2025 (7) TMI 183 - AT - Income Tax

Rejection of books of accounts - estimation of income - suppressed purchases suppressed sales and unaccounted payments - HELD THAT - The Bench was of the view that net profit rate of 5% would be justified on the total turnover worked out by the Ld. AO after including the sales mentioned in the impounded documents SP-68 and SP-73 and SP-42 etc. which were not disclosed in the books of account to the sales recorded in the books of account as after rejection of books of account the profit is to be estimated. Both the Ld. DR and the Ld. AR were fair enough not to argue against the decision before us. The Ld. AO is therefore directed to apply the net profit rate of 5% to the aggregate of the sales shown in the books of account and the unrecorded sales found in the impounded documents and reduce the net profit shown by the assessee and add the difference to the total income returned by the assessee. No separate addition on account of any other head of expenditure relating to the trading and profit and loss account would be called for nor on account of low house hold expenses and undisclosed investments in the name of the daughters etc. which would be covered by the enhanced income estimated. The Ld. AO is directed to apply the net profit rate of 5% to the sales as worked out on the basis of these directions and allow consequential relief to the assessee. Decided in favour of assessee partly.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the Assessing Officer (AO) had jurisdiction to pass the assessment order under section 143(3) of the Income Tax Act, 1961, in absence of proper issuance of notices under sections 143(2) and 142(1), particularly when the order sheet lacked the AO's signature.
• Whether the AO was justified in rejecting the books of account maintained on electronic media and invoking section 145 of the Act for estimating income.
• Whether the additions made by the AO on various heads such as suppression of sales and purchases, unexplained investments, disallowance under section 40A(3), salary expenditures from undisclosed sources, and other disallowances were legally sustainable.
• Whether the AO violated principles of natural justice by not providing adequate opportunity to the assessee, including non-supply of draft assessment order.
• Whether the interest charged under sections 234B and 234C was justified.
• Whether the net profit rate applied by the AO in estimating income was appropriate, given the rejection of books of account and incriminating evidence found during survey under section 133A.

2. ISSUE-WISE DETAILED ANALYSIS

Jurisdiction and Validity of Assessment Notice

The assessee challenged the validity of the assessment order on the ground that notices under sections 143(2) and 142(1) were not properly issued within the stipulated time, as the order sheet did not bear the signature of the AO. The legal framework requires that notice under section 143(2) must be issued within prescribed time limits to confer jurisdiction on the AO to proceed with assessment under section 143(3).

The Tribunal noted that this ground was not argued during the hearing. No evidence was placed on record to substantiate the claim of non-issuance of notices. The Tribunal accordingly did not dwell on this issue further, implying that the procedural requirements were either met or not contested effectively. The absence of signature on the order sheet alone was insufficient to invalidate the assessment.

Rejection of Books of Account and Invocation of Section 145

The AO rejected the books of account maintained on electronic media, alleging that the books were not reliable and that the assessee had suppressed sales and purchases. Section 145 empowers the AO to estimate income when books are not maintained or are found unreliable.

The Tribunal observed that incriminating evidence was found during the survey under section 133A, including suppressed sales, purchases, and unaccounted payments. This justified the AO's rejection of books and estimation of income. However, the Tribunal emphasized that once books are rejected, the AO must estimate income on a reasonable basis rather than making arbitrary additions on multiple heads.

The Tribunal held that the AO's approach of rejecting the books but then making multiple separate additions was not appropriate. Instead, the AO should have estimated the net profit rate on the aggregate turnover including unrecorded sales found in impounded documents.

Estimation of Income and Net Profit Rate

The AO computed total income at Rs. 29,50,300/- against the returned income of Rs. 2,25,110/-, applying various additions. The assessee contended that the AO's additions were arbitrary and that the net profit rate should be applied to the total turnover to estimate income.

After considering submissions from both sides, the Tribunal found that the net profit rate of 5% would be justified on the aggregate sales turnover of Rs. 1,61,92,516/-, which included sales recorded in books and unrecorded sales found in impounded documents (marked SP-42, SP-68, SP-73).

