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.
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.
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.