In a recent decision, the Delhi High Court observed that the rejection of certain entries from books of account by pick and choose method is arbitrary.
On 30.11.2014, the respondent-assessee filed its ITR declaring income of Rs.66,53,882/- for AY 2014-15. A notice under Section 143(2) of the Income Tax Act was issued on 10.09.2015 and another notice under Section 142(1) of the Income Tax Act alongwith detailed questionnaire was subsequently issued on 06.09.2016 to the respondent-assessee.
The Income Tax Appellate Tribunal ( ITAT ) dismissed the appeal of the Revenue and partly allowed the appeal of the respondent-assessee. The issue pertaining to the addition based on estimation of unaccounted profits was remitted back to the AO with a direction to obtain information from the parties regarding transactions carried on by the respondent-assessee during the concerned AYs.
The counsel for the revenue submitted that CIT (A) and the ITAT are de hors the settled position of law as the respondent-assessee had failed to substantiate the claims of the expenses with supporting documents, bills or vouchers which could legitimize the allowability of the expenses. According to the counsel, the expenses claimed by the respondent-assessee are bogus/inflated expenses in order to substantially mitigate the taxable income and therefore, the additions made by the AO to the total income of the respondent-assessee do not suffer from any perversity, material illegality or arbitrariness.
The counsel for the respondent-assessee, on the other hand, opposed the arguments advanced by the appellant and submitted that the additions made by the AO are only based upon surmises and conjectures. According to him, the ledger containing the details of the parties alongwith their addresses was presented to the AO to explain the expenses, however, the AO did not make any effort to verify the genuineness of such expenses from the concerned parties.
A Division Bench of Justices Purushaindra Kumar Kaurav and Yashwant Varma observed that “The underlying rationale behind such an action is to meet the standards of correct computation of accounts for the purpose of a more transparent and precise assessment of income. Therefore, any pick and choose method of rejecting certain entries from the books of account while accepting other, without an appropriate justification, is arbitrary and may lead to an incomplete, unreasonable and erroneous computation of income of an assessee.”
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