2025 (9) TMI 792 - AT - Income Tax

Assessee's audited books upheld; s.145(3) rejection void for breach of natural justice; s.68/69A and s.115BBE not applicable

ITAT, Delhi (AT) held the assessing officer's rejection of the assessee's books under s.145(3) void ab initio for breach of natural justice. Additions ... Rejection of books of accounts - HELD THAT:- CIT(A) correctly held AO has invoked sub section 3 of section 145 of the Income Tax Act, 1961 for rejection of the books of accounts of the appellant by alleging that correct profits and gains cannot be deducted from the accounts which is in complete breach of the principles of natural justice, and therefore, the action of the assessing officer in rejecting the books of accounts is void-ab-initio. Addition on account of estimated net profit on sales and cash receipt from sale of vehicle - It is seen from the ledger account and cash sheet pertaining to sale of vehicle, the appellant had considered the said receipt from sale of Vehicle in the books of accounts of the company. Also, the said receipt is duly recorded in the books of accounts and also taken in Profit & Loss account and correspondingly the amount of vehicle has deducted from the fixed assets chart of the audited balance sheet and independent auditor has not taken any adverse remark on it. Similarly, the tax auditor has also taken the effect of same in the deprecation chart under Income Tax Act, 1961 as reported in the tax audit report. Accordingly, addition made by the learned assessing officer ignoring the facts of the case and above details based on conjectures and surmises is bad in law and liable to be deleted. Addition made u/s 68 - cash deposits during demonetization period - HELD THAT:- As carefully gone through impugned orders of AO and CIT(A) and once books of assessee are valid and correct/complete u/s 145 then no exception can be made to stated cash deposit being generated from cash sales recorded and forming part of defect free audited books. As decided in S. Balaji Multitech Private Ltd [2024 (12) TMI 490 - ITAT DELHI] AO/CIT(A) cannot invoke the provisions of section 68 or 69A when the assessee is already declared the source for cash deposits in the books of accounts and the lower authorities without their being any material to support on their contrary view, the provisions of section 68 or 69A cannot be invoked. Invocation of section 115BBE becomes infructuous in light of our findings on Ground Nos.1 and 4 on books rejection and section 68 addition of cash deposits, accordingly. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer validly rejected the books of account under section 145(3) of the Income-tax Act by invoking best judgment assessment under section 144 where the assessee had partly complied with statutory notices. 2. Whether additions made by estimating notional net profit (NP) for months with nil sales and treating certain cash receipts as unexplained income are sustainable where audited books and trading results were otherwise accepted. 3. Whether cash deposits made during the demonetization period can be added to income under section 68 where the assessee recorded corresponding cash sales in books and furnished corroborative records (cash sheets, purchase/sale ledgers, stock register, VAT returns). 4. Whether invocation of section 115BBE is permissible where additions under section 68 or related provisions are found unsustainable and the same receipts have been assessed as business income in the profit & loss account. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of rejection of books under section 145(3) Legal framework: Section 145(3) permits the Assessing Officer to reject the accounts maintained by the assessee where correct profits and gains cannot be deduced therefrom; section 144 empowers best judgment assessment when assessee does not comply with notices. Natural justice and reasoned application of statutory conditions are required before rejecting books. Precedent treatment: The Tribunal relied on the principle that books must be rejected only upon fulfillment of statutory conditions and not by arbitrary selective rejection; authorities emphasize that AO cannot accept parts of books while rejecting others without justification. Interpretation and reasoning: The Tribunal reviewed the appellate authority's detailed factual analysis which concluded that the Assessing Officer's invocation of section 145(3) was in breach of principles of natural justice and unsupported by tenable grounds. The appellate authority had examined stock register, ledgers and other evidence and found no material warranting rejection. The Tribunal found no perversity in that finding and refused to disturb it. Ratio vs. Obiter: Ratio - books cannot be rejected without fulfillment of statutory conditions and adherence to principles of natural justice; arbitrary or selective rejection is impermissible. Obiter - emphasis on the role of detailed appellate scrutiny in assessing AO's exercise of power. Conclusion: The Tribunal upheld the appellate authority's conclusion that rejection of books was void-ab-initio and dismissed Revenue's challenge to that conclusion. Issue 2 - Estimation of net profit and addition of cash receipts where books were rejected/partly disbelieved Legal framework: Where books are validly rejected, AO may estimate income under section 144; however, absent valid rejection, additions based on notional sales/NP cannot be made against audited trading results. The assessing process must be based on evidence, not conjecture. Precedent treatment: Authorities hold that estimation must be reasonable and supported by material; suspicion or conjecture cannot substitute