AO's 3% Profit Estimation Rejected as Books Audited Under Section 44AB and Supported by VAT Reports

The ITAT Mumbai held that the AO's rejection of the assessee's books of account and estimation of net profit at 3% of turnover was unjustified, as the books were audited under section 44AB and supported by audited VAT reports and returns. The AO's verification of sales, purchases, and profit figures was satisfactory. The CIT(A) erred in sustaining the addition based on absence of sales bills despite the availability of comprehensive documentary evidence. The tribunal concluded that the 3% addition was founded on assumptions without material basis. Consequently, the appeal was allowed, and the estimation was set aside.

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ISSUES:

Whether the Assessing Officer (AO) was justified in rejecting the assessee's books of account under section 145(3) of the Income Tax Act and estimating net profit at 3% of turnover'Whether the appellate authority erred in confirming the addition based on estimated net profit despite the assessee submitting audited books of accounts and supporting documents during appellate proceedings'Whether estimation of income by assumptions and presumptions is permissible once the assessee has placed on record audited accounts and relevant supporting documents?

RULINGS / HOLDINGS:

The AO's rejection of the books of account and estimation of net profit @ 3% of turnover was initially justified due to non-response by the assessee, but after submission of audited accounts and supporting documents during appellate proceedings, the estimation was found to be unjustifiable.The appellate tribunal held that once the assessee placed on record "books of accounts audited u/s. 44AB," VAT audit reports, VAT returns, and other supporting documents which were duly examined and found in order by the AO, the confirmation of addition by estimation by the CIT(A) was erroneous.The addition sustained by the CIT(A) on the basis of estimation "is not based on any material and is only on the basis of assumptions and presumptions," and therefore, such addition was quashed.

RATIONALE:

The legal framework applied includes section 145(3) of the Income Tax Act, which allows the AO to reject books of account if they are not maintained or are unreliable, and section 44AB which mandates audit of accounts.The AO initially invoked section 145(3) due to the assessee's failure to respond to notices, justifying estimation of income.Upon remand, the assessee submitted audited financial statements, VAT audit reports, VAT returns, and other relevant documents which were examined and found to be in order by the AO, undermining the basis for estimation.The appellate tribunal emphasized that estimation of income "by assumptions and presumptions" is impermissible once reliable audited accounts and corroborative evidence have been provided and verified.This decision reinforces the principle that estimation under section 145(3) is a measure of last resort and cannot be sustained when proper audited accounts are available and accepted by the AO.

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