Rejection of Books u/s 145(3) Set Aside by CIT(A) as No Specific Defects Found; ITAT Dismisses Revenue’s Appeal

Rejection of Books u/s 145(3) Set Aside by CIT(A) as No Specific Defects Found; ITAT Dismisses Revenue’s Appeal

Issue

1. Rejection of Books: Whether the Assessing Officer (AO) was justified in rejecting the books of account under Section 145(3) and estimating net profit at 8% on the grounds of non-submission of sales/purchase accounts and creditor confirmations, when the assessee had provided substantial details and no specific defect was pointed out in the audited accounts.

2. Rule 46A Violation: Whether the Commissioner (Appeals) erred in admitting “additional evidence” (ledger accounts, remaining confirmations) without giving the AO an opportunity under Rule 46A, when the documents were merely an extension of details already on record.

Facts

• Assessee: A partnership firm engaged in business, declaring an income of Rs. 79.85 Lakhs.

• AO’s Findings: The AO observed that the assessee failed to provide:

  • Sales and Purchase accounts.

  • Details of suppliers and customers (GST Nos.).

  • Copy of Cash Book.

  • Confirmation from 60 out of 67 sundry creditors.

  • EPF/ESI details for all employees (only 16 were registered).

• AO’s Action: Citing these deficiencies, the AO rejected the books under Section 145(3) and applied a flat 8% Net Profit rate, assessing the income at Rs. 12.81 Crores (a massive addition).

• CIT(A)’s Relief: The CIT(A) deleted the addition, observing:

  • The assessee had furnished lists of sales/purchases, creditors with addresses, and TIN details during assessment.

  • The “additional” documents (ledger copies, remaining confirmations) filed during appeal were part of the regular books already available.

  • The AO did not point out any specific defect in the books or verify the creditors using statutory powers (u/s 133(6)).

  • Lack of GST number was irrelevant as GST was not applicable in that year.

  • Wage records with Aadhar details were sufficient even if not all employees were under EPF/ESI coverage.

Decision

• The ITAT Chandigarh Bench dismissed the Revenue’s appeal.

• No Specific Defects: The Tribunal held that the AO failed to point out any specific defect or discrepancy in the books of account (like unrecorded sales or bogus purchases) to justify rejection under Section 145(3). Merely asking for more details and rejecting books because they weren’t provided in a specific format is not valid.

• Substantial Compliance: The assessee had substantially proved the financial results through audited statements, tax audit reports, and party-wise lists.

• Rule 46A Not Violated: The Tribunal accepted that the documents filed before the CIT(A) were not “new” evidence but extensions/clarifications of the material already on record (like ledger extracts of transactions already summarized in the list). Since the CIT(A) has co-terminus powers, verifying these details to conclude the assessment did not violate Rule 46A.

• Confirmation of Creditors: The failure to file confirmations from all creditors during the short assessment window does not automatically render the books unreliable, especially when the AO made no independent inquiry.

Key Takeaways

• • Rejection Threshold: Section 145(3) cannot be invoked casually. The AO must prove that the method of accounting is defective or that income cannot be properly deduced from the accounts. A general dissatisfaction with the volume of documentation is not enough.

  • Estimation Requires Rejection: You cannot estimate profits (Net Profit addition) without first validly rejecting the books. If the rejection falls, the estimation falls.

• Additional Evidence: Documents that merely support or clarify existing submissions (like ledgers for listed creditors) may not strictly be treated as “fresh evidence” requiring a Rule 46A remand, especially if they are part of the books already produced.

• Audit Report Value: A Tax Audit Report under Section 44AB carries significant evidentiary weight. The AO needs strong contrary evidence to disregard it.