Case Law Details

Case Name : ITO Vs M/s Royal Health Care Pvt. Ltd. (ITAT Mumbai)
Appeal Number : I.T.A. No. 119/Mum/2013
Date of Judgement/Order : 10/12/2014
Related Assessment Year :
The first issue relates to rejection of books of account and estimation of profit. The assessee is a private limited company and it has got its account audited under the provisions of Companies Act, 1956. The assessee has stated that it was following cash system of accounting. However the AO took the view that the assessee, being a private limited company, is required to follow mercantile system of accounting in accordance with Companies Act. Since the assessee had followed cash system of accounting and since the same is against the mandate of provision of Companies Act, the AO took the view that the books of accounts of the assessee are not reliable. Further, citing some more reasons, the rejected the books of account and estimated the net profit of the assessee @ 15% of the turnover of the assessee company.

In the appellate proceedings, the assessee submitted before the ld. CIT(A) the profit declared by it including the amount of depreciation works out to 10% of the turnover during the year under consideration and also in the immediately preceding year. It was also submitted that the assessee is following consistently cash system of accounting and since there is no change in it, the AO was not justified in rejecting the books of account maintained by the assessee, more particularly, in view of the fact that the AO did not find any defect or fault in the books of accounts. The ld.CIT(A) was convinced with the contentions of the assessee and accordingly set aside the decision of the AO relating to rejection of the books of account and consequently the estimation of income also. The relevant observations made by the ld. CIT(A) in this regard are extracted below, for the sake of convenience:

“5.3 I have considered rival submission and finding of the A.O carefully. I find that A.O. has wrongly rejected the veracity of books of accounts on the basis of his presumption which is not at all justifiable. The AO has rejected the books of accounts on the basis of five grounds and it is found that none of the ground is maintainable. Contrary to the presumption of the AO, it is found from the record itself that AO has not properly analysed the veracity of the books of accounts nor has properly appreciated the various facts. It is wrong to believe that the assessee has not shown security deposit of Rs.3,70.50,000/-. This issue shall be further discussed in respect of individual grounds of appeal based on this addition. As regards sub point No.2 of para 9 of the assessment order, it is worthwhile to mention that if there is any defect in audit report that does not mean that books of accounts of the appellant is defective. The logic of Assessing Officer is baseless, similarly interest income has been properly shown in the accounts of Mr. A.K. Chamaria, proprietor of J.P. Dental. It appears that AO has not properly scrutinized the record. Similarly an amount of Rs.1,26,90,000/-, it appears that AO has not properly scrutinized records of both the companies duly assessed by him viz. M/s Royal Dental Clinic Pvt. Ltd. and Royal Health Care Pvt. Ltd. This finding further gets support while deciding the individual grounds of appeal. Similarly, I do not find any merit in sub point 5 of para 9. Only on the basis of debit of depreciation in profit & loss account, veracity of books of accounts cannot be challenged. The arguments of AO is found to be baseless.

I have gone through the rival submissions and am of the opinion that as per Income Tax Law, assessee can maintain its books of accounts on Cash Basis or Mercantile basis. It is not the case of A.O. that assessee has maintained its books on hybrid system which has been done away with, by the Income Tax Act 1961. Further, assessee has not changed its method of accounting since inception. Therefore, this is no ground for rejection of books of account. In any event, even after rejecting of the books of accounts A.O. could not have assessed net profit @15% on turnover without any verifiable evidence in possession. There is no basis for the same. As a matter of fact, if any assessee company invests and expands its business, the depreciation would increase and if a fixed net profit is assessed, the entire provisions of allowing depreciation would become meaningless. I am therefore of the opinion that the amount of Rs.20,41 ,386/- added by Assessing Officer to assesses higher income, on this ground being unsubstantiated, is deleted”

We have carefully considered the reasoning given by the First Appellate Authority. The First Appellate Authority has held that the assessee, under the provisions of Income Tax Law, can maintain its books of accounts either on Cash Basis or Mercantile basis. He has further held that the AO has not properly analyzed the veracity of books of account nor has he properly appreciated various facts. The Ld CIT(A) has also held that the various other reasons given by the AO in support of his decision to reject the books of account are, in fact, trivial in nature, which does not warrant such a decision. Accordingly, the ld. CIT(A) has came to the conclusion that the rejection of books of account of the assessee and consequently estimation of net profit is not justified. Thus, we notice that the ld. CIT(A) has properly analyzed the facts prevailing in the instance case and has taken conscious decision on this matter. Further, it is seen that the AO has not found any defect in the books of account. At the time of hearing, the ld. DR could not file any material to controvert the findings given by the ld. CIT(A). Hence, we do not find any reason to interfere with the decision arrived at by the ld. CIT(A) on this issue. The grounds relating to this issue are rejected.

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  1. adv. dr.g.balakrishnan says:

    Presumptions of AOs seem to be grounded that all tax payers are fraudulent and AO is only highly ethical and when he presumes all tax payers are cheating government and thus that something is fishy presumption surfaces by his mental paroniacal standards, and he proceeds to go by his own weird accounting analysis,God save the Nation!

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