AO cannot reject entire books of accounts on insignificant defects having minuscule impact on profit
Case Law Details
Brief of the Case
ITAT Ahmedabad held In the case of The ACIT vs. Garden Silk Mills Ltd. that rejection of books of accounts should not be in a mechanical manner. The AO has to come to a definite conclusion that the accounts are not correct or not complete; consequently, it has distorted the true picture of profit. The AO is required to make analysis of each item and factor which has impact on the profit of the assessee. If a particular item of account is found to be not correct or complete, the AO is required to find out its impact on the profit of the assessee, if it is found that there is no impact or very miniscule impact on profit, such defect becomes insignificant. In such a situation, there would be no need of rejection of entire books of accounts; the AO would be justified to make addition into the profit to the extent of such item.
Facts of the Case
The case of the assessee was picked up for scrutiny assessment and the assessment u/s.143 (3) was framed vide order dated 31/12/2007, thereby the AO made disallowance of commission paid to its Director of Rs.88,00,000/- and disallowance of expenditure by invoking provisions of section 14A of Rs.298/-. The AO after rejecting the books of accounts of the assessee made estimation of profit and, thereby made addition of Rs.31,31,87,129/- being 5% of net turnover considering the same as suppression of Gross Profit (GP). Further, the AO made disallowance of interest of Rs.1,88,84,000/- and made disallowance of depreciation of capital goods of Rs.62,23,134/- and computed the book profit at Rs.2,15,36,320/- as against the book profit declared by the assessee of Rs.2,02,69,269/-.
Contention of the Assessee
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