Books can not be rejected on suspicion or presumption of abnormal sales cannot

ITAT Upholds CIT(A) Decision: No Justification for Rejection of Books and Addition of Rs. 9.37 Crores During Demonetization. Tribunal rules suspicion cannot replace evidence; emphasizes need for concrete defects in accounting before rejecting books under Section 145(3).

In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench "A", has upheld the decision of the Commissioner of Income Tax (Appeals) [CIT(A)], which annulled the addition of Rs. 9,37,76,500 made by the Assessing Officer (AO) on the grounds of unexplained cash credits during the demonetization period. The tribunal emphasized that the rejection of books of account under Section 145(3) of the Income Tax Act, 1961, and the subsequent addition of cash deposits under Section 68 cannot be based merely on suspicion or presumption of inflated sales, but must be supported by concrete evidence of defects in the books.

The case arose when ITO, Ward-1(1)(3), Ahmedabad, scrutinized the books of Arvindbhai Jewellers Pvt. Ltd. due to substantial cash deposits made between November 9 and December 30, 2016. The AO alleged that these deposits were unexplained and represented income from undisclosed sources. Despite the company's submission of comprehensive financial records, including audited accounts and VAT returns, the AO rejected the books citing abnormal sales patterns and insufficient invoice details.

The CIT(A) overturned this decision, ruling that the rejection of the books was unjustified as no specific discrepancies were found in the stock records or books of accounts. The CIT(A) noted that the higher sales during the demonetization period were attributed to the Diwali festival and wedding season, a claim supported by quantitative stock records and VAT returns.

Upon appeal by the Revenue, the ITAT supported the CIT(A)’s decision, stating that the AO's action lacked basis in evidence. The tribunal reiterated that the power to reject books under Section 145(3) should not be exercised whimsically, but should be grounded on identifying glaring defects in the accounts, such as unverified stock or bogus purchases. The tribunal highlighted that the quantitative stock details provided by Arvindbhai Jewellers were consistent and undisputed, further invalidating the AO's claim of inflated sales.

The ITAT’s order underscores the principle that suspicion, however strong, cannot substitute for evidence in tax assessments. This decision aligns with previous rulings in similar cases, affirming that mere financial analysis or presumptions about abnormal sales do not justify the rejection of books or the addition of cash deposits as unexplained income under Section 68.

The tribunal’s decision not only provides relief to the assessee but also sets a precedent for handling similar disputes, emphasizing the need for tax authorities to substantiate their claims with tangible evidence.

Bottom Line:

Rejection of books of account under Section 145(3) is permissible only when the Assessing Officer points out specific defects or discrepancies rendering the accounts unreliable; suspicion or presumption of abnormal sales cannot replace evidence for addition under Section 68.

Statutory provision(s): Section 68, Section 115BBE, Section 145(3) of the Income Tax Act, 1961.

ITO, Ward-1(1)(3) Ahmedabad v. Arvindbhai Jewellers Pvt. Ltd., (ITAT)(Ahmedabad Bench "A") : Law Finder Doc Id # 2793908