Rejection of books of accounts for want of tax audit report is unjustified

DCIT Vs Maa Umiya Agritech Pvt. Ltd. (ITAT Indore)

ITAT Indore held that in the absence of any major discrepancies or defects in the books of accounts, the rejection of the books of account only for want of tax audit report is not justified.

Facts- The assessee company was engaged in the business of food process and cold storage. The assessee filed its return of income on 29.09.2012 declaring total income at loss of Rs.13,43,58,600/-. The AO completed the assessment u/s 144 on 25.03.2015 at the total income of Rs.5,38,80,006/-. Aggrieved by the assessment order, the assessee filed before the Ld. CIT(A). The Ld. CIT(A) after calling remand report twice from the AO has deleted the majority of the additions made by the AO. Therefore, aggrieved by the impugned order of the Ld. CIT(A) the revenue has filed the present appeal.

Conclusion- It is specifically noted that the remedy for non-filing of the tax audit report is to initiate separate proceedings under Income Tax Act but when all other documents and books of account are maintained and statutory audit reports were filed to show that books of account have been audited by the auditor then the AO ought to have examined books of account and supporting evidence.

It is only a case where accounts were not correct or incomplete or the method of accounting employed by the assessee is not such as to enable the AO to determine the income properly then can resort to the provisions of section 145(3) or 144 of the Act. In the absence of any major discrepancies or defects in the books of accounts, the rejection of the books of account only for want of tax audit report is not justified.

FULL TEXT OF THE ORDER OF ITAT INDORE

This appeal by the Revenue is directed against the order dated 14.09.2020 of Commissioner of Income Tax(Appeal)-III Indore for Assessment Year 2012-13.

2. The present appeal has been filed on 27.04.2022. The registry has pointed out a delay of 499 days in filing the present appeal. We have heard the Ld. DR as well as the Ld. AR on the point of delay in filing the present appeal. The Ld. AR of the assessee has fairly admitted that the delay in filing the present appeal is covered by the judgment of Hon’ble Supreme Court in case of Suo-moto Cognizance of extending the Limitation reported in 441 ITR 722 (SC) wherein the Hon’ble Supreme Court has finally issued the following direction in Para 5 as under:

“5. Taking into consideration the arguments advanced by learned counsel and the impact of the surge of the virus on public health and adversities faced by litigants in the prevailing conditions, we deem it appropriate to dispose of the M.A. No. 21 of 2022 with the following directions:

(i) The order dated 23-3-2020 is restored and in continuation of the subsequent orders dated 8-3-2021, 27-4-2021 and 23-9­2021, it is directed that the period from 15-3-2020 till 28-2­2022 shall stand excluded for the purposes of limitation as may be prescribed under any general or special laws in respect of all judicial or quasi-judicial proceedings.

(ii) Consequently, the balance period of limitation remaining as on 3-10-2021, if any, shall become available with effect from 1­3-2022.

iii. In cases where the limitation would have expired during the period between 15-3-2020 till 28-2- 2022, notwithstanding the actual balance period of limitation remaining, all persons shall have a limitation period of 90 days from 1-3-2022. In the event the actual balance period of limitation remaining, with effect from 1-3-2022 is greater than 90 days, that longer period shall apply.

iv. It is further clarified that the period from 15-3-2020 till 28­2-2022 shall also stand excluded in computing the periods prescribed under sections 23 (4) and 29A of the Arbitration and Conciliation Act, 1996, Section 12A of the Commercial Courts Act, 2015 and provisos (b) and (c) of section 138 of the Negotiable Instruments Act, 1881 and any other laws, which prescribe period(s) of limitation for instituting proceedings, outer limits (within which the court or tribunal can condone delay) and termination of proceedings.”

Accordingly, in view of the judgment of Hon’ble Supreme Court in suo-moto cognizance for extension of the limitation, the appeal of the revenue is treated as filed within the period of limitation.

3. The Revenue has raised following ground of appeal:

“1. The Ld. CIT(A) was not justified in deleting the addition of Rs.5,20,37,486/- out of the total addition made of Rs.5,38,80,806/-admitting the additional documents, violating the Rule 46 of the I.T Rules, 1962 regarding admission of additional evidences.

2.The Ld. CIT(A) was not justified in not considering the letter of AO to extended the time limit for filing the final remand report as she (AO) was busy in completing the time barring assessments. However, the Ld. CIT(A) proceeded and passed appellate order without obtaining the said remand report for the AO.

3.The Ld. CIT(A) was not justified in ignoring the remand report dated 11.11.2016 in which specifically mentioned that the assessee was entitled for set off of earlier loss amounting to Rs.2,55,25,774/-however the Ld. CIT(A) allowed the loss of Rs.13,43,58,600/- without any specific findings.

