2025 (5) TMI 748 - AT - Income Tax

Rejection of books of accounts - estimation of income - HELD THAT - AO has rejected the books of account without any basis and also adopted the rate as per section 44AD overlooking the book results certified by the auditor. There is no rationale brought on record to reject the books of account and adoption of the rate as per section 44AD. Therefore we are inclined to direct the AO to accept the books results certified by the auditor this is not the first year of operation and the same method of accounting was adopted by the assessee in the past. There is no change in the business carried on the assessee in the past and also the method of books maintained by the assessee. As long as the results declared by the assessee as backed by the evidence and system adopted to certify the book result it is sufficient and not ideal. The assessee is managed to control the business by adopting a method based on the DSRs and the same can be traced back to the individual sales in the business there is no bar to maintain the same considering the fact that the assessee has restaurant in the different locations. The businessman knows the best way to control its business and the result. As long as they are able to demonstrate the books results by whatever method adopted in the business. If the nature of the business is so complicated the AO had the opportunity to refer to the special auditor. Therefore we are not inclined to accept the method adopted by the authorities to determine the income of the assessee overlooking the various documents and parallel commercial Acts like GST Act. The assessee also regularly filing other returns of revenue before GST regulations. Therefore we are inclined to direct the AO to accept the certified book results declared by the assessee and the same result was also certified by the same statutory auditor. Hence the grounds raised by the assessee in this regard are allowed. Addition of cash deposit in bank account during demonetization - After considering the cash book and held that the assessee had sufficient sources of cash available in the business. The same was utilised to deposit the cash during the demonetisation period. The relevant facts are very much available on record and the cases cited by the ld. CIT(A) are for the factual findings and the facts of both the cases are exactly same. We observed that ld. DR has expressed issues on relying on the decisions of individual cases on the corporate cases in our view for relying on the facts of other cases on the factual matters need not be of the same category of the persons. Therefore we are inclined to accept the detailed findings of ld. CIT(A) and do not see any reason to accept the same. In the result grounds raised by the Revenue are dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

(a) Whether the Assessing Officer (AO) was justified in rejecting the books of account of the assessee under section 145(3) of the Income-tax Act, 1961, on the ground that the books were neither correct nor complete;

(b) Whether the AO was justified in estimating the income of the assessee at 8% of turnover under section 44AD of the Act after rejecting the books of account, despite the turnover exceeding the threshold limit prescribed under section 44AD;

(c) Whether the addition of Rs. 1,28,30,720/- made by the AO under section 68 of the Act on account of unexplained cash deposits during the demonetization period was sustainable, given the assessee's explanation regarding the source of cash withdrawals and deposits;

(d) Whether the AO's reliance on survey proceedings and statements recorded under section 131(1A) and section 133A of the Act, without providing the assessee a copy of the survey report or opportunity to rebut, was in conformity with principles of natural justice;

(e) Whether the AO's disallowance of declared loss of Rs. 2,90,19,970/- was valid in the absence of any specific findings on the correctness or completeness of the accounts or the method of accounting adopted;

(f) The legal effect of the auditor's report which contained qualifications regarding maintenance of regular books but certified the financial statements and profit and loss account;

(g) The applicability and rationale for adopting the presumptive income rate under section 44AD in the facts of the case;

(h) The treatment of time gap between cash withdrawals and subsequent deposits in the bank during demonetization period as a ground for addition under section 68.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Rejection of Books of Account under Section 145(3)

Legal Framework and Precedents: Section 145(3) permits rejection of books of account where the AO is not satisfied about their correctness or completeness, or where the method of accounting has not been regularly followed, or income is not computed in accordance with notified standards. The AO must record specific reasons satisfying these conditions. Reliance was placed on judicial precedents emphasizing the need for AO to confront the assessee with adverse material and provide opportunity to rebut.

Court's Interpretation and Reasoning: The AO rejected the books based primarily on statements recorded during survey proceedings and auditor's remarks regarding non-maintenance of regular books. The AO relied on the admission that sales from delivery orders, bulk orders, corporate sales, and catering were not properly recorded or maintained in separate accounts. The AO estimated income at 8% of turnover under section 44AD.

The CIT(A) upheld the rejection of books, observing that the books were neither correct nor complete, relying on the director's statement and auditor's remarks. However, the Tribunal found that the AO failed to demonstrate how the conditions under section 145(3) were met. The AO did not record satisfaction regarding correctness or completeness of accounts, nor did he find irregularity in the method of accounting or failure to compute income as per standards.

