2024 (3) TMI 156 - HC - Income Tax

AO cannot make additions on estimation basis without rejecting books of account under Section 145(3) and Section 144

Pr. Commissioner of Income Tax (Central) -1 Versus M/s. Forum Sales Pvt. Ltd.

Delhi HC held that AO cannot make additions on estimation basis without first rejecting books of account under Section 145(3) and proceeding under Section ... Assessment u/s 144 - estimation of income - Method of accounting - Non rejection of books of account - disallowance of expenses, addition of inflated purchases and protective addition of cash found and seized - HELD THAT:- AO wields an authority to make additions on the basis of estimation of income upon fulfillment of the conditions mentioned in Section 145(3) of the Act. Once the AO is satisfied about the existence of irregularities in the books of account as per Section 145(3) of the Act, it shall proceed in the manner provided under Section 144. The Division Bench of the Karnataka High Court in. the case of CIT v. Anil Kumar & Co. [2016 (3) TMI 184 - KARNATAKA HIGH COURT] has held that in cases where the Revenue had failed to reject the books of account and proceeded to an estimation of income without framing the assessment under Section 144 of the Act, such an action is unsustainable as per law Thus as books of account have to be necessarily rejected before the AO proceeds to the best judgment assessment upon fulfilment of conditions mentioned in the Act. The underlying rationale behind such an action is to meet the standards of correct computation of accounts for the purpose of a more transparent and precise assessment of income. Therefore, any pick and choose method of rejecting certain entries from the books of account while accepting other, without an appropriate justification, is arbitrary and may lead to an incomplete, unreasonable and erroneous computation of income of an assessee. In the present case, the ITAT has made a categorical finding that despite the fact that the AO was provided with the requisite bills, vouchers and addresses of the transacting parties, it did not make any effort to confirm the veracity of the alleged bogus or inflated bills. Admittedly, the addition of income as discussed in questions (B), (C) and (D) on estimate basis has been done without rejecting the books of account. Issues Involved: 1. Deletion of addition on account of unaccounted profits.2. Deletion of addition on account of disallowance of expenses.3. Deletion of addition on account of inflated purchases.4. Deletion of protective addition on account of cash found and seized.5. Deletion of addition on account of deemed dividend under Section 2(22)(e) of the Act.Summary:1. Deletion of Addition on Account of Unaccounted Profits:The ITAT remitted the issue of addition based on estimation of unaccounted profits back to the AO to obtain information from the parties regarding transactions carried on by the respondent-assessee during the concerned AYs. The High Court found no ground to entertain the appeals on this question, as the assessment was not confined merely to the material gathered in the course of a search but was kept open to be examined with reference to all transactions in the Assessment Years in question.2. Deletion of Addition on Account of Disallowance of Expenses:The ITAT upheld the findings of the CIT (A) on the additions made in respect of disallowance of expenses of Rs. 19,05,653/-, in absence of any defect on record brought by the AO. The High Court noted that the AO did not make any effort to verify the genuineness of such expenses from the concerned parties, and without rejecting the books of account, such disallowance of the purchases by the AO is completely unjustified and contrary to the provisions of the Act.3. Deletion of Addition on Account of Inflated Purchases:The ITAT upheld the findings of the CIT (A) on the additions made in respect of inflated purchases of Rs. 9,30,49,222/-, in absence of any defect on record brought by the AO. The High Court reiterated that the books of account must be rejected before the AO proceeds to the best judgment assessment upon fulfillment of conditions mentioned in the Act. The ITAT found that the AO did not make any effort to confirm the veracity of the alleged bogus or inflated bills despite having the requisite details.4. Deletion of Protective Addition on Account of Cash Found and Seized:The ITAT held that the addition of Rs. 1,00,000 on account of cash found and seized was made on a protective basis and should be deleted in view of the substantive addition already made in the hands of Mr. Moin Akhtar Qureshi. The High Court found no infirmity in the deletion of the said addition by the CIT (A).5. Deletion of Addition on Account of Deemed Dividend:The High Court noted that the questions regarding deemed dividend under Section 2(22)(e) of the Act were covered against the appellants by virtue of the decision rendered by the Court in CIT v. Ankitech (P) Limited, which was also upheld by the Supreme Court. Therefore, these questions did not merit further consideration.Conclusion:The High Court dismissed the appeals, finding no substantial question of law arising in the present appeals, and upheld the view taken by the ITAT.