ACIT Vs Om Shree Agrotech Pvt Ltd

Case snapshot

Sections / provisions: 145(3)

Questions before the Court / Tribunal

• Section 145(3): whether defects in a third party's accounts justify rejection of the assessee's books.
• What factual, statutory and procedural conditions control the relief?
• How does the operative order apply to the parties and the challenged proceeding?

Material facts and procedural background

IN THE INCOME TAX APPELLATE TRIBUNAL, PUNE “A” BENCH, PUNE BEFORE HON’BLE SHRI S. S. VISWANETHRA RAVI, JUDICIAL MEMBER AND SHRI G. D. PADMAHSHALI, ACCOUNTANT MEMBER आयकर अपऩल स.ं / IT(SS)A No. 45 to 50/ PUN/2022 निर्धारण वषा / Assessment Year : 2009-10 to 2014-15 Asstt. Commissioner of Income Tax, Central Circle-2, Pune . . . . . . . अपीलार्थी / Appellant

द्वधरध / Appearances Assessee by : Shri Sharad Shah & Rohit Tapadiya Revenue by : Shri Keyur Patel सनु वाई की तारीख / Date of conclusive Hearing : 11/05/2023 & 19/05/2023. घोषणा की तारीख / Date of Pronouncement : 28/06/2023.

आदेश / ORDER PER BENCH; These appeals of the Revenue and Cross Objection thereagainst of the assessee are directed against the consolidated order of Commissioner of Income Tax (Appeals)-12, Pune [‘CIT(A)’ hereinafter] dt. 30/03/2022 passed u/s 250 of the Income-tax Act, 1961 [‘the Act’ hereinafter], which in turn emanated from separate orders of assessment dt. 07/03/2016 framed u/s 143(3) r.w.s. 153(A) of the Act by the Asstt. Commissioner of Income Tax, Central Circle-2, Nashik [‘AO’ hereinafter] for assessment years [‘AY’ hereinafter] 2009-10 to 2014-15.

3. Succinctly stated undisputed facts borne out of case records are; 3.1 The respondent assessee is a private limited company engaged in manufacturing and trading of edible & non-edible oils etc. Whereupon a search action u/s 132 of the Act on ‘Omshree Group’ [‘Searched Party’ hereinafter] was conducted on 20/11/2013, wherein as many as seven residential premises, three factory premises and a locker maintained at treasury branch of SBI Bank, Dhule were also covered.

3.2 Beside aforestated search action on the assessee group, a simultaneous survey action u/s 133A of the Act were also conducted at the factory premise of M/s Shree Gajanan Oil Mills, M/s Om Industries and at the business premises of M/s Sunil Traders [‘Other Party’ hereinafter].

Appellant / assessee submissions

4.2 At the outset of the physical hearing, the learned departmental representative Mr. Keyur Patel, CIT [‘DR’ hereinafter] has fairly submitted that, albeit the grounds raised in these appeals are inconsonance with rule 8 of Income Tax Appellate Tribunal Rules, 1963 [‘ITAT-Rules’ hereinafter] nevertheless they are predominantly directed against sole and substantive issue of reversal of rejection of books made u/s 145(3) of the Act and consequential deletion of addition made based on estimated gross profit which was arrived on the basis of audited financials statement of similar & comparable companies engaged into similar type of business as that of respondent assessee.

4.3 For a clarity and convenience, on a specific query from the bench, the Ld. DR adverting to impugned order has equally submitted that, in this case of respondent assessee, as on the date of search action i.e. 20/11/2013, the scrutiny assessment for AY 2008-09 & 2009-10 were already completed u/s 143(3) of the Act, whereas the time for service of

4.4 During the course of physical hearing, the Ld. DR has meticulously taken us through assessment findings vis-a-vis impugned order and bolstered the action of Ld. AO in rejecting the books of the respondent on its effective failure to prove the genuineness of purchases in the absence of books and records of broker/agent who were exclusively instrumental in procuring raw-materials for the respondents. Per contra in demolishing these cases of the appellant Revenue, the learned counsel for the assessee Mr Sharad Shah [‘AR’ hereinafter] contested that, since the order of Ld. CIT(A) reversing the rejection of books and consequential deletion of addition is already accepted by the Department for AY 2008- 09, the Revenue has no case on merits, therefore all these appeals of the

