Entire Books Of Account Can't Be Rejected Merely Because Of Non-Issuance Of Sale Memos: Orissa High Court

"…mere non-issuance of production of sale memos could not have been a ground to reject the entire books of account particularly since it pertained to sale of country liquor to tribal populations. Also, the ITAT appears to have overlooked the fact that the books of account of the Assessee were not rejected by the Excise Department and that the ITAT itself had accepted them for the subsequent AY 2001-02."

Brief Facts:

Each of the Assessees was a partnership firm deriving income from sale of country liquor. The Appeals arose from the orders passed by the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack ("ITAT") for the Assessment Year ("AY") 1998-99, wherein it had rejected the books of accounts of the Assessees merely because they had not issued sale memos. However, for the AY 2001-02, the ITAT accepted the books of accounts of all these three Assessees and allowed their appeals setting aside the orders of the Assessing Officer ("AO") and the Commissioner Income Tax (Appeal) ["CIT(A)"] affirming the said assessment orders.

Issues for Consideration:

While admitting the appeals, the Court had framed the following two issues to be answered in this case, viz.

I) Whether in the particular facts and circumstances of the case, rejection of books of accounts and estimation of profit can be said to be legal and proper?

II) Whether the ITAT is legally correct in holding that rejection of books of accounts solely on the ground of non-issuance of sale memos is proper and justified?

Findings:

The Court, after hearing the contentions on behalf of the parties, held that in the impugned assessment orders, which are identical in each of the cases, the AO accepted the fact that there was nothing wrong with the Assessee's books of accounts. However, only on the ground that sales memos were not filed, the books of accounts were rejected by him.

When the matter went in an appeal to the CIT(A) it was noted by him in the order dismissing the appeals that "it is true that the AO had not pointed out any specific omission or commission nor cited any specific instance of irregularity in the books of accounts" and that the only reason for rejection was that "element of inflation in purchases or incorrectness of purchase could not be ruled out". However, it was again surmised that "there was also possibility of suppression of sale price". Therefore, the Court observed,

"It is therefore plain that both the AO and CIT(A) proceeded on surmises and conjectures with no supporting material to justify the rejection of the Assessee's books of accounts. The ITAT having accepted the Assessee's accounts for the subsequent AY 2001-02 for some reason did not accept them as far as the AY in question was concerned."

Further, stressing upon the importance to assess the situation on the basis of pragmatic considerations, the Court held:

"Where the issue is of sale of country liquor to tribal populations to expect the Assessees to issue sales memos is not even realistic. Importantly, since the books of account of the Assessees in the present appeals have been accepted by the Excise Department, and for the subsequent year AY 2001-02 by the ITAT, there was no reason to resort to surmises and conjectures and 'best judgment assessment' to reject the Assessee's books of account for the AY in question."

The Court found that judgment in Ram Chandra Ram Nivas v. State of Odisha, (1970) 25 STC 501 (Ori) supports the contentions of the Assessees herein. There it was held that earning low profits by itself, without corresponding facts, cannot be a ground for holding that the books of account are not properly maintained. Again, in Md. Umar v. Commissioner of Income Tax, (1975) 101 ITR 525 (Patna), a Division Bench of the Patna High Court accepted the Assessee's books of account and held that the rejection was based on suspicion and surmises as well as irrelevant material.

The Court also relied on the judgment in St. Teresa's Oil Mills v. State of Kerala, (1970) 76 ITR 365 (Ker), where a Division Bench of Kerala High Court held that the rejection of accounts was not justified particularly because it was based only on the fact of variation in the consumption of electricity.

Resultantly, the Court concluded that the ITAT appears to have overlooked the fact that the books of account of the Assessee were also not rejected by the Excise Department and that the ITAT itself had accepted them for the subsequent AY 2001-02. Having regard for the aforesaid reasons, the issues were answered in favour of the Appellants and the appeals were allowed.

Case Title: M/s. Cresent Co. v. Commissioner of Income Tax, Sambalpur and other connected matters.

Case No.: ITA No. 221-223 of 2004

Date of Judgment: 2^nd February 2022

Coram: Chief Justice Dr. S. Muralidhar and Justice R.K. Pattanaik

Citation: 2022 LiveLaw (Ori) 11

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