2010 (4) TMI 111 - HC - Income Tax

Business of travel and tourism accounting: rejection of books under Section 145(3) not justified, appeal dismissed

Dispute concerns whether books of a travel and tourism operator could be rejected under Section 145(3) for alleged defects. The legal basis is that ... Business of travel and tourism - Arranging inland tour of foreign tourists visiting India - rejected the book results in terms of Section 145(3) - Whether the accounts produced by the assessee were defective/incomplete or not is a question of fact. - HELD THAT:- It is not the case of the Revenue that the assessee had not followed either cash or mercantile system of accounting. It is also not the case of the Revenue that the Central Government had notified any particular accounting standards to be followed by tour operators. Hence, the second part of sub-Section (3) of Section 145 does not apply to this case. The onus is upon the Revenue to show that either the Books of Accounts maintained by the assessee were incorrect or incomplete or method of accounting adopted by him was such that true profits of the assessee cannot be deduced therefrom. The Tribunal which is the final fact finding authority has held that considering the nature of the business of the assessee, it was not obligatory to enter into a formal agreement with the foreign principal. Hence, non-production of formal agreements with the foreign principals would not render the accounts of the assessee incomplete and would not give justification to the Assessing Officer to reject them under Section 145(3) of the Act. Similarly, the explanation given by the assessee for the tour expenses not reconciling with tour itinerary having been accepted, both by Commissioner of Income Tax(Appeals) as well as by the Tribunal, the accounts of the assessee cannot be said to be defective on this ground and, therefore, could not have been rejected. If any particular expense claimed by the assessee remained unverified, the Assessing Officer could have disallowed that particular expense. But, that by itself cannot be a ground for rejection of accounts as a whole under Section 145(3) of the Act. The finding of fact recorded by the ITAT has not been shown to be perverse, and hence cannot be interfered with by this Court. Thus, no substantial question of law arises for our consideration. The appeal is, accordingly, dismissed. Issues: Whether the Assessing Officer was justified in rejecting the assessee's books of account under Section 145(3) of the Income-tax Act, 1961 and assessing income on presumptive rates instead of accepting the returned income.Analysis: Section 145(3) permits assessment under Section 144 where the Assessing Officer is not satisfied about correctness or completeness of accounts; however, it applies only if specific defects, incompleteness, or non-adherence to an accounting method or notified accounting standards are shown. The assessee maintained regular books of account, audited without qualification, produced vouchers and tour-wise ledgers, and explanations for variations between tour itineraries and expenses were accepted. The Assessing Officer did not point to any specific defect in the accounts nor produce positive evidence of concealment; instead general assertions about low profit rates and absence of formal agreements were relied upon. Findings by the first appellate authority and the Tribunal that the accounts were neither defective nor incomplete are factual findings and have not been demonstrated to be perverse. Where only particular expenses are unverified, disallowance of those items rather than wholesale rejection of accounts is the appropriate exercise of assessment powers.Conclusion: The rejection of the assessee's books under Section 145(3) and consequent assessment on presumptive rates was not justified; the returned income, subject to allowable deductions, must be accepted.