7.38 In this regard, the appellant submitted that these comparable cases referred to in the assessment order by the AO were never confronted to the appellant nor the detailed financial transactions i.e. trading account along with quantity details were provided. It is a precondition to provide these details, which were used adversely against the appellant and this is one of the basic principles of natural justice. Since neither these details were provided nor the appellant was confronted on the same, no such comparison can be used against the appellant. The appellant further submitted that the GP ratios of the cases relied upon by the AO cannot be compared with the appellant's business since the items manufactured and produced by the comparable companies are very different from those of the appellant. Further, the turnovers and the scale of operation of the comparable companies are also very different from that of the appellant. That being so, the AO was wrong to take GP ratio of these companies for comparison with the GP ratio of the appellant Further, the AO did not provide the details of the items manufactured by the companies compared, the items debited to the Trading A/c, and…

Revenue / respondent submissions

4.2 At the outset of the physical hearing, the learned departmental representative Mr. Keyur Patel, CIT [‘DR’ hereinafter] has fairly submitted that, albeit the grounds raised in these appeals are inconsonance with rule 8 of Income Tax Appellate Tribunal Rules, 1963 [‘ITAT-Rules’ hereinafter] nevertheless they are predominantly directed against sole and substantive issue of reversal of rejection of books made u/s 145(3) of the Act and consequential deletion of addition made based on estimated gross profit which was arrived on the basis of audited financials statement of similar & comparable companies engaged into similar type of business as that of respondent assessee.

4.4 During the course of physical hearing, the Ld. DR has meticulously taken us through assessment findings vis-a-vis impugned order and bolstered the action of Ld. AO in rejecting the books of the respondent on its effective failure to prove the genuineness of purchases in the absence of books and records of broker/agent who were exclusively instrumental in procuring raw-materials for the respondents. Per contra in demolishing these cases of the appellant Revenue, the learned counsel for the assessee Mr Sharad Shah [‘AR’ hereinafter] contested that, since the order of Ld. CIT(A) reversing the rejection of books and consequential deletion of addition is already accepted by the Department for AY 2008- 09, the Revenue has no case on merits, therefore all these appeals of the

15. We shall now deal with Cross Objections [‘CO’ hereinafter] CO. No. 04, 05 & 07/PUN/2022 of the respondent assessee; 15.1 It is worthy to note here that, the respondent assessee initially had filed six cross objections against each of the appeals filed by the Revenue. During the course of present physical hearing the Ld. AR submitted that, these Cos are supportive to the extent relief granted by Ld. CIT(A), and concurrently agitates against sustaining the addition of expenditure made on estimation basis. It is also brought to the notice of the bench that, out of aforestated six Cos filed by the respondent assessee, three COs i.e. CO. No. 06, 08 & 09/PUN/2022 were withdrawn it by and allowed vide ordered dt. 14/03/2022, wherein similar & identical issues

Court / Tribunal analysis and reasoning

8.3 Going by the principles of stricter interpretation laid by the Hon’ble Apex Court in ‘Commission of Customs Vs M/s Dilip Kumar And Co. & Ors’ reported in 9 SCC 1 (2018) in our considered view; 1. The books of assessee can only be rejected if the assessing officer is not satisfied about the correctness or completeness of assessee’s accounts and in no case the correctness or completeness of other person’s accounts with whom the assessee had any transaction would empower the assessing officer to reject the books of the assessee.

9. In view of our foregoing observations and discussion, we disapprove the action of rejection of books and countenance the views of Ld. CIT(A) in reversing the rejection of books for the reasons that; 9.1 It is settled proposition that, the assessing officer has to work out & deliberate a detailed exercise indicating defects with reasoning as to why he is unable to rely on assessee’s books of accounts and accordingly to deduce estimated profits. Here in present case, non-maintenance of books by third parties [adats/agents] founded a pillar for rejecting assessee’s books, thus such rejection without cementing incorrectness or incompleteness in the accounts of the respondent assessee, is contra legem, hence disapproved for 145(3).