4.The Ld. CIT(A) was not justified in allowing the appeal of the assessee on account of rejection of books of account invoking the provisions of section u/s 145 of the IT Act, 1961 by A.0.

5.The appellant craves leave to add or deduct form or otherwise amend the above grounds of appeal.”

4. The assessee company was engaged in the business of food process and cold storage. The assessee filed its return of income on 29.09.2012 declaring total income at loss of Rs.13,43,58,600/-. The AO completed the assessment u/s 144 on 25.03.2015 at the total income of Rs.5,38,80,006/-. Aggrieved by the assessment order, the assessee filed before the Ld. CIT(A). The Ld. CIT(A) after calling remand report twice from the AO has deleted the majority of the additions made by the AO. Therefore, aggrieved by the impugned order of the Ld. CIT(A) the revenue has filed the present appeal.

5. The Ld. DR has submitted that the assessee neither attended assessment proceedings nor produced books of account or any documentary evidence with respect to claim of loss in the return of income and therefore, the AO rejected the books of account by invoking provision of section 145(3) of the Act and framed the assessment as on the basis of best judgement.

6. The AO has passed assessment order u/s 144 of the Act when there was no response or compliance on the part of the assessee to the notices issued by the AO u/s 142(1) as well as summons u/s 131 of the Act issued by the AO. The AO given sufficient opportunity to the assessee to present the case and file the supporting evidence however, the assessee failed to produce the supporting evidence and requisite details. Accordingly, the assessment was framed by the AO u/s 144 on the basis of the information available with the AO. He has further submitted that the assessee filed the additional evidence before the Ld. CIT(A) but the same was not allowed to be verified and examined by the AO in the remand proceedings as the Ld. CIT(A) did not allow the sufficient time to the AO. The Assessing Officer requested for allowing him some more time to verify and examine the books of account and additional evidence filed by the assessee as he was busy in time barring assessments however, ld. CIT(A) did not allow the same and passed impugned order. Thus, the Ld. DR has submitted that the impugned order of the Ld. CIT(A) may be set aside and the matter may be remanded to the record of the AO for fresh examination and adjudication. He has relied upon the order of the Ld. AO.

7. On the other hand, Ld. AR has submitted that during the course of assessment proceedings the assessee through its representative Shri Mahendra Kumar Jain, CA attended the office of the Assessing Officer and submitted its submissions/reply to the notice u/s 142(1) of the Act dated 19.02.2015. The AO did not take submissions filed by the assessee on record on the ground that it is not filed with the power of attorney in favour of the representative. Ld. AR has further submitted that on the very next day when the representative of the assessee again tried to submit power of attorney, he was asked to come on next working day and on the next working day he again reached to the office of the AO to submit requisite power of attorney, the AO did not allow the same on the ground that there is no date fixed for hearing of the assessee’s case. Therefore, the assessee was denied to submit power of attorney and relevant papers, information and explanation to the notice u/s 143(1) of the Act. The AO has framed assessment u/s 144 ignoring the loss declared by the assessee in the return of income of Rs.13,43,58,600/-. The AO has computed the total income by taking the return of income at nil which is contrary to the record and facts. The Ld AR has submitted that in these circumstances the assessee has produced this record before the Ld. CIT(A) and remand report was called by the Ld. CIT(A) vide letter dated 05.10.2016. The AO submitted the remand report dated 11.11.2016 objecting to the none filing of the tax audit report with the statutory audit report and on this very ground the AO again refused to allow the carry forward of losses. The assessee filed a copy of the assessment order for A.Y.2011-12 showing the loss of earlier year to the tune of Rs.2,55,25,774/- which was accepted by the AO as eligible for setting off. The AO again disallowed the statutory allowance of depreciation on the ground that no such claim of depreciation has been filed by the assessee. The assessee produced books of account during the remand proceedings but the AO again made the remarks that ledger was not supported with complete bills and hence, reiterated the rejection of books of account. The AR has submitted that the assessee produced books of account along with bills and vouchers during the remand proceeding and also replied point wise details with each of the disallowance made by the AO while passing the assessment order and explained that a sum of Rs.13,87,504/- relates to advance against sales. The detailed chart containing name and addresses of the parties with ledger account and confirmation were filed. A sum of Rs.37,05,000/- related to unsecured loan taken during the year and assessee has produced the detailed chart with PAN, Address and confirmation of the parties. A sum of Rs.3,79,83,403/- related to the sundry creditors and assessee produced all the details explaining the nature, name, addresses, phone no. of the parties along with ledger account. The assessee also explained the amount of Rs.63,04,100/- on account of alleged cash deposit in the bank account is actually a transaction pertains to bank account belonging to Patidar Enterprises and not of the assessee. A certificate in this regard issued by the bank of India was filed before the AO in the remand proceedings along with bank account statement of the assessee to prove that this amount was not deposited in the bank account of the assessee. Further a sum of Rs.45 lakh is related to sale of property of the assessee and relevant details were produced. The AO verified all these documents and no adverse comments were passed by her.

