2025 (6) TMI 149 - AT - Income Tax

Partnership firm's books rejected for improper maintenance, unsubstantiated expenses worth Rs. 30 lakh disallowed

R.K. Wines Versus The Income Tax Officer, Ward-4, Panvel.

ITAT Pune rejected assessee's books of accounts due to improper maintenance and unsubstantiated expenses. The assessee claimed electricity expenditure for ... Rejection of books of accounts - estimating the net profit at 4% of total business receipts - HELD THAT:- Assessee has claimed Electricity Expenditure of the residences of the partners. The total expenditure under the head “Electricity” is Rs. 2,35,431/-. The amount paid for the residents of the partners cannot be said to be expenditure wholly and exclusively for the purpose of the business of the Assessee. Similarly, under the Head “Travelling”, there are certain cash vouchers showing amount paid for Travel from Mumbai to Pen. From these vouchers, one cannot understand who has travelled from Mumbai to Pen, what was the reason for the travel! The amount is Rs. 4,000/- dated 03.05.2021. Similarly, there are expenditures showing travel between Mumbai and Pen, but nowhere the name of the person who travelled is mentioned. It is also observed that Assessee has merely filed Self-made Vouchers to claim transportation expenditure of Rs. 11,01,192/-. We have perused these Self-made Vouchers and observed that there is no proper serial number for the vouchers. The Assessee has not filed copy of the cash book to co-relate these cash expenditures. On perusal of these Vouchers and the Electricity Bills, we are convinced that accounts are not maintained properly and accounts cannot be relied. Therefore, we upheld the rejection of books of accounts by the Assessing Officer. As far as interest payment and remuneration to partners is concerned, the Assessee has not filed copy of partnership deed to demonstrate that partnership deed mentions about interest and remuneration to partners. It is also observed that Assessee has not explained at what rate the interest has been paid to partners. As noted that the Net Profit for A.Y.2022-23 is 0.95%. The Assessee has submitted that for A.Y.2023-24, the Net Profit was 1.23% which has been accepted by the Assessing Officer u/s. 143(3) after making disallowance of Rs. 6,00,185/-. The Net Profit for A.Y.2021-22 was 1.42%. Thus, the Net Profit shown for A.Y.2022- 23 at 0.95% is comparatively less. As already stated above that the Indirect Expenditure excluding interest to partners is Rs. 19,80,000/- and Direct Expenses in cash qua Transportation of Wines/Beer is Rs. 11,01,192/-. We have already pointed out the defects, therefore, we are convinced that Assessee has failed to prove that the expenditure was wholly and exclusively for the purpose of business of the Assessee. In these facts and circumstances of the case, considering the Net Profit of subsequent years and earlier year, we direct AO to disallow a lump sum of Rs. 10,00,000/- out of the total expenditure of Rs. 30,81,192/-. The core legal questions considered in this appeal pertain to the validity of rejection of the assessee's books of accounts under section 145(3) of the Income Tax Act, 1961, and the consequent estimation of net profit by the Assessing Officer (AO). Specifically, the issues are:1. Whether the Assessing Officer was justified in rejecting the assessee's audited books of accounts under section 145(3) on grounds of non-verification of sundry creditors and expenses.2. Whether the addition of Rs. 69,92,549/- by estimating net profit at 4% of turnover, after rejection of books of accounts, was justified.3. The appellant's general ground seeking liberty to amend or vary grounds of appeal.Issue 1: Justification for Rejection of Books of Accounts under Section 145(3)The legal framework under section 145(3) empowers the Assessing Officer to reject the books of accounts if he is not satisfied about their correctness or completeness, or if the prescribed method of accounting or accounting standards have not been regularly followed. The AO rejected the books primarily because out of 11 sundry creditors to whom notices under section 133(6) were issued, only 5 responded, while 6 did not; and because evidences supporting direct and indirect expenses amounting to Rs. 59,65,828/- could not be verified.The assessee contended that the books were properly maintained and audited by a Chartered Accountant, with all purchases duly recorded and supported by TCS reflected in Form 26AS. The non-response of certain creditors to section 133(6) notices, issued after the show cause notice, was argued to be an insufficient ground for rejection, relying on precedent that non-response alone does not warrant rejection of books. Further, the appellant explained that the inability to upload voluminous expense bills was due to technical limitations of the IT portal, and that the expenses were reasonable and consistent with the nature and scale of business.The Tribunal examined the evidence, including cash vouchers and electricity bills submitted by the assessee. It noted several deficiencies: