2025 (5) TMI 1066 - AT - Income Tax

Rejection of books of accounts u/s 145(3) - as proposed that the gross profit @ 8 % of sales computed - HELD THAT - While examining the books no defects as such was observed in the books of accounts which suggest the rejection of book results based on the provision of the Act as discussed herein above. Thus the ld. AO or that of the ld. CIT(A) cannot reject books of accounts based on conjectures and surmises as such there is no comments on the books of accounts so maintained and produced forget about the comments on record placed on record. The assessee s books of account are regularly maintained audited and no discrepancies whatsoever have been indicated by the CIT(A). This is an utter disregard of the fact that all the books of account were maintained and regularly audited were simply not relied and rejected based on one simple reason that there exist a difference in the figure of purchase reported in the books and in the portal data base of the revenue and there is no other reasons. So far as the rent on godown transportation of the goods and labour the lower authority failed to understand that nature of business carried on by the assessee. The records reveals that the assessee performs the duty of commission agent who purchase the perishable goods from the agricultural products producers and then forward the same to the ultimate whole vendor or the retail and therefore the person comes with their own vehicle and deliver the goods in the Mandi itself as per the direction of the assessee and the Mandi provide the storage facility for the temporary period. Thus the rejection of books is purely based on surmises and conjectures and against the set of records made available on record. when the records produced does not shows any defect which are in accordance with that of the provision of section 145(3) of the Act the rejection of the book results were merely based on the surmises and conjectures. Based on the reasons of the scrutiny there is no case of the revenue that the assessee has shown the bogus purchase to claim the lower profit in fact the ld. AO says that the assessee has not accounted various expenses and thus the scope of scrutiny cannot be expanded without following the sanctioned route for that even on that aspect of the matter revenue has not demonstrated that there is no force in the arguments of the assessee. and therefore we see no reason to support the rejection of the book results as the assessee figure is more than the what is reported in the portal for purchases. Since we have ordered that the rejection of the books results were not correct the consequential addition making addition of profit on estimate basis deserves to be deleted. Appeal of the assessee is allowed.

Summary

The core legal issues considered in this appeal relate to the validity and correctness of the assessment order passed under section 143(3) read with section 144B of the Income Tax Act, 1961, specifically:

1. Whether the Assessing Officer (AO) was justified in rejecting the assessee's books of accounts under section 145(3) of the Act on grounds of alleged discrepancies in purchases and related expenses.

2. Whether the AO's estimation of income by applying a gross profit (GP) rate of 8% was reasonable and in accordance with law, considering the past history and nature of the business.

3. Whether the AO exceeded the scope of limited scrutiny assessment under the Centralized Automated Scrutiny Selection (CASS) scheme without proper approval, thus violating CBDT guidelines.

4. Whether the omission of reference to section 144 in the assessment order renders the assessment void ab initio.

Issue 1: Rejection of Books of Accounts under Section 145(3)

Legal Framework and Precedents: Section 145(3) empowers the AO to reject the books of accounts if he is not satisfied about their correctness or completeness. The AO must have cogent material to justify such rejection, and mere discrepancies or differences do not suffice. The AO's power under section 145(3) is not arbitrary and must be exercised based on relevant material. This principle is supported by judicial precedents including the decision of the coordinate bench in M/s Bajrang Trading Company vs. ITO and the jurisdictional High Court in Commissioner of Income Tax v. Ceramic Industries.

Court's Interpretation and Reasoning: The AO rejected the books primarily because of an alleged difference of Rs. 33,17,981/- between purchases recorded in the books and those reflected on the IT portal (GST data). The AO also noted negligible transportation expenses and absence of godown rent, questioning the completeness of accounts. However, the assessee demonstrated that the purchases reported on the portal included not only material cost but also various charges such as Mandi Tax, KUMS, Tulai, freight, and wages, which were posted under separate heads in the books. The total purchases in the books, when these components were aggregated, actually exceeded the portal figures.

The assessee furnished detailed ledgers, invoices, and reconciliations explaining the differences, including typographical errors and revised GST returns by suppliers. The AO and the CIT(A) did not adequately address these explanations and relied mainly on the difference in figures without appreciating the nature of accounting and business operations.

Key Evidence and Findings: The assessee submitted audited financial statements, detailed purchase ledgers, sample invoices showing breakup of material cost and other charges, and reconciliations for five key suppliers. The evidence established that the books were regularly maintained, audited by an independent Chartered Accountant, and reflected a true and fair view of the business transactions.

Application of Law to Facts: Given the detailed documentary evidence and absence of any adverse observation in the audit report, the rejection of books based solely on a numerical difference without considering the nature of entries and explanations was unwarranted. The AO's rejection was based on surmises and conjectures rather than material evidence.

Treatment of Competing Arguments: The Revenue emphasized the discrepancy and lack of supporting documents for payments and transportation details. The assessee countered by explaining the nature of the business (commission agency dealing with agricultural produce), modes of transportation (tractor trolleys, camel carts, buffalo carts), and that no godown was required due to the mandi's storage facilities. The assessee also highlighted that the AO failed to provide a meaningful opportunity for oral submissions due to incorrect VC credentials.

