TMI Blog2023 (10) TMI 1269X X X X Extracts X X X X X X X X Extracts X X X X ..... ade to rejecting the books of accounts by invoking Sec. 145(3), specially where same were duly audited by a statutory auditor. It is a settled law, that merely because the Net Profit has declined, the AO cannot resort to rejecting the books of accounts. The discretion exercised about how much remuneration shall be paid to the partners is upon the discretion of the assessee firm cannot be basis to doubt the net profit itself. It is a settled position of law that revenue cannot sit into the armchair of the businessman and question the reasonableness of expenditure. We are of considered view that ad-hoc addition of Net Profit has not been sustained by Ld. CIT(A) on the basis of additional evidences before it. Prudent approach is needed to examine the explanation given by an assessee for decline in profits and statistical examination of financial of past years alone cannot be basis of gearing up the Net Profit. Ld. CIT(A) has appreciated the transactions leading to lower Net profit and accepted explanation of assessee for fall in Net Profit while Ld. AO had examined the issue only on statistical parameters, which is not sustainable. The grounds raised by Revenue have no sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and consequently decline in Net Profit. The assessee submitted that net profit before remuneration has declined by Rs.2,09,67,550/- which was due to the following factors: S. No. Particulars Amount (Rs.) 1 Gross Profit Declined (4,12,72,944- 3,66,42,122) 46,30,822 2. Other Income consist of commission and other declined (1,90,00,779 + 488,336- 1,1,3,75,512-1,780-2,53,427) 78,58,416 3. Bank charges and Interest (35,38,633- 14,85,905) 20,52,728 4. Charity Donation (6,02,850-76,052) 5,26,798/- 5. Bad Debts (17,10,450-4,24,897) 12,85,553/- 6. Interest to Partners (1,14,99,711- 87,94,159) 27,05,552/- Total 1,90,59,869 3.3 It was also submitted before the AO that Decline in GP wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest to Partners - Paid/credited in accordance with partnership deed. Apart from the increase in abovementioned expenses, various other expenses had increased/decreased normally whose net adverse impact on the profitability comes to Rs.20,79,194/-. The assessee also submitted a comparative chart of expenses incurred for FY 2013-14 FY 2014-15 which is placed at PB pg. 391. 4. However AO rejected the books of accounts and made addition of Rs. 2,05,29,361/- by computing the differential between average NP rate of 3 years before remuneration to partners vis- -vis the NP declared by assessee. The assessee went in appeal where assessee had made rebuttal of the case of AO by submissions of which the important submission were as follows; 5. Observation of AO ; The sales made to Max Healthcare as reported by the assessee of Rs. 5.99 lakhs was not in conformance with the response received from Max Healthcare Ltd. u/s 133(6) which reflected purchases of Rs. 9.16 lakhs from the assessee. 5.1 Response of assessee ; The assessee transacts with Max Group which has two branches i.e. Max Healthcare Institute Ltd and Max Super Specialty Hospital. During the assessment proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly been falling over the preceding years. 7. Ld. CIT(A) considered the detailed submissions and justification provided by the assessee and has categorically held that the rejection of Books of Accounts was not justified. Relevant finding as appearing at. Pg. 10 of the CIT(A) order is reproduced below: Every year is a different year owing to its facts and circumstances, therefore, it cannot be expected that appellant has to declare the same margin of profit in each year. The rejection of books of accounts can be made under section 145(3) of the Act where the AO is not satisfied about the correctness and completeness of the accounts of the assessee or where the assessee has not followed the method of accounting regularly and consistently, then the AO may compute the income/ loss of the assessee per the material available on record. In the present case of the appellant, the AO has not recorded any finding which could reflect that he is not satisfied about the correctness and completeness of the accounts of the appellant. Further, on perusal of various replies filed by the appellant it is noticed that details have been filed with respect to the sale, purchase, closing stock a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances of the case, whether the Ld. CIT(A) has erred by deleting the additions made by AO @ 5.206% on account of Net Profit. 3. On the facts and circumstances of the case, whether the Ld. CIT(A) has erred by deleting the additions made by AO of Rs. 2,05,29,361/- on account of Net Profit. 4. The appellant craves, leave to add, to alter or amend any ground of appeal raised above at the time of hearing. 10. Heard and perused the record. Ld. DR submitted that Ld. CIT(A) has not considered the detailed examination of circumstances of AO. However, ld. AR supported the findings of Ld. CIT(A). The resultant findings on the grounds is as follows. 11. It is pertinent to observe from the record and submissions that; i. The assessee has duly followed mercantile system of accounting throughout the year and has prepared books of account duly adhering to the accounting standards. Such books of accounts have also been duly audited by the Statutory Auditor. ii. The assessee firm is also subject to Tax Audit and no adverse remarks have been made by the Tax Auditor of the assessee. iii. The assessee has furnished ledger accounts of the expenses, details of sun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this regard: The Pr. Commissioner of Income Tax-9 Versus IBILT Technologies Ltd. 2018(10) TMI 63-Delhi High Court, Dated 12-09-2018. CIT versus Winner Constructions Pvt. Ltd., 2012 (5) TMI 394-Delhi High Court, dated- May 3, 2012 Commissioner of Income Tax-XII versus Smt. Poonam Rani, 2010 (5) TMI 57-Delhi High Court, wherein the court held as under 8. The fall in gross profit ratio, in the absence of any cogent reasons could not, by itself, have been a ground to hold that proper income of the assessee cannot be deduced from the accounts maintained by her and consequently, could not have been a ground to reject the accounts invoking Section 145(3) of the Act. 14. The discretion exercised about how much remuneration shall be paid to the partners is upon the discretion of the assessee firm cannot be basis to doubt the net profit itself. It is a settled position of law that revenue cannot sit into the armchair of the businessman and question the reasonableness of expenditure. Reliance is rightly by Ld. AR placed on the following judicial pronouncements in this regard: SA Builders Ltd. Versus Commissioner of Income Tax, 2006(12) TMI 82-Supreme Court, D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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