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Books of Accounts of cannot be rejected without finding any specific defects in them

The Revenue is bound to accept the authenticity of the accounts prepared with reference to the manner provided in section 128 r.w. section 129 of The Companies Act, 2013 and Income Computation and Disclosure Standards issued under section 145 of The Income Tax Act, 1961. Further, the authenticity of the books is further appraised when the said books are being audited by statutory auditors under section 143(3) of the Companies Act, 2013 and are also supplemented by the Tax Auditors under section 44AB of the Income Tax Act, 1961.

The Financial statements are first of all signed by the directors of the company along with public declaration regarding the correctness of the books of accounts. The books are also approved by the shareholders in the Annual General Meeting of the Company. The books are also filed before the Registrar of Companies who has a statutory obligation under the Companies Act to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Thereby it can be said that the procedures contemplated under the provisions of section 128 r.w.s. 129 of The Companies Act, 2013 and section 44AB r.w.s. 145 of the Income Tax Act, 1961 is generally complied with while preparation of books of accounts.

The rejection of books of accounts without disclosing any specific defect upon which the rejection has been based is not justified. In the absence of any specific discrimination or defect in the maintenance of books, the AO cannot reject the books without proper appreciation of the facts and material on record.

It is a well settled principle of law that the Revenue cannot make any additions by presuming any facts and circumstances against the assessee. It is for the Revenue to prove the allegations imposed by them really exist. It is a fundamental principle that one need not take any assumptions and presumption in the taxing statutes. In order to reject the books, the AO should bring out that there has been a clear infringement of any accounting standard or accounting principles and prove the same by the way of concrete and material evidences and not merely on the basis of some assumptions and presumptions.

It is an undisputed law of the land that suspicion, however strong cannot take place of evidences and proofs and addition can be made only on the basis of relevant material and concrete evidences and not on the basis of mere surmises, conjectures, suspicion, presumptions or assumptions.

Nevertheless, in the case, where the AO without recording any finding that the books of account maintained by the appellant were incorrect, proceeded to reject the books of account on the basis of his sweet will without having any documentary evidences on record. In these circumstances, the rejection has legs to stand.

Reliance in this regard is placed upon the decision in the case of Dhakeshwari Cotton Mills -vs.- CIT (1954) 26 ITR 775 (SC) wherein Hon’ble Apex Court held that AO cannot make any addition on the account of his guess work without having any material evidence on record. The relevant extracts of the said judgement is reproduced as under:

“….that in making the assessment under sub-section 3 of section 23 of the Income Tax Act, 1922 [corresponding to the section 143(3) of the Income tax Act, 1961], the Income Tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 23(3)”

Reliance in this regard is placed on the decision in the case of CIT -vs.- J.J. Enterprises (2002) 122 Taxman 124 (SC) wherein the Hon’ble Supreme Court approving the decision of the lower authorities affirmed that the addition made on the basis of ‘pure guess work’ were unsustainable.

Reliance in this regard is placed on the decision in the case of State of Orissa -vs.- Maharaja B.P.Singh Deo (1970) 76 ITR 690 (SC) wherein the Assistant Collector has not given no reasons for enhancing the assessment and his order does not disclose the basis on which he has enhanced the assessment. The Hon’ble Supreme Court held that the assessment must be based on some relevant material. It is not a power that can be exercised under the sweet will and pleasure of the concerned authorities.

Reliance is further placed on the decision in the case of Brij Bhushan Lal Parduman Kumar -vs.- CIT (1978) 115 ITR 524 (SC) wherein it was held that in the best judgment assessment an honest and fair estimate of the income should be made and the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case.

Further, in the case of State of Kerala -vs.- C. Velukutty (1966) 60 ITR 239 (SC) it was held that though there is an element of guesswork in a ‘best judgment assessment’, it should not be a wild one, but should have a reasonable nexus to the available material and the circumstances of each case. Though the section provides for a summary method because of the default of the assessee, it does not enable the assessing authority to function capriciously without regard to the available material.