The Tribunal noted that the assessee maintained Daily Sales Reports (DSRs) from various franchise restaurants and compiled these monthly, which formed the basis for year-end books. The auditor's report, though qualified on maintenance of regular books, certified the financial statements and profit & loss account. The Tribunal emphasized that the AO did not bring any defect or incorrectness in the figures or books during assessment and rejected the books merely on surmises and audit qualification.

The Tribunal also highlighted the failure of the AO to provide the survey report to the assessee, violating principles of natural justice as established in precedents, thereby invalidating reliance on survey findings.

Key Evidence and Findings: Statements recorded under section 131(1A), auditor's report, absence of survey report furnished to assessee, DSRs maintained and compiled, audited financial statements.

Application of Law to Facts: The Tribunal applied the statutory conditions under section 145(3) strictly, requiring AO to record satisfaction on correctness or method of accounting, which was absent. The Tribunal relied on the auditor's certification and the absence of any material showing defect in accounts.

Treatment of Competing Arguments: The Revenue argued that audit qualification and survey findings justified rejection; the Tribunal rejected this, emphasizing lack of opportunity to rebut and absence of AO's satisfaction. The assessee's explanation of business practices and maintenance of DSRs was accepted.

Conclusion: Books of account could not be rejected merely on audit qualification or survey statements without AO's recorded satisfaction on statutory grounds. The rejection under section 145(3) was not justified.

(b) Estimation of Income under Section 44AD after Rejection of Books

Legal Framework: Section 44AD provides for presumptive taxation for eligible businesses with turnover up to Rs. 2 crores, allowing income estimation at a prescribed rate (8%). It is not applicable if turnover exceeds this threshold.

Court's Reasoning: The AO applied section 44AD to estimate income at 8% of turnover of Rs. 6.04 crores, exceeding the threshold. The CIT(A) sustained this estimation as reasonable given the nature of business and admitted deficiencies in recording certain sales.

The Tribunal disagreed, holding that section 44AD was not applicable as turnover exceeded Rs. 2 crores. Further, since the books were wrongly rejected, income could not be determined on presumptive basis ignoring audited accounts. The Tribunal observed the AO failed to bring any rationale or basis for adopting 8% rate and overlooked the auditor-certified results.

Key Evidence: Turnover figures, auditor's report, statutory provisions.

Application: The Tribunal applied the statutory limit on turnover for section 44AD applicability and rejected estimation on that basis.

Competing Arguments: Revenue relied on audit qualification and business nature; Tribunal prioritized statutory applicability and auditor certification.

Conclusion: Estimation under section 44AD was not justified and addition on this basis was disallowed.

(c) Addition under Section 68 on Cash Deposits during Demonetization

Legal Framework: Section 68 requires unexplained cash credits to be added to income unless satisfactorily explained by the assessee. Judicial precedents establish that cash withdrawals from bank accounts can explain subsequent cash deposits, even if there is a time gap, unless there is material to show cash was spent elsewhere.

Court's Reasoning: The AO made addition of Rs. 1,28,30,720/- on cash deposits during demonetization, rejecting the explanation that cash was withdrawn for purchase of agricultural land, which did not materialize, leading to redeposit. The AO relied on time gap and absence of supporting documents for property transaction.

The CIT(A) deleted the addition, holding that opening cash balance and cash withdrawals were verifiable and sufficient to explain deposits. The Tribunal upheld this deletion, relying on precedents that time gap alone cannot discredit explanation absent evidence of alternative use of cash. The Tribunal noted correspondence with landowner evidencing bona fide attempt to purchase land, and absence of any material showing undisclosed income.

Key Evidence: Bank statements, cash book, correspondence with landowner, audited financials.

Application: The Tribunal applied the principle of preponderance of probability and judicial precedents to accept the assessee's explanation.

Competing Arguments: Revenue argued lack of documentary proof and time gap; Tribunal emphasized absence of contrary material and accepted reasonable explanation.

Conclusion: Addition under section 68 was not sustainable and was rightly deleted.

(d) Reliance on Survey Report and Principles of Natural Justice

Legal Framework: It is well established that AO cannot rely on material not furnished to the assessee or not confronted to the assessee, as it violates principles of natural justice. The assessee must be given opportunity to rebut adverse material.

