2025 (8) TMI 35 - AT - Income Tax

ITAT Upholds Income Estimation Under Section 145(3) Due to Lack of Documentary Evidence in Dead-Stock Clearance

M/s Delhi Best collection Hospeth Galli, Gokak Versus The Income Tax Officer, Ward-1, Gokak

The ITAT upheld the rejection of the appellant's audited books under section 145(3) due to failure to provide documentary evidence supporting the ... Rejection of audited books u/s 145(3) - estimation of sales realisation/receipt from clearance of dead-stock - argument of the appellant in present appeal is that, owning to winding up of entire business and dissolution of firm, the assessee was forced to vacate the building by immediate removal vis-à-vis sale/clearance of entire closing stock which were old/non-moving at the relevant time HELD THAT:- The appellant laid no record or information and adduced no documentary evidences to establish correctness and completeness of audited results & claims made in its return of income. In the event, the Ld. AO was constrained to reject the books and advanced the determination of income on the basis of estimation to the best of his judgement. We also note that, the assessment was challenged in appeal before the Ld. NFAC never prosecuted by the appellant. In-spite of several notices issued to it in appellate proceedings, the appellant produced no effective records or documentary evidences in support of grounds raised in form No 35 and claims that were made in the return of income filed by it. In view of such fettered findings, the first appellate authority upheld the rejection of books on the same reasoning and countenanced the consequential action of estimation. However considering other market influential factors, a partial relief by restricting estimation of sales to 25% as against 50% of inventory value, was granted. We note that, the appellant admittedly failed to adduce on record the details of movement of stock, inventory valuation, details of dead-stock clearance sales, invoices raised therefore and receipts/realisation made on such account. Further the details of receipt, details of customers to whom such sales were made, bank accounts statement etc., none of these documentary evidences were filed on record. The failure not to mention continued in the present proceedings too. In the absence of full details of items of inventory, nature of stock, market condition, payment terms and buyers bargaining power, the original estimation as well reduced estimation of sales/realisation found arrived by both the tax authorities on ad-hoc basis. The appellant made out its case on no issue/subject, on the contrary distorted the fact of actual sale of inventory in the grab of its dissolution and ongoing legal dispute etc. Therefore keeping in mind the conduct of the appellant and after considering general retail textile market determinants we see no convincing reason to interfere with the impugned order & thus with the reduced estimation. The grounds of appeal thus stands dismissed accordingly. ISSUES: Whether the rejection of books of account under section 145(3) of the Income-tax Act, 1961 is justified in the absence of correctness and completeness of records.Whether estimation of income by the Assessing Officer under section 143(3) read with section 144B of the Act, based on ad-hoc valuation of dead-stock clearance sales, is lawful and reasonable.Whether the assessee's claim of extraordinary circumstances (business winding up, firm dissolution, and forced clearance sale at deep discount) justifies deviation from standard assessment procedures.Whether the appellate authority's reduction of estimated sales value from 50% to 25% of inventory value constitutes appropriate relief.Whether failure to produce documentary evidence and non-cooperation with tax authorities affects the validity of assessment and appeal proceedings. RULINGS / HOLDINGS: The rejection of books under section 145(3) of the Act was upheld due to the assessee's failure to establish 'correctness & completeness' of the audited results and non-production of documentary evidence.The estimation of income by the Assessing Officer under sections 143(3) read with 144B of the Act, based on ad-hoc valuation of dead-stock clearance sales, was affirmed as 'perfectly in order' given the absence of verifiable records.The claim of extraordinary circumstances such as firm dissolution and forced clearance sales was found unsubstantiated and collapsed due to lack of valid dissolution deed and corroborative evidence, thus not justifying any deviation.The appellate authority's action to reduce the estimation of sales from 50% to 25% of the inventory value was considered a reasonable partial relief, reflecting consideration of market factors.The assessee's persistent failure to cooperate and produce necessary documentary evidence throughout assessment and appellate proceedings justified the rejection of claims and dismissal of the appeal. RATIONALE: The court applied the statutory provisions of the Income-tax Act, 1961, specifically sections 145(3), 143(3), and 144B, governing rejection of books and estimation of income.Precedents including decisions in CIT Vs Anil Kumar & Co, Kachwala Gems Vs Jt. CIT, and Bastiram Narayandas Vs CIT were relied upon to affirm that rejection of books and best judgment assessment are warranted where correctness and completeness are not proved.The court emphasized the necessity of documentary evidence to substantiate extraordinary claims such as firm dissolution and forced clearance sales, and found the absence thereof fatal to the assessee's case.The appellate reduction of estimation was recognized as a discretionary adjustment reflecting market realities, but no further interference was warranted given the assessee's conduct.No dissent or doctrinal shift was noted; the decision follows settled legal principles on assessment and estimation in tax law.