Where errors in vouchers and in other account books are discovered and no credible reason was extended by the assessee then, AO’s action of rejecting books of accounts and additions made thereon was justified.   

Case: Commissioner of Income Tax vs. Mangilal Choudhary

Facts:

The assessee was engaged in execution of contract works awarded by different departments of the government. During the assessment year 2006-07, the assessee showed net profit rate of 1.1% as against 1.15% in the immediately preceding year. The Assessing Officer considered the declared net profit quite low, thus, called upon the assessee to explain as to why a net profit rate @ 12.5% be not applied.

While going through the books of accounts, the AO found discrepancies in the accounts. The AO pointed out that no stock register was maintained, attendance register-muster roll suffers from serious defects, vouchers of purchase and expenses are self-prepared, no work in progress was shown and the identity of the creditors was not borne out in the accounts books.

In the view of the above, the AO invoked the power as per provisions of Section 145(3) of the Income Tax Act, 1961. Thus, books of account of the assessee were rejected and estimated the net profit of assessee by applying a net profit rate of 12.5 per cent on the contract receipts. Accordingly, additions were made.

The Commissioner (Appeals) upheld the order of the Assessing Officer.

Further, the Tribunal deleted the addition made by the Assessing Officer.

Appeal was made to the High Court.

Held:

The Court viewed that the AO after undertaking various errors and incompleteness in the books of account decided to invoke the authority as per section 145(3). The assessee failed to provide any tenable reason regarding the mentioned errors.

The Court mentioned that the Tribunal without examining the errors pointed out by the Assessing Officer reversed the order of assessment.

Under Section 145(3) of the Act of 1961 the requirement is that the Assessing Officer must be satisfied about correctness and completeness of the accounts of the assessee. Mere submission of vouchers is not sufficient to arrive at the conclusion that the trading results shown by the assessee are true.

Thus, the order of AO was affirmed concluding that if AO not satisfied with correctness of accounts then AO has the power to reject the books.

Section 145(3): It provides that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in Section 144.

 

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