2005 (3) TMI 747 - AT - Income Tax

Rejection of books of account - Profit Loss Account and Balance Sheet with tax audit report u/s 44AB - Marginal decline in the rate of gross profit - HELD THAT - In the instant case the Commissioner (Appeals) himself has looked into reconciliation of shortage of one tractor which was due to sales return of one tractor. He has also sent reconciliation statement to the Assessing Officer for his comment. However on verification of material placed on record we find that the difference of one tractor was duly reconciled and other defects pointed by the Assessing Officer did not justify rejection of the books of account so as to attract the provision of section 145(1) of the I.T. Act. Even after the rejection of books of account the Assessing Officer cannot act vindictively and capriciously because he must exercise judgment in the matter. In making a best judgment assessment the Assessing Officer does not possess absolute and unbridled powers to the assessee any figure he likes although he is not bound by strict judicial principle he should be guided by rules of justice equity and good conscience. The limited power of the Assessing Officer are implicit in the expression best of his judgment though there is an element of guess work in best judgment assessment it shall not be wild one but shall have reasonable nexus to the available material and circumstances of each case. The Hon ble Rajasthan High Court in the case of CIT v. Gotan Lime Khanij Udyog 2001 (7) TMI 19 - RAJASTHAN HIGH COURT observed that mere rejections of books of account not necessarily lead to additions to the returned income or different figure of income than what has been disclosed by the assessee. Even after invocations of provisions of section 145 ipso facto does not mean that the rejection of books of account the assessee must yield to a higher rate of gross profit than the declare one and different conclusion to be drawn in the computation of income returned by the assessee. Therefore notwithstanding the rejections of the books of account the material disclosed by the assessee along with material that may be collected by the Assessing Officer forms the basis of computation of income. So far as marginal decline in the rate of gross profit as compared to last year is concerned we find that marginal decline of 1.16 per cent in the gross profit rate has been duly taken care of by increase in turnover of Rs. 2.46 crores which has resulted into increase in gross profit by Rs. 5.43 lakhs as compared to immediately preceding assessment year. The department has not brought on record any material to controvert the findings recorded by the Commissioner (Appeals). We therefore do not find any valid reason to justify the action of the Assessing Officer with regard to rejection of books of account and making ad hoc addition of Rs. 2 lacs. Thus we are inclined to agree with the learned AR that the Assessing Officer was not justified in rejecting the books of account without pin pointing the specific defects and thereby making an ad hoc additions when the discrepancy was duly reconciled before the lower authorities. We therefore do not find any infirmity in the order of the Commissioner (Appeals).

Summary

Issues:
1. Addition of Rs. 2 lakhs by Assessing Officer
2. Rejection of book results under section 145(1)
3. Discrepancy in sales figures
4. Justification for rejecting books of account
5. Compliance with accounting standards

Analysis:
1. The appeal by the revenue concerns the addition of Rs. 2 lakhs made by the Assessing Officer. The revenue contested the CIT(A)'s deletion of this addition.

2. The primary issue revolves around the rejection of book results by the Assessing Officer under section 145(1). The Assessing Officer rejected the book results due to the absence of a daily quantitative stock register for inventory, lack of clarity on the method of costing for valuation, and discrepancies in sales figures. The CIT(A) disagreed with the rejection, emphasizing that the results were consistent with previous years and that no trading addition was warranted.

3. A significant discrepancy in sales figures, specifically the sale of one tractor, was a key point of contention. The CIT(A) acknowledged the error but highlighted that the discrepancy was reconciled during the appellate proceedings. The Assessing Officer's objections to additional evidence were deemed unfounded by the CIT(A).

4. The justification for rejecting the books of account was scrutinized. The Tribunal emphasized that the absence of a stock register alone does not justify rejection, citing legal precedents. The Tribunal stressed that the revenue must satisfactorily prove the accounts are incorrect before rejection, and the Assessing Officer's actions must be based on substantive reasons rather than whims.

5. The compliance with accounting standards and the rationale behind the Assessing Officer's actions were thoroughly evaluated. The Tribunal emphasized that the Assessing Officer's judgment must be reasonable and supported by evidence. The Tribunal highlighted the need for proper investigation and verification before rejecting accounts. The Tribunal also noted that even after rejection, the Assessing Officer must act judiciously and base assessments on available material.

In conclusion, the Tribunal upheld the CIT(A)'s decision, finding no fault in the order. The rejection of book results and the addition of Rs. 2 lakhs were deemed unjustified, given the reconciliation of discrepancies and the lack of substantive grounds for rejection. The Tribunal emphasized the importance of evidence-based assessments and the need for Assessing Officers to exercise judgment prudently.