Similarly, in the case of CIT -vs.- Om Overseas (2008) 173 Taxman 185 (P&H) it held that the AO can’t reject the book of accounts provided by the assessee without specifying proper adequate and sufficient reasons. The Hon’ble High Court held that,

 “We find no force in the arguments raised by the learned counsel for the revenue. While allowing the appeal of the assessee, the CIT(A) has given a finding of fact that the additions have been made by the Assessing Officer without pointing out any specific defect in the books of account. The said finding has been further upheld by the Tribunal. During the course of arguments, learned counsel was unable to point out any illegality or perversity in the said finding of fact. Thus, we find no infirmity in the order of the Tribunal.

[Emphasis Added]

Further, in the case of CIT -vs.- Vikram Plastics (1999) 239 ITR 161 (Guj.) it was found there was no discrepancy or defects in books of account maintained by assessee and further, the books of account maintained by assessee were not found to be incorrect or incomplete and that no material was brought on record by the revenue to prove that purchases and expenses had been inflated or sales had been suppressed. In this context the Hon’ble High Court held that,

 “In our opinion, in view of the finding reached by the Tribunal that there were no discrepancies or defects pointed out in the books of account and further that they were regularly maintained and also on the finding that there was no material brought on record to establish that purchases or expenses were inflated or sales suppressed and also in view of the finding that this was not a case that there was no method of regular accounting employed, the Tribunal was fully justified in coming to the conclusion that the provisions of section 145(2) could not be invoked.”

[Emphasis Added]

Reliance is further placed on the decision in the case of ITO –vs.- Abbey Chemicals Pvt. Ltd. (ITA no. 2875/Ahd/2004) wherein the Hon’ble Ahmedabad Tribunal held that  there lies no justification for the rejections of books of accounts on pure guess. The Hon’ble Tribunal held as under:

“Undisputedly and as observed by the ld. CIT(A) in the impugned order the AO did not point out any defects in the books of account while ignoring the book results…The ratio of the judgments in Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC); Raghubir Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770 (SC); State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC); State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC); Brij Bhusan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC); Chouthmal Agarwalla v. CIT [1962] 46 ITR 262 (Assam); R.V.S. and Sons Dairy Farm v. CIT [2002] 257 ITR 764 (Mad); International Forest Co. v. CIT [1975] 101 ITR 721 (J & K) ; M. Durai Raj v. CIT [1972] 83 ITR 484 (Ker); Ramchandra Ramnivas v. State of Orissa [1970] 25 STC 501 (Orissa); Action Electricals v. Deputy CIT [2002] 258 ITR 188 (Delhi) and Kamal Kumar Saharia v. CIT [1995] 216 ITR 217 (Gauhati) indicate that the AO is not fettered by any technical rules of evidence and pleadings, and he is entitled to act on material which are not acceptable in evidence in a court of law, but while making the assessment under the principles of best judgment, the Income-tax Officer is not entitled to make a pure guess without reference to any evidence or material. There must be something more than a mere suspicion to support the assessment

[Emphasis Added]

On perusal of the above, it may be kindly note that disallowance on adhoc basis is not sustainable. The Disallowance has to be necessarily supported by material on record and not on mere surmises and conjectures. However, in the case where there lies no material on record before the AO to uphold the disallowance on estimate basis, the said disallowance is not sustainable being purely made on surmises and conjectures.

The ratio laid down by the Hon’ble Courts of our Country clearly shows that if the proceeding has been concluded merely with a preconceived notion, guided by mere presumptions, surmises and conjecture on the premise that the assessee’s books were incorrect without having any concrete evidentiary material evidence on record then such rejection cannot be sustained in the eyes of law.

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Limitation: The views expressed herein above are based on some facts/assumptions as indicated above. No assurance is given that the revenue/judicial authorities will concur with the above views. The views are based on the existing provisions of law and its interpretation, which are subject to change from time to time. No responsibility is assumed to update the views consequent to such changes. The views should not be considered as a legal opinion. Copying the same without consent is not permitted.


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June 2024