Brief of the case:
The Hon’ble Himachal Pradesh High Court in the case of CIT vs. Swastik Foods held that the rejection of basis by merely expressing a doubt about the correctness of profit declared taking inconsistent GP ratio as basis cannot be a said to be rejection of books for incompleteness or incorrectness. Therefore, such rejection is not in line with Sec 145(3) and thus, bad in law.
Facts of the case:
- The assessee firm engaged in the business of manufacture and sale of wheat products. For the A.Y. 2003-04, it filed a return showing income of Rs. 34,71,660/- and claimed the entire amount as deduction under Section 80IB and accordingly declared NIL income in the return.
- During the course of assessment proceedings , the AO send balance confirmation to various debtors and creditors , out of 238 confirmation request send by AO only 95 parties responded to the same and letters to 143 parties were returned unserved as the parties could not be found at he addresses given.AO also noted certain discrepancies in the accounts and supporting vouchers. Considering all the facts, a special audit under Section 142(2A) was ordered with the approval of the Commissioner.
- After a period of time report of special audit was received by AO pointing out several discrepancies in the books of accounts in depreciation claim, expense claim without supporting vouchers, non-recording of certain purchase transactions and incorrect stock valuation.
- Taking into consideration the findings of special audit , inconsistency of profit and expenses as compared to subsequent years and non-confirmation of balances by parties , AO rejected the books of accounts as unreliable.
- He also found that in the immediate succeeding assessment year 2004-05, where the assessee was eligible for deduction under Section 80IB at only 25% of profits, the G.P. rate had been disclosed at 6.32% as against about 8% declared in the current year.
- Applying the profit rate of 6.32% to the sales of Rs. 15.69 crores declared during the year, the A.O. completed the assessment under Section 143(3) by a taxing a sum of Rs. 26,39,958/-. as income from undisclosed sources.
- CIT(A) allowed the appeal of the assessee on the ground that no recorded concrete basis in his order rejecting books of accounts and, therefore, the profit declared by the assessee could not be disturbed.
- ITAT also decided the case in favour of assessee and held that the AO has not recorded any finding that how books of accounts are incorrect and/or incomplete but he has merely doubted the trading results declared by the assessee.
- Aggrieved by the order of AO, revenue filed an appeal before High Court.
Issue before High Court:
Whether Assessing Officer was justified to reject the books of accounts by invoking the provisions of Sec 145(3) of the I.T Act, 1961?
Contention of the Assessee:
The learned counsel for the respondent has supported the order passed by the ITAT as being strictly in conformity with law. No other fresh argument was raised before the High Court.
Contention of the Revenue:
