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Friday, 04 March 2016 14:43

Section 145(3) - Books of accounts cannot be rejected merely on the grounds that some of the addresses given in the Bills are incomplete - AO must point out specific defects - Delhi Tribunal

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Section 145(3) - Rejection of Books of Accounts

Rejection of Books of Accounts u/s 145(3) - Without pointing out specific defects in bills, vouchers or books of accounts, it was not proper on the part of the AO to reject the books of accounts. AO is not justified in outright rejection of the books of accounts merely on the grounds that some of the addresses given in the bills and vouchers were not complete.

Facts

1. Return of income was filed on 30.10.2006 declaring total income of Rs.40,86,300/-

2. The assessee is a partnership firm and claimed interest on capital amounting to Rs.12,94,710/- and salary u/s. 40(b)(v) amounting to Rs.3,30,000/-

3. He also received FDR interest of Rs.6,03,081/- and interest on Income Tax Refund of Rs.57,267/-

4. The above interest of Rs.6,60,348/- (6,03,081 + 57,267) was treated as business income by the assessee

5. The case was selected for scrutiny. Notices were issued and served

6. The Assessing Officer pointed out four samples of the bills where complete addresses were not give and stated that proper bills were not there for many expenses, but she has failed to identify any such specific defect in the books of accounts

7. She also stated that the payments were made in cash to the parties where complete address was not given in the bills

8. Therefore, the ld. Assessing Officer out rightly rejected the books of account and applied 5% of the total turnover of Rs.13,54,58,515/- and calculated net profit rate of Rs.67,72,925/-

9. She also did not allow interest and salary paid to the partners and interest received was treated as income from other sources

10. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the CIT(A)

11. The ld. CIT(A) accepted the claims made by the assessee and deleted the additions made by the AO

12. Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal

13. Tribunal decided the appeal in favour of the Assessee

Arguments by Revenue

The ld. DR submitted that the Assessing Officer has made reasoned order and it does not require any interference. She has rightly rejected the books of accounts because she made verification and bills were not in proper form. Some payments were made in cash. The ld. DR submitted that rejection of accounts is based on justified reasons u/s 145(3).

Arguments by Assessee

The learned AR relied on the order of the ld. CIT(A) and submitted that the CIT(A) has made reasoned order which does not require any interference. He has submitted comparable cases of contractors of relevant assessment year, in which the respective AOs have accepted the cases below @ 5% net profit rate.

He submitted that some creditors are old and transaction is continuously going in previous and subsequent assessment years. The assessments in previous and subsequent years were made under scrutiny, but no addition on account of creditors was made and the interest income was also treated as business income. The rejection of books of account by the AO was wrong. Therefore, the question of estimation of profit itself does not rise. The books of account were duly audited by the Chartered Accountant and no any other adverse report has been given. 

Adjudication

Honb. Tribunal heavily relied upon the findings of the CIT(A) which is as under -

On Rejection of Books of Accounts u/s 145(3) :

Thus, in my opinion, the AO was not justified in outright rejection of the books of accounts of the appellant merely on the grounds that some of the addresses given in the bills and vouchers were not complete. She should have seen that purchases had been made consistently from these parties even in earlier years, which were accepted by the Department. In fact, the purchases from and payments to these parties have been accepted by the Department in the succeeding years also.

On Estimation of Net Profit @ 5% of Gross Receipts -

Since it has been held in the preceding paragraph that no justifiable grounds existed for the rejection of books of accounts u/s. 145(3) of the Act as no specific defects have been pointed out by the AO in the hills, vouchers or books of accounts of the appellant, and that the rejection of books of accounts by the AO was wrong, therefore, the question of estimation of profit itself does not arise.

On allowing Partners Salary and Partners Interest u/s. 40(b) -

This issue becomes redundant once directions are issued to the AO to accept the Net Profit as per the audited books of accounts of the appellant

On treatment of interest on FDRs and interest on Income Tax Refund under the head "Income from Other Sources" -

I have also considered the fact that in subsequent years the Department has treated FDR interest as business income. Under these circumstances, I am of the opinion that the interest income should be treated under the head Business and Profession only. The appellant has also submitted that these FDRs were made by the appellant firm as a guarantee against contracts. Thus, this issue is decided in favour of the appellant.”

Order of Tribunal - In view of the above discussion, we do not find any justification to interfere with the well reasoned order of the ld. CIT(A). The ld. DR could not contradict the findings given in the impugned order. Therefore, the appeal of the Revenue is liable to be dismissed, being devoid of merit.

Cases referred to

1. Madnani Construction Company (P) Ltd. vs. CIT 296 ITR 45 (Gau.)

2. Valtamp Transporter (P) Ltd. vs. CIT (1981) 129 ITR 105, 113, Guj. HC

3. CIT vs. Dalmia Contract (Bharat) Ltd. (2002) 254 ITR 377 Del. HC

4. Hemraj Nebhomal & Sons vs. CIT(2005) 146 Taxman 345 MP HC

5. S. Gurlal Singh Tuli vs. ACIT (2000) 73 ITD 365 (ITAT Nagpur)

6. Vishal Infrastructure Ltd. vs. ACIT, 104 ITD 537 (Hyd. ITAT)

Additional Info

  • Order Date: Wednesday, 02 March 2016
  • Court: Tribunals
  • Cout Name: Delhi Tribunal
  • Section: 145(3)
  • Favouring: Assessee
Read 5744 times Last modified on Wednesday, 04 May 2016 12:17
Anil B.

A practicing Chartered Accountant Anil B. acquired CA, CS and LL.B degrees with over 12 years of rich and diverse management experience across Banking & Financial Services, Insurance and the Logistics industry spanning various markets and geographies globally.

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