By TIOL News Service

NEW DELHI, NOV 17, 2018:THE ISSUE IS - Whether mere increase in expenses cannot be ground for rejection of books of accounts unless the assessee fails to explain the same. YES IS THE VERDICT.

Facts of the case

The assessee company, engaged in dealing structural steel fabrication and installation work had filed return of income for relevant AY. During assessment, the AO noted that the employees of the company attended the assessment proceedings, however, complete books of accounts, bills, vouchers etc were not produced before him. In the assessment order, the AO gave details of the dates on which opportunity was granted to the assessee to produce books of accounts and bills etc. and the non-compliance on the part of the assessee. Looking to the non-compliance on the part of the assessee, the AO issued show cause notice as why the business income might be estimated applying profit rate. No compliance was made on the part of the assessee of the show cause notice also. In view of the fall in net profit rate to 1.13% as compared to net profit rate of 5.82% in the immediately preceding year, the AO rejected books of accounts of the assessee invoking provision of section 145(3) of the Act and applied net profit rate of 5% on the receipts. The AO allowed depreciation of Rs.1,11,90,166/- on the business profit. The CIT(A) partly allowed the appeal of the assessee. Aggrieved Revenue filed appeal before the Tribunal.

Tribunal held that,

++ CIT(A) has addressed the justification of increase in expenses, relying on which the AO rejected books of accounts of the assessee. The CIT(A) has examined the rent paid of Rs.62,51,809/- during the year under consideration. The CIT(A) has noted that during the assessment proceeding the assessee filed all the document in respect of rent agreement of the premises and proof of tax deducted at source, wherever applicable was also filed. The CIT(A) has reproduced the entire detail of the rent paid in the impugned order. In view of the necessary evidence filed in support of the claim of the rent paid, the CIT(A) is justified in holding that books of accounts cannot be rejected on the basis of increase in expense on account of rent. Similarly, the CIT(A) has examined the claim of expenses of Rs.51,91,667/- on directors' remuneration, administrative expenses of Rs.3.6 crores, purchase of fixed assets amounting to Rs.4,72,80,249/- alongwith the invoices and other evidences maintained by the assessee and already produced before the AO. The CIT(A) has also pointed out that the AO has not given any specific expense in respect of which proper bill/voucher had not been maintained by the assessee. In the instant case the Assessing Officer has rejected the books of accounts on the ground that he was not satisfied about the correctness or completeness of the accounts. But for rejection of the books of accounts on the ground of non-satisfaction of correctness or completeness, it is essential for the Assessing Officer to point out the specific defects. The CIT(A) has made detailed verification of invoices and vouchers in respect of the expenses claimed by the Assessing Officers as excessive. The DR could not controvert the finding of the CIT(A) on justification of increase in expenses in question. In view of the facts and circumstances of case, no error was found in the action of the CIT(A) in cancelling the rejection of books of accounts by the Assessing Officer and estimation of the profit.

(See 2018-TIOL-2143-ITAT-DEL)