AO's rejection of assessee's books without establishing Section 145 violations overturned by tribunal

ITAT Chennai held that AO's rejection of assessee's books of accounts was unjustified. The AO failed to establish that assessee didn't follow proper accounting methods under Section 145(1) or compute income according to notified accounting standards under Section 145(2). Conditions for invoking Section 145(3) were not satisfied. AO's action based on mere suspicion without proper findings was unacceptable, especially when books were regularly maintained and audited under Section 44AB. Additionally, statements cannot be used against assessee without cross-examination opportunity as per SC precedent. CIT(A)'s decision upholding AO's action was overturned. Assessee's appeal allowed.

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Issues:
Challenge to addition of undisclosed income in assessment, rejection of books of accounts by AO, validity of re-opening of assessment based on search conducted at M/s. Apollo Hospitals Ltd.

Analysis:
The appeal was against the addition of Rs. 16,47,500 made by the AO after rejecting the books of accounts of the assessee. The AO re-opened the assessment based on information that the assessee received unaccounted income as fees from out-patient consultations at M/s. Apollo Hospitals. The AO doubted the veracity of the log book submitted by the assessee, alleging it was recently prepared. The Ld.CIT(A) partly allowed the appeal but confirmed the addition. The Tribunal noted that the AO rejected the books based on suspicion without alleging any deficiencies or violations of Rule 6F of the Rules. The AO did not give the assessee an opportunity to explain or rebut the rejection of the log book. The Tribunal found that the conditions for invoking sec.145(3) of the Act were not satisfied. The addition of Rs. 16,47,500 was held to be legally unsustainable.

The Ld.DR representing the department referred to a statement of an individual from M/s. Apollo Hospitals recorded during a search, but the AO did not discuss or mention this statement in justifying the addition. The Tribunal refused to consider this material as it had not been referred to by the AO or Ld.CIT(A). Additionally, the Tribunal highlighted that the statement of a person cannot be used against an assessee without being tested through cross-examination. Even if the statement was considered, the addition could not be sustained without proper testing. Therefore, the impugned addition of Rs. 16,47,500 was ordered to be deleted.

In conclusion, the appeal by the assessee was allowed, and the addition of Rs. 16,47,500 was deleted. The Tribunal found that the rejection of books by the AO was unjustified and that the re-opening of assessment lacked proper justification. The decision was pronounced in Chennai on October 23, 2024.

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