Profit Estimation Without Rejecting Books of Account Unsustainable: ITAT deletes additions u/s 40A(3) [Read Order]
Estimation of profit at 2% without rejecting audited books of account under Section 145(3) of the Income-tax Act, 1961 is unsustainable in law.
The Bangalore Bench of the Income Tax Appellate Tribunal has deleted the disallowance made under Section 40A(3) of the Income Tax Act, 1961 and held that estimation of profit without rejection of books of account is not sustainable in law.
The assessee, Shri Gajanana Shamanna Talageri, an individual engaged in extraction and trading of granite blocks, filed his return of income. The assessment was reopened under Section 148 of the Income Tax Act and notices were issued. During reassessment proceedings, the Assessing Officer alleged that the assessee had made cash purchases in violation of Section 40A(3) of the Income Tax Act and further observed that the book profit declared was low.
The Assessing Officer disallowed 2% of cash purchases under Section 40A(3) of the Income Tax Act and also estimated book profit at 2% of total turnover.
The assessee submitted various details and documentary evidence; however, the Assessing Officer was not satisfied. On appeal, the Commissioner of Income Tax (Appeals) confirmed the additions in a cryptic order without properly examining the ledger accounts and supporting records, which demonstrated that there was no cash payment in excess of the limit prescribed under Section 40A(3) of the Income Tax Act.
Before the Tribunal, it was submitted that the assessee was operating a quarry in a remote area where cash transactions were inevitable; however, even then, no payments exceeded the statutory threshold under Section 40A(3) of the Income Tax Act.
It was further submitted that the books of account were duly audited under Section 44AB of theIncome Tax Act and no defects were pointed out in the audited accounts. It was contended that in the absence of rejection of books of account under Section 145(3) of the Income Tax Act, estimation of profit at 2% was unjustified.
The Departmental Representative supported the orders of the lower authorities.
The Tribunal of Prashant Maharishi, Vice President and Soundararajan K., Judicial Member observed that ledger extracts and supporting records clearly indicated that no cash payments exceeded the limits prescribed under Section 40A(3) of the Income-tax Act, 1961. It further noted that the Commissioner of Income Tax (Appeals) had failed to properly consider the documentary evidence furnished by the assessee. In such circumstances, the disallowance under Section 40A(3) of the Income-tax Act, 1961 was held to be unsustainable.
On the issue of profit estimation, the Tribunal held that the books of account were duly audited under Section 44AB of the Income Tax Act and no defects were pointed out by the Assessing Officer. It was also noted that no basis or comparable industry data was relied upon for estimating profit at 2%, nor were the books rejected under Section 145(3) of the Income Tax Act. In the absence of rejection of books and supporting material, estimation of profit was held to be arbitrary and not permissible.
The Tribunal deleted both the disallowance made under Section 40A(3) of the Income Tax Act and the addition made on account of estimated profit.
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