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REJECTION OF BOOKS OF ACCOUNT UNDER INCOME TAX ACT 1961

Income Tax - By: - Mr. M. GOVINDARAJAN - Dated:- 9-3-2017 - Method of Accounting Section 145 of the Income Tax Act, 1961 ( Act for short) provides the method of accounting by the assessee. Section 145(1) provides that income chargeable under the head Profits and gains of business or profession or Income from other sources shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Section 145(2) gives powers to the Central Government to .....

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sh receipts and actual cash payments that are recorded. The cash system will cover cases where accounts are not maintained on the mercantile basis. The cash system of accounting also includes receipt of kind as revenue receipt of the year in which kind is received. Under the mercantile system, credit entries are made in respect of the amounts due immediately they become legally due and before they are actually received. Similarly, the expenditure items for which legal liability has been incurred .....

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where the method of accounting provided in has not been regularly followed by the assessee; or income has not been computed in accordance with the standards notified, the Assessing Officer may make an assessment in the manner provided in section 144. Section 144 provides for best judgment method of assessment by assessing Officer. Thus it is clear that before the Assessee goes for best judgment he is to reject the books of accounts maintained by the assessee. Justification for rejection In reje .....

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tuation may not per se lead to an inference that accounts are false or incomplete. However where a stock register, cash memos etc., coupled with other factors like vouchers in support of the expenses and purchases made are not forthcoming and the profits are low, it may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee. In such a situation the High Court held that the authorities would .....

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of Accounts of the assessee. The Department was not in a position to dislodge the findings of fact recorded by the Tribunal by providing out any material to the contrary, nor was it the case of the Department that the Tribunal had placed reliance upon any irrelevant material or that any relevant material had been ignored. Under the circumstances the accounts could not be rejected. Accounting method Books of account cannot be rejected while the assessee is following consistently following one met .....

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delivered to him. The Commissioner (Appeals) accepted the plea of the assessee and set aside the order of the Assessing Officer. The Tribunal confirmed the same. The High Court held that the assessee had been consistently following one of the recognized methods of accounting i.e., Project Completion Method. In the absence of any prohibition or restriction under the Act for doing so, it could not be held that the approach of the Commissioner (Appeals) and the Tribunal was erroneously or illegal. .....

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by the assessee in the books of account which were never rejected by him. The Assessing Officer had not doubted the sales. If the Assessing Officer s version was accepted then the gross profit works out 83% which was unbelievable. Non production of parties could not be a ground for disallowance of all the purchases because the parties from purchases were made could not always be in the control of the assessee especially when they were unrelated parties. The Tribunal held that there was no justif .....

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ejected the books of accounts. The Commissioner (Appeals) upheld the order of the Assessing Officer. The Assessing Officer was directed to estimate the net profit of the assessee at 10%. The Tribunal found that the Commissioner (Appeals) passed speaking order based on the evidence. The Tribunal upheld the order of Commissioner (Appeals). In Bastiram Narayandas V. Commissioner of Income Tax - 1993 (12) TMI 31 - BOMBAY High Court the High Court held that the rejection of books of accounts was just .....

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ts of the assessee. Failure to produce records In Samwon Precision Mould Manufacturing (India) Private Limited V. Income Tax Officer - 2016 (4) TMI 1094 - ITAT DELHI the Assessing Officer rejected the books of account of the assessee under Section 145 of the Act on the ground that the assessee had failed to produce any bills or vouchers in respect of various cash payments made by the assessee and there were mistakes and discrepancies in the books of account. The Assessing Officer applied the net .....

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o - 2015 (5) TMI 315 - RAJASTHAN HIGH COURT the High Court held that where the provisions of Section 145(3) are invoked one has to consider either the past history of the assessee or history of similarly situated other businesses or trades. Out of the past five assessment years, the Tribunal had applied the rate of 5%. For the Assessment year in question though the contract receipts had sharply increased from ₹ 10.60 crores to ₹ 12.32 crores the net profit had increased from 5.02% to .....

