2024 (10) TMI 1674 - AT - Income Tax

Rejection of books of accounts - addition made on estimate basis of Net Profit @ 2% - nature of business - GP determination as per standard market rate in the trade of livestock - HELD THAT - We find force in the contention of the ld. counsel for the assessee that the ITAT in the case of Zakira Kamil 2019 (1) TMI 2070 - ITAT DELHI on identical set of facts has accepted the books of account and deleted the addition made on estimate basis of Net Profit @ 2% which is identical to the present case in hand and squarely applicable wherein held 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 analyzing 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. Assessee appeal allowed. We also find force in the argument of the ld AR that the Department itself has estimated the market standard in such nature of business as not less than 0.50% which is evident from the assessment orders of the Central Circle Delhi in the case of Farman and Irshad Ahmad - Decided in favour of assessee.

Summary

The core legal questions considered in these appeals pertain primarily to the validity and correctness of the assessment orders passed under the Income Tax Act, 1961, specifically concerning the rejection of books of accounts under section 145(3), the estimation of net profit on an adhoc basis by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)], the applicability of section 40A(3) disallowance related to cash purchases, and the charge of interest under sections 234A and 234B. The issues also include whether the principles of natural justice were adhered to during the assessment and appellate proceedings.

Issue-wise detailed analysis is as follows:

1. Legality and Jurisdiction of Assessment Orders Passed under Sections 143(3) and 144

The appellants challenged the assessment orders as illegal, bad in law, and without jurisdiction, contending that the CIT(A) erred in upholding these orders. The legal framework involves the provisions of the Income Tax Act, 1961, particularly sections 143(3) and 144, which govern regular and best judgment assessments respectively. The Court examined whether the AO and CIT(A) had jurisdiction and followed due process.

The Court observed that the AO and CIT(A) had passed orders based on the material on record and after considering submissions. The appellants did not demonstrate any procedural irregularity or lack of jurisdiction. Hence, the orders were held to be within jurisdiction and not illegal.

2. Rejection of Books of Account under Section 145(3)

The AO rejected the books of account on the ground that the assessee had not produced complete books, bills, or vouchers, especially purchase bills for livestock, which were allegedly not maintained because purchases were made from villagers in cash. The CIT(A) upheld this rejection.

The legal framework requires that books of account can be rejected under section 145(3) only if they are found to be not reliable or not properly maintained. The Court referred to the precedent set by a coordinate bench in a similar case (ITA No. 3022/Del/2016), where it was held that in trades involving rural or unorganized sectors, the absence of formal bills or vouchers is understandable and does not justify rejection of books outright.

The Court noted that the assessee had explained the nature of business and the trade practices, showing that cash purchases from villagers without bills are customary. The AO and CIT(A) failed to appreciate these facts and did not point out specific defects in the books. The Court held that the rejection was presumptive, arbitrary, and unjustified.

3. Estimation of Net Profit on Adhoc Basis

The AO estimated net profit at 8% of turnover, whereas the assessee declared net profit at 0.50%. The CIT(A) reduced this estimation to 3.75%. The appellants contended that these estimations were arbitrary, excessive, and not based on any material on record. They also submitted that comparable cases showed gross profit margins between 0.38% and 0.94%, and that the Department itself had accepted 0.50% as the standard market rate in similar trades.

The Court examined the precedents and found that the coordinate bench in the cited case had accepted books of account and deleted additions made on estimated net profit basis at 2%, which was similar to the present facts. The Court emphasized the importance of considering trade practices and realities, especially in unorganized sectors, and cautioned against adhoc estimations based on surmises and conjectures.

Applying the law to facts, the Court found that the AO and CIT(A) had failed to justify the basis for their estimations and ignored relevant comparables submitted by the assessee. The Court held that the additions made on adhoc basis could not be sustained.

4. Applicability of Section 40A(3) Disallowance for Cash Purchases

The AO disallowed expenses under section 40A(3) for cash purchases exceeding prescribed limits and not eligible for exemption under Rule 6DD and Circular No. 8 of 2006. The assessee argued that the purchases were made from villagers and in the nature of the trade, cash transactions were customary and permissible under the rules.

The Court noted that the assessee had explained the nature of the trade and the difficulties in maintaining formal bills or making payments through banking channels. The precedent case recognized the statutory sanctity of cash purchases in such circumstances. The AO's disallowance was therefore not justified.

5. Principles of Natural Justice and Opportunity of Hearing

The appellants contended that the assessment and appellate orders were passed without affording reasonable and adequate opportunity of being heard, thus violating principles of natural justice.

The Court found no evidence of denial of opportunity. The AO and CIT(A) had recorded that repeated opportunities were given, and the appellants had filed submissions and evidence. The Court concluded that the principles of natural justice were complied with.

6. Levy of Interest under Sections 234A and 234B

The appellants challenged the levy of interest on the ground that they could not have foreseen the additions/disallowances and thus could not have included them in advance tax payments.

The Court noted that interest under these sections is automatic and statutory, and that the assessee's failure to estimate correct tax liability attracts interest. Since the additions were upheld by the lower authorities, the interest levy was not illegal or unjustified.

Significant holdings and core principles established:

"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... 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... 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."

The Court established that in assessing income from trades involving rural or unorganized sectors, the peculiarities of trade practices must be appreciated and that rejection of books of account cannot be based on mere absence of formal bills or vouchers if the assessee has satisfactorily explained the trade nature and has not been found to have concealed income.

The Court also held that adhoc estimation of net profit or gross profit must be based on relevant material and comparable data, and cannot be arbitrary or based on conjectures. The burden lies on the revenue to justify such estimations.

Finally, the Court set aside the findings of the CIT(A) and directed the Assessing Officer to delete the impugned additions in both appeals, allowing the appeals of the assessee.