2024 (11) TMI 1293 - AT - Income Tax

Rejection of books of accounts - AO had pointed out defects in the books of accounts of the assessee which are again thoroughly discussed by the Ld. CIT(A) - HELD THAT - Issue regarding rejection of books of accounts has been dealt and deliberated by the CIT(A) at length and has noted that in light of various defects / deficiencies / irregularities a/w assessee s evasive approach towards explanations sought by the Ld. AO the allegation that the rejection of books was done in arbitrary manner does not hold any ground. Such observations of Ld. CIT(A) are worth accepting for the reason that in absence of requisite details or non-maintenance of certain prescribed records necessary to find out the true and fair picture of the books of accounts it is not possible for the Ld. AO to work out the correct profit of the assessee. Accordingly the rejection of books u/s 145(3) on account of dissatisfaction of the AO was justified which has led the Ld. AO to estimate the profit of the assessee. In view of such observations ground no. 1 of the present appeal of the assessee stands rejected. Estimation of profit at 10% before interest and depreciation which was scaled down by the Ld. CIT(A) to 6% - we find force in the contention of the Ld. AR that the estimation should be on a logical basis might be on the basis of comparable instances and in case no comparable instances available then the best ratio to be adopted should be the past performance of the assessee itself. As relying on Action Electricals vs. DCIT 2002 (7) TMI 64 - DELHI HIGH COURT in absence of any comparative instances of similar assessee s in the same line of business dehors any explanation reasoning supported with evidence to show as to how the profit of the current year is low any other factor brought to our knowledge by the either side in support of their contentions we are of the considered opinion that the past history of the assessee herself would be best indicator / major / benchmark to estimate the profits particularly in a situation wherein the assessee is unable to produce proper books and evidence before the Ld. AO. Accordingly in the present case we find it appropriate to estimate the profit of the assessee at a percentage worked out on the basis of preceding 3 years profit of the assessee herself. For this limited purpose only the issue raised in ground no. 2 3 by the assessee are restored back to the files of Ld. AO to recompute the taxable income of the assessee.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the Income Tax Act.
2. Estimation of net profit rate by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)].
3. Justification for the estimation of net profit at 6% by CIT(A) instead of 10% by AO.
4. Consideration of past performance for estimating net profit.

Detailed Analysis:

1. Rejection of Books of Accounts:
The primary issue was whether the rejection of the assessee's books of accounts by the AO under Section 145(3) was justified. The AO pointed out several defects in the books, such as non-maintenance of stock registers, absence of verifiable records of material consumption, and incomplete or self-made vouchers for expenses. These deficiencies led the AO to question the correctness and completeness of the accounts, thereby invoking Section 145(3). The CIT(A) upheld this rejection, noting that despite multiple opportunities, the assessee failed to provide complete books and supporting documents. The Tribunal agreed with the CIT(A), emphasizing that the absence of requisite details and the presence of discrepancies justified the AO's decision to reject the books.

2. Estimation of Net Profit Rate:
The AO estimated the net profit rate at 10% due to the rejection of the books, which the CIT(A) later reduced to 6%. The assessee argued that the AO's observations were general and did not constitute defects under Section 145(3). The Tribunal found that the AO's estimation lacked a logical basis and was not supported by comparable instances or past performance. The Tribunal noted that while the AO and CIT(A) estimated profits due to discrepancies, the estimation should ideally be grounded in comparable instances or the assessee's past performance.

3. Justification for Estimation at 6%:
The CIT(A) reduced the AO's estimation from 10% to 6%, considering the lack of scrutiny in the previous years and the discrepancies noted. The Tribunal acknowledged the CIT(A)'s attempt to be reasonable but emphasized that estimations should be based on logical reasoning and comparable data. The Tribunal found merit in the assessee's argument that the estimation lacked a substantive basis and relied on past judicial precedents to support its stance.

4. Consideration of Past Performance:
The Tribunal highlighted that in the absence of comparable instances, the past performance of the assessee should serve as a benchmark for estimating profits. The Tribunal directed the AO to recompute the taxable income based on the assessee's profit history over the preceding three years. This approach aligns with the principle that past results can provide a reliable basis for estimation when current records are inadequate or disputed.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO to re-evaluate the net profit estimation based on the assessee's past performance. The decision underscores the importance of using logical and evidence-based methods for profit estimation, particularly when rejecting books of accounts under Section 145(3). The Tribunal's directive ensures that the estimation process is fair and grounded in the assessee's historical financial data.