.31,29,31,447/- which are accepted by the AO.
ITA No.143/CHD/2023 A.Y.2017-18 5
The ld. CIT DR, on the other hand submitted that though for this year, only 8 days unrecorded sales were found but for subsequent period, unaccounted sales for a larger period were found and considered by the AO. She relied upon the orders of Revenue Authorities. She submitted that in the presence of unaccounted sales found during the course of search, the AO has rightly estimated the alleged unaccounted sales for the whole year.
On due consideration of the above facts and circumstances, we are of the view that Section 145 of the Income Tax Act provides a method of accounting required to be followed by an assessee. We deem it appropriate to take note of this Section which read as under :
1 [145. Method of accounting.—(1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time 2 [income computation and disclosure standards] to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) 3 [has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2)], the Assessing Officer may make an assessment in the manner provided in Section 144.]
ITA No.143/CHD/2023 A.Y.2017-18 6
A bare perusal of this Section would reveal that income chargeable under the head ‘profit & gains of a business or profession’ or 'income from other sources' shall subject to the provision of sub-section (2) be computed in accordance with either cash or mercantile system of accounting regularly implied by an assessee. Sub Section (2) further provides that Central Government will notify the accounting method required to be followed by an assessee or a class of assessee but sub-section (3) of Section 145 further contemplate that if an Assessing Officer is unable to deduce the correct income of an assessee from the accounts maintained by him, then he would reject the books of account and estimate the income.
If income of an assessee is required to be estimated, then Section 144 of the Income Tax Act provides the procedure required to be followed by an Assessing Officer. A bare perusal of Section 144 of the Income Tax Act would reveal that if books are rejected and income is to be determined according to the best judgement of the AO, then in exercise of that best judgement, element of guess work would be involved. But in making a best judgement assessment, the AO must not act dishonestly or vindictively. He must A.Y.2017-18 7 exercise judgement judiciously. He must make what he honestly believes to be a fair estimation of the proper figure of assessment and for this purpose, he must be able to take into consideration local knowledge and repute in regard to the assessee's circumstances and his own knowledge of previous returns and assessment of the assessee which he thinks will assist him in arriving at a fair and proper estimation.
It is further observed that cash sales of 8 days which according to the AO were not found recorded in the books of account. But it is to be kept in kind that a period of 8 days is too small a period which cannot authorize an AO to reject the books and amplify those unaccounted sales for a whole year. This amplification of sales on the basis of these 8 days’ details is not a fair estimation by the AO. The AO, at the most estimate the GP on these 8 days’ sales. As observed earlier, we find that mechanism contemplated in sub-section 3 of Section 145 would prevail when AO is not satisfied about the correctness or completeness of the accounts. In the present case, the AO has accepted the sales A.Y.2017-18 8 recorded by the assessee amounting roughly to Rs.31 Crore.
He has not pointed out any other defect in the books except recovery of one document which indicate alleged unaccounted sales for 8 days amounting to Rs.12,44,290/-.
If these figures are compared with each other, namely recorded sales of more than Rs.31 Crore and alleged sales of Rs.12,44,000/-, then how it can be assumed that books of account are not reliable. The assessee was maintaining every details. It has got his accounts audited. Had the ld. AO called upon all supporting material, it could have been given to him but he himself has accepted the recorded sales. Once he has accepted the recorded sales, then we do not find any reason as to why the GP rate disclosed by the assessee deserves to be disturbed because assessee has disclosed a GP at 10.36% whereas AO applied the GP at 11.89%. The AO has not given any justification in the impugned assessment order. He simply harboured the belief that since a small part of unrecorded sales were found during the course of search, therefore, he amplified the unaccounted sales and also enhanced the GP on the recorded sales. To our mind, it is not in accordance with A.Y.2017-18 9 law. The ld. AO could not pin point the specific defects in the books demonstrating as to how they are not reliable. If the AO was of the view that books are not reliable, then he should have taken a holistic estimation of the gross income.
He should not have accepted the alleged recorded sales but enhance the GP and he should have not separately estimated the alleged unrecorded sales. Both the steps are not in coherence with each other.
The assessee has filed a Paper Book running into 441 pages whereby it has placed copies of 28 orders of ITAT/ judgements of Hon'ble Gujrat High Court, Bombay High Court etc. We do not deem it necessary to recite and recapitulate the proposition laid down in each of the judgement but it would be suffice to say that common view propounded in all these judgements is to the effect that books are not to be rejected unless the specific defects are found. If defects for a very short period is found, that would not be sufficient to reject the result of whole year. It is also propounded that on the basis of a small period unaccounted sales, the GP rate declared by the assessee on the basis of A.Y.2017-18 10 audited books should not be disturbed. We have already taken cognizance of Section 145 and how this provision is to be construed while implementing. In view of the above discussion, we are of the view that books of account of the assessee are required to be relied upon. The GP rate disclosed by the assessee is not to be disturbed. The only addition sustained by us is GP at 10.36% on the alleged unaccounted sales of Rs.12,44,290/-. Apart from this, both the additions confirmed by the CIT(A) are deleted.
In the result, appeal of the assessee is allowed.
Order pronounced on 29.01.2025.