Pick And Choose Method Of Rejecting Certain Entries From Books Of Account Is Arbitrary: Delhi High Court

The Delhi High Court has held that any pick-and-choose method of rejecting certain entries from the books of account while accepting others without an appropriate justification is arbitrary and may lead to an incomplete, unreasonable, and erroneous computation of the income of an assessee.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has observed that the ITAT has made a categorical finding that despite the fact that the AO was provided with the requisite bills, vouchers, and addresses of the transacting parties, it did not make any effort to confirm the veracity of the alleged bogus or inflated bills.

The respondent-assessee is a company that deals in gift items and novelties, pet treat products, market surveys, research, and commission business and is engaged in providing corporate gifting solutions to various companies.

A search, seizure, and survey operation under Section 132/133A was conducted on the AMQ group of companies, including the office premises of the respondent-assessee. Consequently, a notice under Section 153A was issued to the respondent-assessee for filing its income tax return for six preceding years from the date of search, i.e., for the years 2008–09 to 2013–14.

On November 30, 2014, the respondent-assessee filed its ITR, declaring income of Rs. 66,53,882/- for AY 2014–15. A notice under Section 143(2) was issued on September 10, 2015, and another notice under Section 142(1) along with a detailed questionnaire was subsequently issued on September 6, 2016 to the respondent-assessee.

Thereafter, the Assessing Officer (AO) passed an order under Section 143(3), assessing the income of the respondent-assessee by making the additions to the total income for the concerned AY.

The assessee preferred an appeal before the CIT (A), who partly allowed the appeal of the respondent-assessee. The CIT (A), while considering the fact that the AO has failed to raise any objection regarding the genuineness of the books of account, which were duly audited by the auditor, deleted the additions on account of disallowance of expenses and Rs. 9,30,49,222 on account of inflated purchases.

The CIT (A) also held that the addition of Rs. 1,00,000 on account of cash found and seized was made on a protective basis, and in view of the substantive addition already made in the hands of Mr. Moin Akhtar Qureshi, which was mentioned by the AO, the addition should be deleted.

The assessee as well as the department preferred cross-appeals before the ITAT. The ITAT dismissed the appeal of the department and partly allowed the appeal of the assessee. The issue pertaining to the addition based on the 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 ITAT upheld the findings of the CIT (A) on the additions made in respect of disallowance of expenses and inflated purchases in the absence of any defect on record brought by the AO. Without finding any infirmity in the order of the CIT (A), the ITAT held that neither the AO had endeavored to make any further query to examine the genuineness of the expenses nor he had made any specific remark with respect to any defect in maintaining the details by the respondent-assessee.

The department contended that the expenses claimed by the respondent-assessee are bogus or 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 assessee contended 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 along with 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. In the absence of any discrepancy in the books of account and, more importantly, without rejecting the books of account, such disallowance of the purchases by the AO is completely unjustified and contrary to the provisions of the Act. There were no cogent reasons to make the aforesaid additions at the behest of the AO, and the view taken by the ITAT and CIT (A) in favor of the respondent-assessee is the correct enunciation of the law.

The court held that the books of account have to be necessarily rejected before the AO proceeds to the best judgment assessment upon fulfillment of the conditions mentioned in the Act. 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.

The court dismissed the appeal by the department.

Counsel For Petitioner: Zoheb Hossain

Counsel For Respondent: Yoginder Handoo

Case Title: PCIT Versus M/S Forum Sales Pvt. Ltd.

Citation: 2024 LiveLaw (Del) 280

Case No.: ITA 862/2019

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