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2025 (5) TMI 757 - HC - Income TaxRejection of books of accounts - estimation of income - percentage was accepted by the appellate authority and accordingly the net profit for the assessment year under consideration was fixed at 0.77% of the total turn-over and the appeal stood partly allowed - HELD THAT - Submission does not merit consideration for several reasons more particularly when there can be no such offer made by the assessing officer under protest during the course of the assessment proceedings. The contents of the reply given by the assessee during the hearing on March 1 2016 which has been extracted by the learned Tribunal clearly shows that the offer though stated to be under protest the assessee has made a calculation by computing the average of the net profit for three financial years. Therefore we are of the view that the appellate authority was right in accepting the said percentage as net profit for the assessment year under consideration and we also find that the learned Tribunal rightly affirmed the order passed by the appellate authority. Thus we find no question of law much less substantial questions of law arising for consideration.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court in this appeal under Section 260A of the Income Tax Act, 1961, arising from the assessment year 2013-14, are as follows: (a) Whether the Income Tax Appellate Tribunal (Tribunal) erred in upholding the order of the Commissioner of Income Tax (Appeals) [CIT(A)] confirming an estimated addition equal to 0.77% of the appellant's total turnover, despite both the CIT(A) and the Tribunal rejecting the Assessing Officer's (AO) action of rejecting the appellant's books of accounts based on non-response from certain sundry creditors to notices issued under Section 133(6) of the Act; (b) Whether the estimated addition of 0.77% of the total turnover can be sustained on the basis that it was offered by the appellant during assessment proceedings, even though the offer was made under protest and in the context of the erroneous rejection of the books of accounts, which was held to be legally untenable by the CIT(A) and the Tribunal; (c) Whether non-compliance with notices under Section 133(6) of the Act by some sundry creditors can constitute valid grounds for making an estimated addition equal to 0.77% of the appellant's total turnover for the assessment year 2013-14. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a): Validity of confirming an estimated addition of 0.77% of turnover despite rejection of AO's action of rejecting books of accounts The legal framework involves the provisions of the Income Tax Act, 1961, particularly Section 133(6) which empowers the AO to issue notices to third parties (such as sundry creditors) to verify the correctness of the assessee's books of accounts. The AO had rejected the appellant's books of accounts on the ground that some sundry creditors did not respond to such notices, leading to an estimation of income at 2% of contracted work. The CIT(A) and subsequently the Tribunal found this rejection of books of accounts to be untenable in law. The Court noted that the appellate authorities rightly held that the AO's rejection of the books of accounts solely on the basis of non-response from some creditors was not sustainable. The assessing officer's estimation at 2% was therefore set aside. However, the appellate authorities accepted an alternative method of estimation, i.e., the average net profit percentage of 0.77% based on the appellant's net profits for the preceding three financial years (2009-10, 2010-11, and 2011-12). The Court emphasized that the rejection of books of accounts requires substantial justification and cannot be based merely on non-compliance by third parties without further corroboration. The appellate authorities' approach in rejecting the AO's action but accepting a reasonable estimation based on historical data was consistent with the principles of fairness and reasonableness under the Act. Issue (b): Sustainment of the estimated addition based on the appellant's offer made under protest The appellant contended that the 0.77% net profit figure was offered under protest during assessment proceedings and hence should not have been accepted as a basis for fixing the income. The appellant argued that since the offer was made under protest and in the context of erroneous rejection of books of accounts, it could not be treated as a conclusive admission. The Court rejected this contention, reasoning that an offer made during assessment proceedings, even if stated to be under protest, constitutes a relevant admission unless withdrawn or challenged by appropriate legal means. The Court observed that the appellant's reply to the AO's notice on March 1, 2016, explicitly computed the average net profit over three years at 0.77%, thereby making a clear offer of income estimation. The Court found no legal basis to treat this offer as non-binding or irrelevant, especially since the appellate authorities accepted the offer as a reasonable basis for estimation in the absence of reliable books of accounts. The Court held that the appellate authorities were justified in relying on the appellant's own computation to fix the net profit for the assessment year under consideration. Issue (c): Legitimacy of making estimated addition due to non-compliance of Section 133(6) notices by sundry creditors The AO had initially rejected the appellant's books of accounts on the ground that some sundry creditors did not respond to notices under Section 133(6), which was challenged before the CIT(A) and the Tribunal. Both appellate authorities held that non-compliance by some creditors alone cannot justify rejection of books of accounts or arbitrary estimation of income. The Court agreed with this view, underscoring that non-response to third-party notices is a factor to be considered but cannot be the sole basis for rejecting accounts or making estimated additions. The Court observed that the AO's approach was legally untenable and that the appellate authorities rightly deleted the addition based on the 2% estimation initially made by the AO. However, the Court also noted that in the absence of reliable books of accounts, estimation of income is permissible under the Act, and such estimation can be based on reasonable grounds, including historical profit percentages. Thus, while non-compliance with Section 133(6) notices cannot by itself justify an addition, it may contribute to the overall assessment process when combined with other evidence. 3. SIGNIFICANT HOLDINGS "The rejection of the books of accounts by the assessing officer on account of non-compliance of notices issued under Section 133(6) on some of the sundry creditors and subsequent determination of the income of the assessee at 2% of the contracted work is not tenable." "An offer made by the assessee during the assessment proceedings, even if stated to be under protest, constitutes a relevant admission and can be accepted as a reasonable basis for estimation of income." "Non-compliance with notices under Section 133(6) by some of the sundry creditors cannot be the sole ground for rejection of books of accounts or making estimated additions; such non-compliance must be considered in conjunction with other evidences." "The appellate authorities were justified in accepting the average net profit percentage of 0.77% based on the assessee's net profits for three preceding years as a reasonable basis for fixing income for the assessment year under consideration." Final determinations:
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