2024 (11) TMI 1293 - AT - Income Tax

Rejection of books upheld under section 145(3) but profit estimation must use preceding three years' percentage, not arbitrary rates.

Nanda Agrawal Versus Income Tax Officer Raigarh

Nanda Agrawal Versus Income Tax Officer Raigarh - TMI Issues Involved:1. Rejection of books of accounts under Section 145(3) of the Income Tax Act.2. Estimation of net profit rate by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)].3. Justification for the estimation of net profit at 6% by CIT(A) instead of 10% by AO.4. Consideration of past performance for estimating net profit.Detailed Analysis:1. Rejection of Books of Accounts:The primary issue was whether the rejection of the assessee's books of accounts by the AO under Section 145(3) was justified. The AO pointed out several defects in the books, such as non-maintenance of stock registers, absence of verifiable records of material consumption, and incomplete or self-made vouchers for expenses. These deficiencies led the AO to question the correctness and completeness of the accounts, thereby invoking Section 145(3). The CIT(A) upheld this rejection, noting that despite multiple opportunities, the assessee failed to provide complete books and supporting documents. The Tribunal agreed with the CIT(A), emphasizing that the absence of requisite details and the presence of discrepancies justified the AO's decision to reject the books.2. Estimation of Net Profit Rate:The AO estimated the net profit rate at 10% due to the rejection of the books, which the CIT(A) later reduced to 6%. The assessee argued that the AO's observations were general and did not constitute defects under Section 145(3). The Tribunal found that the AO's estimation lacked a logical basis and was not supported by comparable instances or past performance. The Tribunal noted that while the AO and CIT(A) estimated profits due to discrepancies, the estimation should ideally be grounded in comparable instances or the assessee's past performance.3. Justification for Estimation at 6%:The CIT(A) reduced the AO's estimation from 10% to 6%, considering the lack of scrutiny in the previous years and the discrepancies noted. The Tribunal acknowledged the CIT(A)'s attempt to be reasonable but emphasized that estimations should be based on logical reasoning and comparable data. The Tribunal found merit in the assessee's argument that the estimation lacked a substantive basis and relied on past judicial precedents to support its stance.4. Consideration of Past Performance:The Tribunal highlighted that in the absence of comparable instances, the past performance of the assessee should serve as a benchmark for estimating profits. The Tribunal directed the AO to recompute the taxable income based on the assessee's profit history over the preceding three years. This approach aligns with the principle that past results can provide a reliable basis for estimation when current records are inadequate or disputed.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, directing the AO to re-evaluate the net profit estimation based on the assessee's past performance. The decision underscores the importance of using logical and evidence-based methods for profit estimation, particularly when rejecting books of accounts under Section 145(3). The Tribunal's directive ensures that the estimation process is fair and grounded in the assessee's historical financial data.