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2019 (1) TMI 2070 - AT - Income TaxBest judgement assessment - Rejection of books of accounts u/s 145(3) - estimation of income by taking 2% to the total receipt - assessee is engaged in the business of purchase of livestock and meat from farmers and shepherds and sell them to slaughter houses or supply the meat and other small meat factories - HELD THAT - Once the assessee had justified the entire sales which is purely through cheques and banking channels and has given the party wise details of the purchasers and also explained the nature of trade whereby the assessee has no option but to make the purchases in cash which otherwise has statutory sanctity in view of Income Tax Rules under 6DD then simply because assessee could not furnish the particulars of the purchasers that does not mean that the entire purchases are bogus or are not verifiable. While examining the trading result it is important to keep in mind the nature of trade and the trade practices which needs to be understood and while determining the income trade practices prevalent and the accounting system has to be appreciated. All the trade cannot be viewed from same glass as the different trade has different realities especially in country like ours where most of us agrarians and not much of the population were exposed to banking systems at the relevant time; nor there are any organised sector especially dealing with rural people. Assessee is dealing in sale and purchase of meat and also livestock who procures the meat from local butchers or shepherds or farmers who are mostly illiterate and work in a much unorganised sector. In such circumstances it would very difficult to either make the purchases through account payee cheques or get proper bills. Thus the reasons given by the AO for rejecting the books of accounts on the facts of the present case cannot be sustained. CIT(A) without properly analysing the facts brought on record by the assessee has simply reiterated the reasoning given by the AO and noted that the assessee did not produce any books of accounts before the AO in order to claim deduction and expenses and therefore AO was justified in rejecting the books of accounts. He has not given any finding about the details and replies filed by the assessee before the AO and also the detailed explanation given before him in the written submissions. Hence reasoning given by the Ld. CIT (A) to uphold the order of the AO is completely de-hors the material and facts placed on record cannot be appreciated. Thus as no proper grounds for rejection of books of account has been given and consequently the trading result cannot be disturbed. The additions thus made by the AO and as sustained by the Ld. CIT(A) for rejecting the estimate is deleted. Appeal of the assessee is allowed.
1. ISSUES PRESENTED and CONSIDERED
- Whether the Assessing Officer (AO) was justified in rejecting the assessee's books of accounts under section 145(3) of the Income Tax Act due to alleged non-furnishing of details and documents related to purchases and business activities. - Whether the AO's estimation of income at 2% of total receipts, amounting to Rs. 77,04,617/-, was appropriate and based on sound reasoning and evidence. - Whether the appellate authority (CIT(A)) was correct in confirming the AO's rejection of books of accounts and the consequent income estimation without properly considering the details and explanations furnished by the assessee. - The applicability of section 40A(3) read with Rule 6DD regarding cash payments in the context of the assessee's business, which involves dealings with illiterate farmers and shepherds who operate largely in cash transactions. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Justification for Rejection of Books of Accounts under Section 145(3) Relevant Legal Framework and Precedents: Section 145(3) empowers the AO to reject the books of accounts if they are not maintained regularly or are not reliable. However, rejection requires cogent reasons supported by material facts. The principle is that the AO must give an opportunity to the assessee to produce evidence and cannot reject books arbitrarily. Court's Interpretation and Reasoning: The AO rejected the books on grounds that no bills, vouchers, or party-wise details were furnished despite repeated opportunities, and all payments were made in cash without disclosure of the payees' names and addresses. The AO also noted absence of a detailed note on business activities. However, the Tribunal found that these observations were factually incorrect. The assessee had furnished extensive details before the AO, including party-wise purchase and sales ledgers, stock registers, bank statements, and explanations regarding cash transactions. The assessee explained that the suppliers were mostly illiterate farmers and shepherds who operate in groups and deal only in cash, which is a prevalent trade practice in this sector. Key Evidence and Findings:
Application of Law to Facts: The Tribunal emphasized that the nature of the trade and prevalent business practices must be appreciated. The cash payments to illiterate suppliers are permissible under Rule 6DD, which allows cash payments for purchase of produce of animal husbandry. The AO's failure to consider the furnished details and the trade realities rendered the rejection unjustified. Treatment of Competing Arguments: The AO and CIT(A) relied on the absence of proper bills and party details to justify rejection. The assessee argued that such documentation is not feasible in this unorganized sector and that all relevant details were provided. The Tribunal sided with the assessee, noting the lack of any rebuttal or contrary evidence from the AO or CIT(A) during appellate proceedings. Conclusions: The Tribunal held that the AO's reasons for rejecting the books were factually incorrect and not sustainable. The CIT(A) erred in merely reiterating the AO's findings without analyzing the submitted evidence. Therefore, the rejection of books of accounts was set aside. Issue 2: Appropriateness of Income Estimation at 2% of Gross Sales Relevant Legal Framework and Precedents: When books are rejected, the AO may estimate income under the best judgment principle. However, such estimation must be based on relevant data, industry standards, and consistent with past records. Court's Interpretation and Reasoning: The AO estimated income at 2% of gross sales, amounting to Rs. 77,04,617/-, citing industry comparables where gross profit ranges from 0.29% to 8%. The CIT(A) upheld this estimation, reasoning that the trade practice fixes purchase rates daily, limiting price variation, and that the assessee's declared profit ratios were unusually low compared to preceding years. Key Evidence and Findings:
Application of Law to Facts: The Tribunal noted that since the books were wrongly rejected, the basis for estimation fell away. The assessee's declared profits, supported by detailed records, could not be disregarded. The estimation was therefore not justified in the absence of valid grounds for rejecting the books. Treatment of Competing Arguments: The AO and CIT(A) stressed the low declared profit and industry norms to justify estimation. The assessee countered by emphasizing the correctness of books and the trade realities affecting profit margins. The Tribunal favored the assessee's position given the improper rejection of books. Conclusions: The Tribunal deleted the additions made on estimation and restored the declared income based on the books of accounts. Issue 3: Role and Findings of the Appellate Authority (CIT(A)) Court's Interpretation and Reasoning: The CIT(A) confirmed the AO's order without independently analyzing the evidence submitted by the assessee. The appellate order merely reiterated the AO's findings on non-furnishing of details and justified the estimation without addressing the detailed submissions and documents presented by the assessee. Key Evidence and Findings: The Tribunal observed that the CIT(A) failed to consider the paper book evidencing the replies and documents filed before the AO, and did not record any findings on the credibility of such evidence. Application of Law to Facts: The appellate authority is expected to conduct a thorough review and not merely endorse the AO's findings. The failure to do so amounted to non-application of mind and an erroneous conclusion. Conclusions: The Tribunal set aside the CIT(A)'s order for lack of proper appreciation of facts and evidence. 3. SIGNIFICANT HOLDINGS "When these details have been furnished before the AO, then the entire observation of the Ld. AO in the assessment order that these details have not been furnished renders factually incorrect." "The reasons given by the AO for rejecting the books of accounts on the facts of the present case cannot be sustained." "Ld. CIT(A) without properly analysing the facts brought on record by the assessee has simply reiterated the reasoning given by the AO... Hence reasoning given by the Ld. CIT (A) to uphold the order of the AO is completely de-hors the material and facts placed on record cannot be appreciated." "No proper grounds for rejection of books of account has been given and consequently the trading result cannot be disturbed." Core principles established:
Final determinations: The Tribunal allowed the appeal, set aside the rejection of books of accounts, deleted the addition based on estimation, and restored the income declared by the assessee as per the books of accounts. The impugned orders of the AO and CIT(A) were quashed on these grounds.
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