Court's Reasoning: The AO relied on survey report and statements recorded under section 131(1A) and section 133A but did not provide copy of survey report to the assessee. The Tribunal held that this was violation of natural justice and invalidated reliance on survey report.

Key Evidence: Absence of survey report furnished, case law precedents.

Application: The Tribunal applied settled legal principles requiring AO to furnish adverse material.

Conclusion: AO's reliance on survey report without furnishing copy to assessee was improper.

(e) Disallowance of Declared Loss

Legal Framework: Loss declared in return is to be accepted unless AO is satisfied that accounts are incorrect or income is understated.

Court's Reasoning: The AO disallowed declared loss after rejecting books, but did not record satisfaction on statutory grounds. The Tribunal found disallowance to be arbitrary and based on surmises.

Application: The Tribunal held that in absence of any defect or irregularity established in books or accounting method, declared loss must be accepted.

Conclusion: Disallowance of declared loss was not justified.

(f) Auditor's Report and Its Effect

Legal Framework: Auditor's report is relevant evidence. Qualification on maintenance of regular books does not ipso facto invalidate accounts if financial statements are certified and consistent with books.

Court's Reasoning: Auditor qualified on regularity of books but certified financial statements and profit & loss account. Tribunal relied on this to accept books and reject AO's rejection.

Conclusion: Auditor's certification supported acceptance of books.

(g) Applicability of Section 44AD

Legal Framework: Section 44AD applies only if turnover does not exceed Rs. 2 crores.

Court's Reasoning: Turnover exceeded Rs. 6 crores, so section 44AD was inapplicable.

Conclusion: AO erred in applying section 44AD for estimation.

(h) Time Gap Between Withdrawal and Deposit of Cash

Legal Framework: Judicial precedents establish that time gap alone cannot discredit explanation of cash deposits if withdrawals are explained and no evidence of alternative use exists.

Court's Reasoning: Tribunal relied on several decisions to hold that gap of few months between withdrawal and deposit is not ground for addition.

Conclusion: Addition based solely on time gap was not sustainable.

3. SIGNIFICANT HOLDINGS

"The Assessing Officer has nowhere held: (i) that he is not satisfied about the correctness or completeness of the accounts of the appellant, (ii) that the method of accounting as laid down in Section 145(1) has not been regularly followed by the appellant, (iii) that the income has not been computed in accordance with the standards laid down in Section 145(2). Since Ld. A.O has not found any violation of the three conditions mentioned in Section 145(3), the books of accounts could not be rejected."

"The estimation of net profit at the rate of 8 per cent made by the AO is very reasonable in the case of the appellant considering his nature of business ... However, the provisions of section 44AD are applicable only if the turnover is up to Rs. 2 crores. Since, in case of the appellant the turnover is Rs. 6.04 crores, section 44AD cannot be applied. Therefore, the whole basis of addition is ex-facie illegal, arbitrary and without jurisdiction."

"The gap of few months between the cash withdrawn and cash deposited cannot be the sole reason for the rejection of appellant's explanation... In the absence of any material in support of the view that withdrawals were spent for some other purpose, the Tribunal was right in treating the withdrawals as source of cash found."

"It is judicially settled that when assessee-company had given an explanation which was reasonable, revenue authorities could treat amount in question as income from undisclosed sources only if there was some other material from which such inference could have been drawn."

"The Assessing Officer did not provide the survey report to the assessee and hence reliance on such report without giving opportunity to the assessee to rebut is a violation of principles of natural justice."

"The AO rejected the books of account merely on the basis of audit qualification and statement recorded during survey without bringing on record any defect or incorrectness in the figures depicted in the profit & loss account or balance sheet. This is arbitrary and without jurisdiction."

"The AO cannot reject the books of account and estimate income on presumptive basis under section 44AD when turnover exceeds Rs. 2 crores and the books are audited and certified by a statutory auditor."

"The addition under section 68 on account of cash deposits during demonetization was rightly deleted as the assessee satisfactorily explained the source of cash withdrawals and subsequent deposits, supported by bank statements, cash book and correspondence regarding intended land purchase."

"The disallowance of declared loss of Rs. 2,90,19,970/- was based on surmises and conjectures and without any basis; hence, it is illegal and arbitrary."