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ficer is having power to examine the books of accounts submitted by the assessee and also other supporting materials. If the account is found defective, then the Assessing Officer may reject the books of account and initiate action according to the provisions of the Act. In Chaturbhuj Major Kumar and others V. Commissioner of Income Tax and another - 2016 (7) TMI 1230 - RAJASTHAN HIGH COURT the Assessing Officer examined the books of account and other supporting materials produced by the assesse .....

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ion of books of account. The Tribunal also upheld the order. The High Court held that admittedly the books of account had been found to be defective even on the admission of the assessee. The books of account were rightly rejected for the reasons assigned by the three authorities. In Kachwala Gems V. Joint Commissioner of Income Tax, Jaipur - 2006 (12) TMI 83 - SUPREME COURT the assessee was dealing in precious and semi precious stones. The Assessing Officer noticed certain defects in books of a .....

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aged in similar business. Therefore, the Assessing Officer rejected the books of account of the assessee and resorted to best judgment assessment under Section 144 and estimated the gross profit at 40%. The Assessing Officer further held that the assessee had shown bogus purchases for reducing the gross profits. On appeal, the Commissioner (Appeals) though reduced the quantum of the gross profit, estimated by the Assessing Officer, yet upheld most of his impugned findings. On further appeal, the .....

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being agitated would need to be examined, from the standpoint of the validity or otherwise of the invocation of Section 145(3) of the Act and the concomitant rejection of assessee s book/results and then on the merits of the addition on quantum. The revenue s action in invoking Section 145(3) is confirmed. This is principally for the reason that the assessee s books of account did not meet the test of deduction of true and correct profits there from in the absence of proper stock records, only w .....

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merely because there is no stock register the accounts books must be false. In Bhundiram Dalichand V. Commission of Income tax - 1970 (4) TMI 52 - BOMBAY High Court the High Court found the rejection of books of accounts under Section 145 justified in the absence of quantitative tally of purchases and sales besides unexplained lowness of gross profit. In Commissioner of Income Tax V. Pareck Brothers - 1987 (3) TMI 79 - PATNA High Court it has been that invocation of Section 145 was justified as .....

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he trading account, the fall in margin of profits could not be satisfactorily explained; and the fall was all the more difficult to explain in view of the fact that the assessee had a substantial import quota which could have been given him a handsome margin or profit. A number of High Courts have held that the keeping of stock register is of great importance because it is a means of verifying the assessee s accounts by having a quantitative tally. In any case, after taking into account the abse .....

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ade in the case and the addition made on such estimate was quite reasonable and fair taking cumulative view of all the factors present in the case. Resorting to Best Judgment - when? Section 145 (3) of the Act lays down that the Assessing Officer can proceed to make assessment to the best of his judgment under Section 144 of the Act only in the event of not being satisfied with the correctness of the accounts produced by the assessee. In Commissioner of Income Tax and another V. Anil Kumar & .....

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fied for rejection of books of account. As such the Tribunal has rightly rejected or set aside the partial addition made by the Assessing Officer for arriving at gross profit and sustained by Commissioner (Appeals). The High Court dismissed the appeal filed by the Revenue. Best judgment to be judicial In case where the provisions of Section 145(3) are attracted, although the assessment is made in the manner provided in Section 144, nevertheless the assessment is made under Section 143(3) of the .....

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roceed on judicial considerations in the light of relevant material that may be brought on record. In Commissioner of Income tax V. Surejeet Singh Maheskumar - 1993 (11) TMI 22 - ALLAHABAD High Court the Allahabad High Court has held that in every case of best judgment, the element of guess work cannot be eliminated so long as best judgment has a nexus with material on record and discretion in that behalf has not been exercised arbitrarily and capriciously. Opportunity to the assessee The assess .....

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cted, profit has to be estimated on the basis of proper material available. An Assessing Officer is not flattered by technical rules of evidence and pleadings and he is entitled to act on material on which may not be accepted as evidence in Court of Law. Nevertheless the Assessing Officer is not entitled to make a pure guess and make an assessment with reference to any evidence or any material at all. There must be something more than mere suspicion to support an assessment under Section 143(3) .....

