Advocate Akhilesh Kumar Sah
Section 145 of the Income Tax Act, 1961 (for short ‘the Act’) deals with the method of accounting of an assessee. According to sub-section (3) of section 145 of the Act, where the Assessing Officer (AO) is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the AO may make an assessment in the manner provided in section 144 of the Act.
Under section 145 of the Act, rejection of books of accounts is pre- requisite, where books of accounts have been maintained by the assessee, for making additions by the AO on account of estimation of profit.
Recently, in CIT Vs. Pashupati Nath Agro Food Products Pvt. Ltd. [ITA No. 165 of 2010, decided on 4.5.2017], appeal was dismissed. The account books had not been rejected by the AO.
The following two questions of law were raised in the above-mentioned appeal;
1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the additions of Rs. 30,73,542 made on account of sale of rice out of books of Rs. 28,76,125 for investment in stock out of undisclosed sources?
2. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the additions of Rs. 27,84,611 towards investment in stock of wheat purchased out of books?
The dispute was whether the ITAT was justified in deleting the additions made on account of sale of rice and in the investment in stock of wheat outside the books of accounts.
The impugned judgment and order of the ITAT dated 27.10.2009 revealed that the assessee had maintained the books of accounts in accordance with the prescribed standard as per Section 145 of the Act. The account books had not been rejected by the AO.
The ITAT formed an opinion where once the account books are expected to be maintained in the prescribed accounting standard, the AO could not have made any additions towards the sale of rice treating it to be outside the books of accounts or towards investing in stock of rice and wheat outside the books of accounts.
The Allahabad High Court held that it cannot be said that any investment was done beyond the books of accounts.
In ACIT Vs. Garden Silk Mills Ltd. [I.T.A. No.720/Ahd/2009, decided on 15.10.2015], it was observed that what is material for the purpose of section 145 of the Act is, the method to be such that the real income, profit and gain can be properly deduced therefrom. If the method adopted does not afford true picture of profit, it would be rejected, but then such rejection should be based on cogent evidence and would be done with caution.
It is a settled position of law that the AO is expected to make assessment on the basis of the material available on record and basis should be tenable in the eyes of law.
It is also settled position of law that the books of accounts cannot be rejected on insignificant grounds. The AO should point out the specific defects, whereby the accounts of the assessee cannot be treated as correct or complete.