2024 (8) TMI 1071 - AT - Income Tax

Firm's audited books rejection under Section 145(3) requires logical income estimation using average profit rates

The Deputy Commissioner of Income Tax, Raipur Versus M/s. Sanjay Agrawal, Raipur

ITAT Raipur allowed revenue's appeal partly in income estimation case. AO rejected firm's audited books under Section 145(3) and estimated income. ... Estimation of income - Rejection of duly audited books of accounts of the assessee firm u/s.145(3) - Estimation of gross profit - HELD THAT:- Admittedly, the A.O after rejecting the books of account of the assessee firm u/s. 145(3) of the Act ought to have estimated its income on some logical basis. As the income of the assessee firm for the aforementioned five preceding and succeeding years had been framed u/s. 143(3) of the Act, therefore, we are of the view that the average NP rate of the aforementioned years can safely be adopted as a yardstick for estimating its income for the year under consideration. Our aforesaid view is supported by Dr. Prabhu Dayal Yadav case [2017 (12) TMI 680 - ALLAHABAD HIGH COURT]. The Hon’ble High Court while disposing off the appeal for A.Y.2003-04 of the assessee before them, had observed, that as income disclosed by the assessee during the year before them was similar or comparable to the income which the department had assessed in his hands five years later, the same could safely be adopted as a yardstick while estimating his income for the year before them after rejection of the books of accounts. Admittedly, as income disclosed by the assessee firm during the year under consideration is higher as in comparison to that disclosed in the aforementioned preceding years/succeeding years (i.e. average NP rate), and it is not a case that any addition/disallowance had been made by the A.O during the year under consideration by acting upon any incriminating material found in the course of survey proceedings, therefore, we are of a strong conviction that the average NP rate of 2.56% (supra) can safely be taken as a yardstick for estimating the income of the assessee firm for the year under consideration. As the assessee firm had disclosed NP rate of 2.93% during the year, i.e. A.Y.2015-16, which is higher than the average NP rate of 2.56% for the aforementioned preceding years/succeeding years, therefore, we are of the view that no adverse inferences as regards its returned income was liable to be drawn. However, as the aforesaid NP rates of the aforementioned five preceding years/succeeding years are not discernible from record; nor anything has been placed before us which would prove to the hilt the veracity of the same, therefore, the A.O is directed to verify the same while giving effect to our aforesaid observations. We, thus, in terms of our aforesaid observations, though set aside the order of the CIT(Appeals) to the extent he had concurred with the claim of the assessee firm that its books of account in absence of pointing out of any specific defect were not liable to be rejected by the A.O u/s.145(3) but at the same time, in terms of our aforesaid observations, principally concur with him to the extent he had vacated the addition made by the A.O and accepted the latter’s returned income. Appeal of the revenue is partly allowed. Issues Involved:1. Justification of CIT(A) in deleting additions made by AO based on retraction filed by the assessee.2. Justification of CIT(A) in deleting the addition of Rs. 1,70,05,341/-.3. Justification of CIT(A) in ignoring the inability of the assessee to explain the contents of impounded documents.4. Justification of CIT(A) in not utilizing the wide powers under the Income Tax Act.5. Justification of CIT(A) in concluding that there was no reason for AO to reject the books of account.6. Justification of CIT(A) in holding that AO did not bring any material with reasonable nexus to the estimation.7. Justification of CIT(A) in allowing deduction on account of bank interest and bank charges.8. Justification of CIT(A)-3, Bhopal in allowing the appeal despite the assessee having withdrawn an earlier appeal.Detailed Analysis:1. Justification of CIT(A) in deleting additions made by AO based on retraction filed by the assessee:The revenue challenged the deletion of additions by CIT(A), arguing that the retraction by the assessee was an afterthought filed after a delay of more than 23 months without cogent reasons or evidence. The Tribunal noted that the AO had rejected the books of account due to the assessee's inability to explain the impounded documents. The Tribunal found that the CIT(A) had rightly considered the retraction and the inability of the assessee to explain the documents.2. Justification of CIT(A) in deleting the addition of Rs. 1,70,05,341/-:The Tribunal observed that the AO had determined the income of the assessee at 8% of the gross receipts based on the assessee's statement during the survey. The CIT(A) had deleted the addition, considering the retraction and the assessee's inability to explain the documents. The Tribunal upheld the CIT(A)'s decision, noting that the AO had not pointed out any specific defect in the books of account.3. Justification of CIT(A) in ignoring the inability of the assessee to explain the contents of impounded documents:The Tribunal noted that the CIT(A) had considered the assessee's inability to explain the impounded documents. The AO had rejected the books of account and estimated the income at 8% of the gross receipts. The Tribunal found that the CIT(A) had rightly accepted the returned income of the assessee, as the AO had not provided a logical basis for the estimation.4. Justification of CIT(A) in not utilizing the wide powers under the Income Tax Act:The revenue argued that the CIT(A) did not utilize the wide powers available under the Income Tax Act to make further inquiries. The Tribunal found that the CIT(A) had considered the material facts and the assessee's retraction before deleting the additions. The Tribunal upheld the CIT(A)'s decision, noting that the AO had not pointed out any specific defect in the books of account.5. Justification of CIT(A) in concluding that there was no reason for AO to reject the books of account:The Tribunal observed that the AO had rejected the books of account without pointing out any specific defect. The CIT(A) had accepted the returned income of the assessee, considering the retraction and the inability to explain the impounded documents. The Tribunal upheld the CIT(A)'s decision, noting that the AO had not provided a logical basis for the estimation.6. Justification of CIT(A) in holding that AO did not bring any material with reasonable nexus to the estimation:The Tribunal found that the AO had estimated the income at 8% of the gross receipts without providing a logical basis. The CIT(A) had deleted the addition, considering the retraction and the inability to explain the impounded documents. The Tribunal upheld the CIT(A)'s decision, noting that the AO had not pointed out any specific defect in the books of account.7. Justification of CIT(A) in allowing deduction on account of bank interest and bank charges:The revenue argued that the CIT(A) had wrongly allowed deductions for bank interest and bank charges. The Tribunal found that the AO had not considered these deductions while estimating the income at 8% of the gross receipts. The CIT(A) had rightly allowed these deductions, considering the retraction and the inability to explain the impounded documents.8. Justification of CIT(A)-3, Bhopal in allowing the appeal despite the assessee having withdrawn an earlier appeal:The revenue argued that the CIT(A)-3, Bhopal had allowed the appeal despite the assessee having withdrawn an earlier appeal before CIT(A)-1, Raipur. The Tribunal found that the assessee had withdrawn the withdrawal letter and requested disposal of the grounds of appeal on merits. The Tribunal dismissed the additional grounds raised by the revenue, noting that the CIT(A)-3, Bhopal had rightly proceeded with the appeal on merits.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO and accept the returned income of the assessee. The Tribunal found that the AO had not provided a logical basis for the estimation of income and had not pointed out any specific defect in the books of account. The Tribunal directed the AO to verify the NP rates of the preceding and succeeding years while giving effect to its observations. The appeal of the revenue was partly allowed.