cash vouchers lacked proper serial order and clarity; electricity bills were in the names of third parties or residential connections unrelated to the business; travel vouchers lacked details on the persons traveling or purpose; and self-made vouchers for transportation expenses lacked corroborative documentation such as cash books. The Tribunal also observed the absence of a partnership deed to substantiate interest payments to partners and lack of explanation regarding the interest rate.Applying the law to these facts, the Tribunal found that the AO's dissatisfaction with the correctness and completeness of the books was justified given the discrepancies and inadequate substantiation of expenses. The Tribunal emphasized that the mere maintenance of books and audit report does not preclude rejection if the AO is not satisfied with the correctness or completeness of accounts.The competing argument that non-response to notices under section 133(6) alone cannot lead to rejection was acknowledged but weighed against the broader deficiencies in documentation and verification. The Tribunal concluded that the rejection under section 145(3) was appropriate in the circumstances.Issue 2: Justification for Addition by Estimating Net Profit at 4% of TurnoverFollowing rejection of books, the AO estimated net profit at 4% of turnover, resulting in an addition of Rs. 69,92,549/-. The assessee challenged this on the ground that the estimation was arbitrary and excessive, pointing out that the actual net profit declared was around 0.95%, consistent with previous years' profits ranging between 1.34% and 1.42%. The assessee also highlighted that for the subsequent assessment year, the AO accepted net profit at 1.23% after some disallowances.The assessee submitted a comparative chart of net profits for earlier years, argued that the 4% estimate was not supported by any comparable case or material on record, and that the addition exceeded even the amount of disputed expenses. The appellant further argued that rejection of books does not ipso facto justify an addition if the declared profit rates are comparable or better than preceding years.The Tribunal noted the reliance by the Commissioner of Income Tax (Appeals) on a precedent where estimation at 5% was upheld due to the assessee's failure to maintain proper books and non-filing of returns. However, the Tribunal distinguished that case on facts, as the present assessee maintained audited books and filed returns.Despite this, the Tribunal found the assessee's evidence on expenses and supporting documents insufficient to fully accept the declared profits. Given the defects in vouchers and bills, and the unexplained cash expenses, the Tribunal was not convinced to accept the full declared expenses. However, it also found the AO's 4% net profit estimation excessive compared to the declared profits and accepted profit rates in prior and subsequent years.Balancing these considerations, the Tribunal directed the AO to disallow a lump sum of Rs. 10,00,000/- out of the total disputed expenditure of Rs. 30,81,192/-, thereby partially allowing the appeal on this issue.Issue 3: General Ground for Amendment of Grounds of AppealThe general ground allowing the appellant to amend or vary grounds was not pressed or elaborated upon and was dismissed as not requiring adjudication.Significant Holdings and Core PrinciplesThe Tribunal upheld the principle that rejection of books under section 145(3) requires the AO to be dissatisfied with the correctness or completeness of accounts, and that such dissatisfaction must be founded on cogent reasons and evidence. Mere non-response to section 133(6) notices is insufficient by itself to reject books if the assessee has otherwise maintained proper records and submitted evidence.However, the Tribunal also confirmed that inadequacies in documentary evidence, unexplained cash expenses, and unverifiable vouchers can justify rejection of books and disallowance of expenses.On estimation of income post-rejection, the Tribunal emphasized that the AO's estimate must be reasonable and based on material, comparable profits, and that excessive estimation without basis is not justified. The Tribunal's direction for a partial disallowance reflects a balanced approach between the assessee's declared profits and the AO's concerns.Verbatim, the Tribunal stated: 'We are convinced that Assessee has failed to prove that the expenditure was wholly and exclusively for the purpose of business of the Assessee. In these facts and circumstances of the case, considering the Net Profit of subsequent years and earlier year, we direct Assessing Officer to disallow a lump sum of Rs. 10,00,000/- out of the total expenditure of Rs. 30,81,192/-.'Final determinations were:- Ground No.1 (rejection of books under section 145(3)) was dismissed, affirming the AO's and CIT(A)'s decision.- Ground No.2 (addition by estimating net profit at 4%) was partly allowed by reducing the disallowance to Rs. 10,00,000/- instead of the full addition.- Ground No.3 was dismissed as not requiring adjudication.