INCOME TAX ACT, 1961

Section 145(3)

Accounting method - Rejection of books of account - No specific defects in the books pointed out - Rejection uncalled for

In the course of assessment proceedings, AO noted that turnover of the assessee had increased from Rs. 9.43 Cr. in the preceding year to Rs. 26.23 Cr. in the current year, whereas his net profit had reduced from .21% to 0.18%. He further noted that the assessee had debited huge expenses under the head “Staff salary and Bonus” amounting to Rs. 2,35,78,857 which in the preceding year was Rs. 10,42,331. AO also noted that the assessee had not done TDS on certain payments. AO was not convinced on the assessee's explanation and completed assessment under section 143(3) after making certain additions. On appeal, CIT(A) recorded his satisfaction on the assessee's explanations on the financial anomalies, noted by the assessee. However, he rejected the books of account of the assessee on the ground that most of the expenses were wrongly clubbed under salary or bonus which were not verifiable and the burden was on the assessee to prove the genuineness of these expenses and estimated G.P.% @ 10.5% as against 9.8%, as disclosed by the assessee and made addition of Rs. 18,36,237. Held: In this case, it is not the AO but the CIT(A) who rejected the books of account without pointing out specific defects therein. While rejecting the books of account, conditions stipulated under section 145(3) had not been referred to by the CIT(A) and without giving any finding that account books were unreliable, incorrect or incomplete. In view of this, the action of CIT(A) in adopting the G.P rate at 10.5% was held as erroneous and unsustainable and hence the consequential addition was deleted.

Followed:CIT v. M/s. Anil Kumar & Co. (2016) 67 taxmann.com 278 (Kar.) : 2016 TaxPub(DT) 1607 (Karn-HC) and ITO v. M/s. Karthik Poultry Farm [ITA No.1106(B)/2014, dt. 6-11-2015]

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :

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