Rejecting audited business books and estimating profit at 10% turnover u/s144/144B struck down as arbitrary

The dominant issue was whether rejection of books and best-judgment estimation of profit at 10% of turnover under s. 144 r.w. s. 144B was legally sustainable. The ITAT held that the AO neither identified specific defects in the audited books nor pointed out discrepancies in the documents furnished, and failed to rebut the assessee's explanations. The ITAT further found the assessment approach internally inconsistent: the AO doubted genuineness of purchases and sales yet simultaneously accepted the declared sales turnover to compute business income, rendering the estimation arbitrary and without evidentiary basis. Consequently, the addition based on 10% profit estimation was deleted and the appeal was allowed.

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ISSUES:

Whether the addition of Rs. 12,50,99,530/- made by estimating profit @ 10% on turnover is justified where books of account are audited and no specific defect is pointed out.Whether the Assessing Officer (AO) was justified in invoking provisions of section 145(3) of the Income Tax Act, 1961 and rejecting the books of account without specific material defects.Whether the AO was justified in passing order under section 144 of the Act without issuing valid notice under section 143(2) and whether such notice is invalid and non-est.Whether mere inactivity of purchase parties on GST portal or their non-filing of Income Tax Returns can be a ground for disallowance of purchases or additions in the hands of the assessee.Whether the non-response of purchase parties to notices under section 133(6) can justify disallowance of purchases or additions to income.Whether the AO's application of a 10% profit rate without comparables or reasons, contrary to the declared and audited gross profit rate, is sustainable.

RULINGS / HOLDINGS:

The addition of Rs. 12,50,99,530/- by estimating profit at 10% on turnover is not justified as the books of account were "duly audited" and no specific defect or discrepancy was pointed out by the AO; the AO's approach was "contradictory and not sustainable in the eyes of law."The AO erred in invoking section 145(3) and rejecting the books of account without pointing out any "specific material defects" or inadequacies in the accounts; the rejection was not justified.The AO's passing of order under section 144 without valid notice under section 143(2) was erroneous; the notice under section 143(2) was "invalid and non-est," and the CIT(A) erred in not holding so."Merely because some of the purchase parties are not having active GST Portal and some of them have not filed the Income Tax Return, that cannot be ground for making the addition in the hands of the Assessee"; there is "no legal obligation" on the assessee to ensure tax compliance of third parties.Purchases cannot be disallowed merely on the ground of non-furnishing of response by the purchase parties to notices under section 133(6), as held by the Hon'ble Bombay High Court and affirmed by the Apex Court.The AO's application of 10% profit rate without assigning any reason or comparables, despite the declared gross profit rate being lower and audited, is unjustified; the gross profit rate for the year under consideration (1.91%) was higher than the preceding year (1.78%) which was accepted.

RATIONALE:

The Court applied the legal framework under the Income Tax Act, 1961, particularly sections 143(2), 144, 144B, and 145(3), and relied on precedents emphasizing that rejection of books of account requires specific material defects or discrepancies.Precedents from the jurisdictional High Court and ITAT were followed, including rulings that "without rejecting the books of accounts maintained by the assessee by pointing out specific material defects therein, the results declared by the assessee ... cannot be disturbed" and that "the onus is upon the Revenue to show that either the Books of Accounts ... were incorrect or incomplete."The Court rejected the AO's reliance on the inactivity of third-party suppliers on GST portal or their non-filing of returns as a basis for additions, holding that the Department must take action against such parties, not the assessee.The Court noted the contradiction in the AO's approach of accepting turnover declared by the assessee but rejecting the books and estimating profit arbitrarily.The Court also relied on authoritative decisions that disallowance of purchases cannot be based solely on non-response of third parties to statutory notices.There was no dissent or doctrinal shift; the judgment reaffirmed established principles protecting the integrity of audited books of account and requiring reasoned assessment actions.

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