Conclusion: The Tribunal found that the AO and CIT(A) erred in rejecting the books of accounts under section 145(3) without sufficient material and proper appreciation of the evidence. The rejection was not justified in law or fact.

Issue 2: Estimation of Income by Applying Gross Profit Rate of 8%

Legal Framework and Precedents: When books are rejected, the AO may estimate income under section 144 or 145(3), but such estimation must be a fair and honest exercise based on material and past history. Arbitrary or whimsical estimations are impermissible. The Supreme Court in Kanchwala Gems v. JCIT and other High Court decisions have emphasized that best judgment assessments require relevant material and cannot be based on guesswork.

Court's Interpretation and Reasoning: The AO applied a GP rate of 8% for estimation, significantly higher than the declared GP rate of approximately 1.36% by the assessee. The AO did not consider the assessee's past consistent GP rates, audited accounts, or comparable cases. The CIT(A) upheld this estimation without assigning detailed reasons or considering the past history submitted by the assessee.

Key Evidence and Findings: The assessee submitted past years' turnover and GP rates showing a consistent low GP rate around 1.3% to 1.6%. The assessee also maintained stock registers explaining fluctuations. The AO's estimate was disproportionate to the facts and lacked any basis in the record.

Application of Law to Facts: The AO's estimation was arbitrary and not supported by any material. The Tribunal noted that the AO failed to apply the legal principle that estimation must be based on evidence and past history. The addition of Rs. 1,29,91,435/- was thus unsustainable.

Treatment of Competing Arguments: The Revenue argued that the estimation was justified due to discrepancies and non-availability of supporting evidence. The assessee countered with documentary proof and legal authorities requiring a reasoned estimation. The Tribunal sided with the assessee.

Conclusion: The estimation of income at 8% GP rate was arbitrary and not in accordance with law. The addition based on such estimation was liable to be deleted.

Issue 3: Scope of Scrutiny and Violation of CBDT Guidelines

Legal Framework and Precedents: Under the CASS scheme, scrutiny is limited to specific issues for which the case is selected. Expanding the scope without proper approval violates CBDT guidelines and renders the assessment invalid.

Court's Interpretation and Reasoning: The case was selected for scrutiny on the issue of purchases from non-filers or suppliers with lower turnover. The AO's action extended beyond verifying purchases to rejecting books and estimating income on an unrelated basis. The assessee contended that such expansion was without approval and contrary to the limited scrutiny framework.

Key Evidence and Findings: The AO's order shows the rejection of books and estimation based on general grounds rather than the specific issue of genuineness of purchases. The assessee was not granted proper opportunity to address expanded issues.

Application of Law to Facts: The Tribunal observed that the AO exceeded the scope of limited scrutiny without following prescribed procedure. However, since the books were held not liable to rejection and estimation was arbitrary, this issue became less significant in the overall decision.

Treatment of Competing Arguments: The Revenue maintained that the scrutiny was within scope as the differences in purchases justified further enquiry. The assessee emphasized procedural violations. The Tribunal noted the procedural irregularity but focused on the substantive merits.

Conclusion: The AO's expansion of scrutiny was improper, but given the ultimate findings on books and estimation, this did not materially affect the final outcome.

Issue 4: Validity of Assessment Order in Absence of Reference to Section 144

Legal Framework and Precedents: Section 292B provides that assessment orders shall not be invalid merely due to mistakes or omissions if they conform to the intent and purpose of the Act. Courts have held that omission of reference to section 144 does not invalidate the assessment.

Court's Interpretation and Reasoning: The assessee argued that since the AO invoked section 145(3), the order should have been passed under section 144. The CIT(A) rejected this plea relying on section 292B and judicial precedents from various High Courts.

Key Evidence and Findings: The AO issued notices under sections 143(2) and 142(1), and the assessee participated in proceedings. The only defect was omission of explicit reference to section 144 in the order.

Application of Law to Facts: The Tribunal agreed with the CIT(A) that the omission was a procedural defect not affecting the validity of the assessment.

Treatment of Competing Arguments: The assessee's argument was rejected as technical and not affecting substantive rights.

Conclusion: The assessment order is valid despite omission of section 144 reference.

Significant Holdings:

"The Assessing Officer cannot reject the books of accounts and invoke section 145(3) merely on the basis of numerical differences without appreciating the nature of business and the manner of accounting, especially when the books are audited and no adverse observations are made in the audit report."

"Estimation of income under section 144 or 145(3) must be a reasoned exercise based on material on record, past history, and comparable cases; arbitrary or whimsical additions are not permissible."

"Omission of reference to section 144 in the assessment order does not invalidate the assessment where the order is otherwise in conformity with the Act's intent and the assessee has been given due opportunity."

"The AO must not exceed the scope of limited scrutiny under the CASS scheme without proper approval, and any such excess renders the proceedings vulnerable."

Final determinations:

- The rejection of books of accounts under section 145(3) was not justified and is set aside.

- The addition of Rs. 1,29,91,435/- on estimation of gross profit at 8% is deleted.

- The assessment order is valid despite omission of section 144 reference.

- The AO exceeded the scope of limited scrutiny, but this procedural irregularity does not affect the substantive decision.

- The appeal is allowed in favor of the assessee on substantive grounds.