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Court has held that where assessee s business income is estimated after rejecting the books of account produced by the assessee, it is not reasonable on the part of the Income Tax Officer to work out the Peak credit on the basis of such books of accounts. Accounting of commission In Sajid Iqbal Qureshi V. Assistant Commissioner of Income Tax - 2016 (7) TMI 106 - ITAT MUMBAI the assessee was sole selling agent and power of attorney of film producer marketing, selling films to prospective distribu .....

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ibunal allowed the appeal holding that the assessee had rightly accounted for the commission on the gross value instead of accounting for payment from the parties on which tax was deducted. Since the assessee was working as the sole selling agent the provisions of Section 194J or 194C and Section 40(a)(ia) were not attracted. The Tribunal directed the Assessing Officer to delete the addition made of ₹ 60,33,736/-. Reference to Valuation Officer Section 142A (1) of the Act provides that the .....

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counts under Section 145(3) of the Act. Comparing gross profit of earlier years In International Forest Company V. Commissioner of Income Tax - 1974 (12) TMI 33 - JAMMU AND KASHMIR High Court the High Court held that the rate of gross profit in a particular year depends on many factors such as general market conditions based on demand and supply position, the rise or fall in market rates, specially abrupt ones, the capital position and the turnover achieved etc., It is for the assessee to explai .....

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he taxing authorities to prove that the assessee made more profits. The rejection of books of accounts under Section 145(3) cannot be sustained merely on the fact that the gross profit of the assessee is low during the relevant period as compared to the book results of other years. Similarly the system of accounting adopted by the assessee cannot be rejected merely on the ground that the gross profits disclosed by his books were low as compared with those of others in the same line of business. .....

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missioner of Income Tax - 1972 (11) TMI 9 - MADHYA PRADESH High Court the High Court held that once the books are properly rejected, the income has to be estimated and in making the estimate of such income, the best record along with other things will become the relevant material. In Commissioner of Income Tax V. Nuchem Limited - 2015 (5) TMI 259 - PUNJAB & HARYANA HIGH COURT the Assessing Officer made an application of ₹ 30.26 lakhs on account of trading addition by applying the gross .....

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ified. Power to be exercised judicially The power to reject the books of accounts by the Assessing Officer is to be exercised judicially. The Assessing Officer is to bring on record material on the basis of which he has arrived at the conclusion with regard to correctness or completeness of the accounts of the assessee or the method of accounting employed by it. In Karnataka State Forest Industries Corporation Limited V. Commissioner of Income Tax - 1992 (10) TMI 65 - KARNATAKA High Court the Hi .....

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roceedings exercises all the powers vested with Assessing Officer to be exercised while framing the assessment order. Therefore the Commissioner (Appeals) can reject the books of accounts of the assessee by invoking the provisions of Section 145(3) of the Act for the first time, while framing the appellate order provided with all other conditions exist warranting reject of such books of accounts. No presumption In Commissioner of Income Tax V. Kohinoor Foods Limited - 2015 (5) TMI 82 - DELHI HIG .....

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s work based again on conjectures. The High Court held that the Assessing Officer s narrow basis for rejecting the books of account and addition of 1% of sales and bringing to it tax was legally untenable. Explanation of the assessee In Pawan Kumar V. Income Tax Officer, Malerkotla - 2012 (11) TMI 3 - ITAT CHANDIGARH the Tribunal confirmed the rejection of books of account under Section 145(3) holding that the discrepancies pointed out by the Assessing Officer, while rejecting the book results h .....

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is also true that there is always a wide variation in the percentage of yield of oil and sale rates of oil and oil cakes in the market. However, the assessee has preferred to put up a consolidated account of difference types of oil seeds for the reasons best known to him. The assessee was asked by the Assessing Officer to rework the yield of oil and oil cakes separately from different types of oil, oil seeds crushed by him. The assessee was also asked to explain the reasons for mixing up the co .....

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