9.5 In the extant appeals, undisputedly the respondent assessee is engaged in the peculiar business where the raw material is procured from agro- industry and finished product is fast moving consumer goods [‘FMCG’ hereinafter]. In such case the supplies of agricultural raw-material are always in the form of kachha & pacca bills prepared by the adats/agents which are then supplied to assessee, therefore rejecting the accounts on the grounds that purchases of raw materials were vouched only by internal vouchers/bills where it was not possible to get third party/farmers supporting documents, in our considered opinion is unjustified as such rejection did failed considered the peculiar feature of oil industry. And we find this our view has been fortified by the Hon’ble Guwahati High Court in ‘Madnani Construction Corporation P Ltd. v. CIT’ reported in 296 ITR 45, wherein their lordships have held, that the addition without considering assessee’s peculiar case is not correct. And here we are mindful to quote that, the assessment for AY 2008-09 and 2009-10 were culminated under regular assessment proceedings u/s 143(3) of the Act. That is to say the Revenue had due knowledge of nature of…

9.9 In addition, referring to foregoing para 4.3 (placed at page no. 5 of this order), in the light of ratio laid down by Hon’ble Delhi High Court in ‘CIT Vs Kabul Chawla’ reported in 380 ITR 573, we are unable to persuade as to how accounts of these unabated assessment years can be subjected to rejection without first bringing on record any incriminating documents pertaining to these years showcasing such defects therein. In our considered view, even the existence of any incriminating material is powerless to nail the books of unabated years, for the reasons the law restricts the addition to the value of incrimination substance protecting the closure of original assessment, thus the books of account.

9.10 Further we find that, ration laid down the Hon’ble jurisdictional Bombay High Court in ‘Bombay Cycle Stores Co. Ltd. Vs CIT’ reported in 33 ITR 13, which is also re-iterated by Hon’ble Supreme Court in ‘S N Namashivayam Chettiyar Vs CIT’ reported at 38 ITR 579, squarely applies to present case of the respondents that, the keeping or maintaining of stock records is of great importance because it is a solitary means of verifying the assessee’s accounts by having a quantitative tally. If in any case, after taking into account the absence of a stock register coupled with other materials, it is felt that correct profits and gains cannot be deduced from the accounts, then only the assessing officer can resort to the provisions of Section 145(3) of the Act, and debarred therefrom in the evince of such stock records.

14.7 Records perused, heard the rival contentions. In our considered opinion, the shortfall of cash represents the utilization and since such shortfall undisputedly emanated from the business premises of the respondent, the presumption always that it must have been used for the outgoing business expenditure which remained to be accounted in the

Operative decision and relief

14.4 In result, all the grounds of appeal raised in ITA 50/PUN/2022 are DISMISSED.

14.8 In result, all the grounds appeal in ITA 50/PUN/2022 are DISMISSED.

15. We shall now deal with Cross Objections [‘CO’ hereinafter] CO. No. 04, 05 & 07/PUN/2022 of the respondent assessee; 15.1 It is worthy to note here that, the respondent assessee initially had filed six cross objections against each of the appeals filed by the Revenue. During the course of present physical hearing the Ld. AR submitted that, these Cos are supportive to the extent relief granted by Ld. CIT(A), and concurrently agitates against sustaining the addition of expenditure made on estimation basis. It is also brought to the notice of the bench that, out of aforestated six Cos filed by the respondent assessee, three COs i.e. CO. No. 06, 08 & 09/PUN/2022 were withdrawn it by and allowed vide ordered dt. 14/03/2022, wherein similar & identical issues

16. In result, all appeals of the Revenue are DISMISSED. And all cross objections of the assessee are also DISMISSED with cost in aforestated terms. In terms of rule 34 of ITAT Rules, the order pronounced in the open court on this Wednesday 28th day of June, 2023.

Ratio and legal principle

• The packaged judgment addresses Section 145(3): whether defects in a third party's accounts justify rejection of the assessee's books. The precise proposition must be read with the Court/Tribunal's reasoning and operative directions.
• Reliance depends on matching the statutory version, jurisdiction, procedural stage and material evidence recorded in the judgment.

Why this judgment matters

This decision is relevant to practitioners and affected parties dealing with section 145(3): whether defects in a third party's accounts justify rejection of the assessee's books. Its value lies in showing how the adjudicating forum connected the applicable rule to the proved facts and procedural posture.

Practitioner action points

• Match the statutory version, jurisdiction, procedural stage and decisive evidence before relying on the result.
• Verify current appellate, review and SLP history and any later amendment or controlling authority.
• Attach the complete judgment to the working paper or filing and cite the paragraph/page supporting the proposition.

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Section / provision impact

• 145(3) - apply the exact version considered in the judgment.

Case network

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• PCIT v. Indravadan Jain, HUF - Court / Tribunal to be verified

Different outcome / possible distinction

• ACIT CIR 6(1) VS ASAHI INFRA & PROJECTS LIMITED - Remanded / restored
• ITO 32(2)(3) VS MAYUR R KAMDAR - Dismissed

Full judgment and source control

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