Acceptance or rejection of books can greatly affect the determination of income for a tax payer in taxation. This decision is made based on factors such as the method of accounting used and the completeness and accuracy of records the revenue department has asked for. We shall therefore examine case law and precedents to find out some of these fine points that are involved in making this very important part of tax assessment.
Grounds for Rejection:
Under Section 145(3) of the Income Tax Act, the Assessing Officer (AO) has the authority to reject books of account if they are found to be incorrect or incomplete. Several factors may contribute to the rejection of books, including discrepancies in stock valuation, unverifiable transactions, or non-compliance with accounting standards.
1. Unexplained Stock and Cash: In the case of Bhimsen Darbarilal Arora v. ACIT, (150 taxmann.com 68): during a survey conducted by tax authorities, unexplained stock and cash were found. As a result, the books of accounts were deemed incomplete and unreliable, leading to their rejection. The presence of unaccounted assets cast doubt on the accuracy and integrity of the records.
2. Absence of Quantitative Details: In Kachwala Gems v. Joint Commissioner of Income-tax, The Supreme Court ruled in this case that the absence of quantitative stock registers and the inability to verify stock valuation were grounds for rejecting the books of accounts. Without proper documentation and verification mechanisms, the reliability of the financial records was compromised.
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