2025 (5) TMI 29 - AT - Income Tax

Assessment reduced under section 145(3) to 1.52% of turnover; declared Rs.12,10,949 accepted, Rs.1,49,165 set-off directed

ITAT Jaipur (AT) partly allowed the assessee's appeal, holding that the AO's addition of 10% under s.145(3) was excessive given the circumstances but the ... Addition applying the provisions of section 145(3) - income was estimated after rejection of expenses claimed in the profit & loss account @ 10% - HELD THAT:- Here, it is pertinent to mention that the accounts of this year were not duly audited. Hence credibility is a concern and despite the fact that the assessee is a company and under obligation to file the return whatever may be the figure of turnover, still it opted not to file the return. Considering these facts, certainly the addition @ 10% made by the AO is not justified, but, at the same time, the assessee is also under obligation to reconcile the gap in the results declared for the current year and need to explain the failure to get the accounts audited. We deem it fit to restrict the addition to 1.52% of the turnover declared and accept last year’s declared by the assessee itself, i.e. Rs. 12,10,949/-and set off of the self-declared figure of Rs. 1,49,165/- is to be given. In view of this, grounds raised on merits are partly allowed. Appeal of the assessee is partly allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal include:- Whether the initiation of reassessment proceedings under section 147 read with section 148 of the Income Tax Act, 1961 was valid and within jurisdiction or void ab initio.- Whether the addition made under section 145(3) of the Act on account of unverifiable expenses and disallowance of 10% of expenses claimed by the assessee was justified.- Whether the application of net profit (N.P.) rate of 2.16% by the Assessing Officer and partly sustained by the CIT(A) was appropriate, especially in comparison to the net profit rate declared by the assessee (0.36%) and the rate applied in the preceding assessment year (1.18% or 1.52% after disallowance).- The correctness and legality of the disallowance made on the basis of non-production of cash book, bill vouchers, and use of self-made vouchers for certain cash payments.2. ISSUE-WISE DETAILED ANALYSISValidity of Reassessment Proceedings under Sections 147/148The assessee challenged the initiation of reassessment proceedings under section 147 read with section 148, contending that the action was without jurisdiction and void ab initio. The Tribunal examined the facts that a survey under section 133A was conducted, and the department had AST data indicating non-filing of return despite substantial business receipts (Rs. 7,96,67,680/-). Consequently, a notice under section 148 was issued.The legal framework mandates that reassessment can be initiated if the Assessing Officer has reason to believe that income has escaped assessment. The Tribunal found that the department's reliance on AST data and non-filing of return despite high turnover constituted sufficient reason to initiate reassessment. Therefore, the reassessment proceedings were held to be valid and within jurisdiction.Addition under Section 145(3) for Unverifiable ExpensesThe Assessing Officer disallowed 10% of expenses claimed by the assessee, relying on section 145(3), which permits estimation of income when accounts are not maintained regularly or correctly. The AO's dissatisfaction stemmed from the assessee's failure to produce cash book, bill vouchers, and the use of self-made vouchers for cash payments, undermining the credibility of the accounts.The CIT(A) reduced the addition from Rs. 91,19,932/- to Rs. 20,19,274/-, applying a net profit rate of 2.16%. The assessee contended that the application of section 145(3) was erroneous and the addition should be deleted in full.The Tribunal noted that the assessee was obligated to maintain proper books and get accounts audited under section 44AB, which was not complied with. The Tribunal emphasized the importance of credible accounts for tax assessment and held that some addition was justified due to unverifiable expenses. However, the 10% disallowance was excessive given the facts and previous year's net profit rates.Appropriateness of Net Profit Rate AppliedThe assessee declared a net profit rate of 0.36%, while the AO applied 10%, and the CIT(A) applied 2.16%. The Tribunal compared these figures with the preceding assessment year, where the net profit rate was declared at 1.18%, and after disallowance, effectively 1.52%.The Tribunal observed a significant drop in declared net profit for the current year without adequate explanation or audited accounts. The Tribunal held that while the AO's 10% addition was unjustified, the assessee's declared net profit rate was unrealistically low and inconsistent with prior years.Accordingly, the Tribunal deemed it appropriate to restrict the addition to 1.52% of turnover, aligning with the prior year's effective net profit rate, and granted set-off of the self-declared income of Rs. 1,49,165/-.Non-production of Cash Book, Bill Vouchers, and Use of Self-made VouchersThe AO's disallowance was premised on the assessee's failure to produce cash book and bill vouchers, and payments made through self-made vouchers, which could not be verified. The Tribunal underscored that proper documentary evidence is essential to substantiate expenses claimed and that the absence thereof justifies estimation under section 145(3).The Tribunal found that the assessee's failure to maintain and produce proper records diminished the credibility of the accounts, warranting some addition but not to the extent claimed by the AO.3. SIGNIFICANT HOLDINGS- 'The reassessment proceedings initiated under section 147 read with section 148 are valid and not void ab initio, given the existence of AST data and non-filing of return despite substantial business receipts.'- 'Section 145(3) empowers the Assessing Officer to estimate income when accounts are not maintained regularly or correctly; the assessee's failure to produce cash book, bill vouchers, and reliance on self-made vouchers justifies application of this provision.'- 'The addition of 10% of expenses claimed by the Assessing Officer is excessive and unjustified; however, the assessee's declared net profit rate of 0.36% is unrealistically low and inconsistent with prior years.'- 'Considering the prior year's effective net profit rate of 1.52%, the addition is restricted to this rate, allowing set-off of self-declared income, balancing the competing interests of the revenue and the assessee.'- 'Proper maintenance and production of accounts and compliance with audit requirements under section 44AB are mandatory for companies; failure to comply undermines the credibility of accounts and justifies estimation of income.'