The Tribunal directed the AO to apply the 5% net profit rate to the aggregate sales, thereby estimating income in a fair and reasonable manner. It further held that no separate additions on various heads such as salary expenditure from undisclosed sources, unexplained investments, or low household expenses would be necessary, as these would be subsumed in the estimated income based on the net profit rate.

Additions on Various Heads

The AO made additions on account of:

• Suppression of sale payments beyond books of account
• Salary expenditure from undisclosed sources
• Peak payments allegedly made from undisclosed sources
• Unexplained investments
• Disallowance under section 40A(3)
• Suppressed purchases and alleged inflated expenditure
• Commission and service charges not accounted for

The Tribunal found that these additions were largely based on the rejected books and impounded documents. Since the Tribunal directed estimation of income by applying a net profit rate on aggregate turnover, these separate additions were to be withdrawn or not insisted upon, as they would be covered by the estimated income.

Principles of Natural Justice

The assessee contended that the AO violated principles of natural justice by not providing sufficient opportunity and not supplying the draft assessment order for submissions. The Tribunal did not explicitly elaborate on this issue in the final order but noted that the appeal was partly allowed on merits, implying that procedural lapses, if any, did not vitiate the entire assessment.

Interest under Sections 234B and 234C

The AO charged interest under sections 234B and 234C for default in advance tax payments. The assessee challenged the validity of these interest charges.

The Tribunal did not specifically address the merits of the interest charges in detail but noted that these grounds were part of the appeal. Since the appeal was partly allowed on the quantum of income, consequential relief on interest would follow.

Application of Law to Facts and Treatment of Competing Arguments

The Tribunal balanced the evidence from the impounded documents, survey reports, and books of account. It acknowledged the AO's justification for rejecting books due to incriminating evidence but found fault with the AO's method of making multiple additions. The Tribunal adopted a pragmatic approach by directing estimation of income at a reasonable net profit rate, thereby simplifying assessment and avoiding double additions.

The assessee's arguments regarding arbitrary additions and rejection of books were partially accepted, while the Department's reliance on survey evidence and impounded documents was recognized as valid to an extent. Both parties did not contest the net profit rate of 5% applied by the Tribunal, indicating a consensus on this approach.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Since incriminating evidence was found containing details of suppressed purchases, suppressed sales and unaccounted payments, most of which related to the business, therefore, there was justification for estimating the income of the assessee and making the addition."

"However, since the books of account were rejected as is mentioned on page 2 of the assessment order, the Ld. AO should have estimated the profit."

"The Bench was of the view that net profit rate of 5% would be justified on the total turnover worked out at Rs.1,61,92,516/- on page 11 of the assessment order by the Ld. AO after including the sales mentioned in the impounded documents... which were not disclosed in the books of account."

"No separate addition on account of any other head of expenditure relating to the trading and profit and loss account would be called for nor on account of low household expenses and undisclosed investments in the name of the daughters etc., which would be covered by the enhanced income estimated."

"The Ld. AO is directed to apply the net profit rate of 5% to the sales as worked out on the basis of these directions and allow consequential relief to the assessee."

Core principles established include:

• Where books of account are rejected due to incriminating evidence, income should be estimated on a reasonable net profit rate applied to aggregate turnover including unrecorded sales.
• Multiple separate additions on various heads should not be made once income is estimated on a net profit basis to avoid double taxation.
• Procedural irregularities such as alleged non-issuance of notices must be substantiated and argued; absence of signature on order sheet alone does not invalidate jurisdiction.
• Survey and impounded documents can be valid bases for rejecting books and estimating income.

Final determinations:

• The appeal was partly allowed by directing the AO to estimate income at 5% net profit on aggregate sales including unrecorded sales.
• Separate additions on various expenditure and investment heads were disallowed as they would be covered by the estimated income.
• Grounds relating to non-issuance of notices were not argued and thus not decided.
• Interest charges and procedural objections were not specifically overturned but consequential relief would follow from the reduction in assessed income.