Proper findings u/s 145(3) of Income Tax are essential for Rejection of Books of Account: ITAT [Read Order]

The Jaipur Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that proper findings under section 145(3)  of Income Tax Act,1961 are essential for rejecting books of account. They found that the assessment lacked a show cause notice and did not meet the criteria for section 145(3), leading to a decision in favor of the assessee.

Govindam Export, the appellant-assessee, a partnership firm engaged in gemstone exports, underwent a search on 24-06-2003, which led to assessment proceedings under section 153A. The assessee filed a return on 02-01-2006, declaring the same income as in the original returns.

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In the first round of litigation, the assessee challenged the AO's findings before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the rejection of the books of accounts but reduced the additions by partially accepting the purchases as genuine. The ITAT further reduced the additions, ruling that the purchases were genuine and directing their deletion. However, the Rajasthan High Court remanded the case back to the AO for a fresh examination.

In the second round of litigation, the AO repeated the initial findings without further investigation. The CIT(A) upheld this, confirming a 25% addition for unverifiable purchases as income from other sources, reducing the business profit and the section 80HHC deduction. The assessee aggrieved appealed before the tribunal.

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The assessee challenged the rejection of its books of account for the assessment year (AY) 1998-99, AY 1999- 2000, AY 2000-01, AY 2001-2002 and AY 2003-04. The assessee argued that the authorities found no issues with the accounts or accounting methods.

They contended that unverifiable purchases alone didn’t justify rejecting the books, especially without a show cause notice under Income tax Section 145, and that assessment should have been done under section 144.

The Tribunal noted that the assessment order lacked a show cause notice for defects in the accounts. Section 145(3) requires such findings, which were missing. The assessments were completed under section 260A with section 153A, not Section 144, which should have been used if there were issues with the accounts.

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The bench observed that none of the conditions for invoking section 145(3) were met, and proper procedures under Section 144 were not followed and cited the Rajasthan High Court's decision in CIT vs. Pink City Developers, which emphasized that if the AO is dissatisfied with the accounts, an assessment under section 144 is required.

The two-member bench, consisting of Dr. S. Seethalakshmi (Judicial Member) and Rathod Kamlesh Jayantbhai (Accountant Member), ruled in favor of the assessee, noting that in the second round of litigation, the AO was unable to find any defects in the books of account.

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