proof. Courts have cautioned against making hypothetical additions when books and audited results are not justifiably discarded. Interpretation and reasoning: The Tribunal examined the appellate authority's findings that the AO's notional NP addition (and related Rs.1,75,100/Rs.1,85,000 additions) rested on conjecture and ignored books, stock adjustments, audit and tax auditor records. Where books were not rejected for tenable reasons, making an addition on assumed cash sales or treating vehicle sale receipt as unexplained was unjustified. The appellate authority had recorded that the vehicle sale was recorded in P&L, reduced from fixed assets, and no adverse remarks were raised by auditors; accordingly the AO's addition was unreasonable. Ratio vs. Obiter: Ratio - additions based on notional NP or assumed cash sales are liable to be deleted if not supported by evidence and where books/audited results remain intact. Obiter - guidance on interplay between acceptance of purchases/closing stock and impermissibility of double taxation by recharacterising same receipts as unexplained credits. Conclusion: The Tribunal affirmed deletion of estimated NP addition and the addition on vehicle sale receipt, finding AO's action unjustified and based on conjecture. Issue 3 - Addition under section 68 on cash deposits during demonetization where corresponding cash sales are recorded Legal framework: Section 68 treats unexplained credits in the books as taxable unless the assessee satisfactorily explains nature and source; provisions apply to 'money found with the assessee' or credits not recorded in books or without satisfactory explanation. Relevant principles bar treating amounts already accounted and assessed as business receipts as unexplained credits. Precedent treatment: The Tribunal referred to coordinate bench decisions holding that where cash receipts are recorded in books as sales and corroborated by purchases, reduction in stock, VAT returns and other ledger entries, AO cannot characterise corresponding bank deposits as unexplained under section 68 or invoke section 69A. Courts and tribunals have held that suspicion cannot replace proof, and the AO cannot 'approbate and reprobate' by accepting books in part and treating same amounts as unexplained under a different head. Interpretation and reasoning: The appellate authority analyzed detailed documentary evidence (cash sheets, stock register, ledgers, VAT returns, reconciliations) and found that cash sales were recorded, purchases corresponded and closing stock adjusted. The AO accepted turnover, purchases and stock in the books yet separately added the recorded cash sales under section 68 - a method amounting to double taxation and irrationality. The appellate authority found no failure by the assessee to explain sources; corroboratory evidence and consistency in book entries rebutted the AO's suspicion. The Tribunal concurred, finding no perversity in the appellate conclusion and emphasizing that section 68 cannot be invoked where the source is recorded and accepted in defect-free audited books. Ratio vs. Obiter: Ratio - where cash deposits correspond to recorded cash sales and are substantiated by corroborative documentary evidence, section 68 additions are not sustainable; AO cannot re-assess already-assessed business receipts under section 68. Obiter - caution against AO's selective treatment and the inadmissibility of suspicion-based additions. Conclusion: The Tribunal upheld deletion of the entire section 68 addition relating to cash deposits during demonetization, holding that assessee's explanations and records were satisfactory and that invocation of section 68 in those circumstances was unwarranted. Issue 4 - Applicability of section 115BBE where section 68 additions are deleted Legal framework: Section 115BBE prescribes tax treatment for certain unexplained income once added. Its applicability depends on valid additions being sustained under relevant provisions (e.g., section 68). Precedent treatment: Authorities recognize that once an amount has been assessed under one head (e.g., business income accepted in P&L), it cannot be re-assessed under another head to invoke special tax provisions; double assessment inconsistent with settled principles is impermissible. Interpretation and reasoning: Because the Tribunal and appellate authority found the section 68 additions unsustainable and deleted them, invocation of section 115BBE became inapplicable. The appellate authority further reasoned that assessing receipts already assessed as business income and accepted in books cannot be recharacterised to attract section 115BBE; doing so would be legally flawed. Ratio vs. Obiter: Ratio - section 115BBE cannot be applied where the foundational additions (e.g., under section 68) are unsustainable or where receipts have been accepted as business income; invocation of section 115BBE in such circumstances is unwarranted. Obiter - reaffirmation of principle against relabelling assessed income to attract penal tax provisions. Conclusion: The Tribunal dismissed Revenue's contention on section 115BBE as infructuous and not applicable given deletions on section 68 and related grounds. Cross-references and Final Outcome All issues are interlinked: the invalidity of books' rejection (Issue 1) underpinned the conclusions on estimation additions (Issue 2) and on section 68 additions for demonetization-period cash deposits (Issue 3). The deletion of section 68 additions rendered invocation of section 115BBE (Issue 4) inapplicable. The Tribunal found no perversity in the appellate authority's factual and legal conclusions and dismissed Revenue's appeal on all grounds.