8. As regards the certain queries raised by the AO during the remand proceedings the assessee filed the reply dated 16.10.2016 and produced requisite details and documents including depreciation chart. Ld. AR has further submitted that the AO has calculated a sum of Rs.13,92,820/- as disallowable u/s 40A(3) whereas the assessee itself has made a suo-moto disallowance of Rs.47,73,187/- in the computation of income. Therefore, this figure of Rs.13,92,820/- is included in the suo moto disallowance made by the assessee of Rs.47,73,187/- . Further an amount of Rs.1,50,500/- paid to transporters has already been disallowed.

9. The Ld. AR has submitted that in the remand report dated 11.11.2016 the AO has question only three items. The AO verified the books of account and bills and vouchers and after verification raised specific queries regarding disallowance u/s 40A(3) of Rs.13,92,820/- which is already part of the suo-moto disallowance of Rs.47,73,187/-, disallowance u/s 40(a)(ia) of Rs.1,50,500/- towards payment to transporters which was also disallowed by the assessee and unsecured loan of Rs.12,50,000/-given in cash was also suo moto added back of Rs.8 laksh in the assessment year 2016-17. The AO has made no adverse comments so far as the other items of the addition made in the original assessment as well as the loss declared by the assessee in the return of income. The AR submitted that it is a case of high handed attitude of the AO during the assessment proceedings as well as in the remand proceeding which is evident from record that despite the directions of the Ld. CIT(A) the AO was reluctant to verify and examine books of account, other documents and record produced by the assessee. The ld. CIT(A) has noted this attitude of the AO and condemned the same in the impugned order. Since the AO has not carried out the verification and examination of the books of account and other evidence in the first remand proceedings and raised certain queries to avoid the same, therefore, the Ld. CIT(A) again called for remand report which was also avoided by the AO on the excuse of busyness. Thus, the Ld. AR has submitted that the ld. CIT(A) has rightly considered the evidence produced by the assessee and deleted the addition though part addition has been confirmed by the Ld. CIT(A). He has supported the impinged order of the Ld. CIT(A) and submitted that the assessee has produced an affidavit of CA, Mahendra Kumar Jain who attended office of the AO during the assessment proceeding but the AO refused to entertain him as well as to take the reply to notice u/s 142(1) of the Act on record for want of power of attorney. In the affidavit CA, Mahendra Kumar Jain has explained all the facts and his bitter experience during the assessment proceedings. He has also filed a copy of the submission given to the AO on 19.02.2015 along with Annexure which were not considered by the AO while passing the assessment order. Thus, the Ld. AR has submitted that there is no infirmity in the impugned order of the Ld. CIT(A) and the same may be upheld.

10. We have considered the rival submission and relevant material on record. The case of the assessee was selected for scrutiny under CASS and consequently the notice u/s 143(2) was issued on 06.08.2013. In the meantime the case was transferred to ACIT-3 Indore from DCIT-1(1), Indore due to change of jurisdiction on account of restructuring. Accordingly further notice u/s 143(2) and 142(1) were issued on 19.01.2015. Thus, it is clear that after the case was selected for scrutiny in the year 2013 the proceedings were resumed in the month of January 2015. Since the case was time barring in the end of March 2015 therefore, the AO was in hurry to complete the assessment and issued notice u/s 143(2) and 142(1) on 19.02.2015 and summons u/s 131 on 03.02.2015 fixing date of hearing on 03.03.2015. As there was no compliance on behalf of the assessee therefore, a summon was also issued to the auditor of the assessee for production of audit report of the assessee. In response to that the auditor of the assessee attended the proceedings and filed audit report. Further the AO recorded that when there is no response of the assessee to the notice u/s 143(2) and 142(1) he has no option but to invoke the provision of section 144 of the Act. Ld. AO further recorded that on perusal of the Income Tax Return and audit report furnished by the auditor of the assessee it was noted that gross receipt of the assessee for year under consideration was Rs.1,81,51,290/- whereas the assessee has claimed loss of Rs.13,43,58,600/-. The AO rejected the books of account u/s 145 of the Act and then framed the assessment by determine the returned income of the assessee at nil. After the income of the assessee was taken at nil the AO made various additions on account of long term liabilities, unsecured loan, unexplained creditors, cash deposit u/s 68, undisclosed sale of property. The AO finally determine the income of the assessee as under: