Now this is quite weird! If the A.O. rejects the books of account and make the addition on estimate basis mainly for the reason that during the assessment year under consideration, the assessee has shown low sale/profit, how far is it justified? Profit being low by itself cannot be a ground for rejection of the books of account. The same decision was upheld in the recent case of Deputy Commissioner of Income-tax, Lucknow v.Hanuman Sugar (Khandsari ) Mills (P.) Ltd.  This decision explains that Profit being low could not be a ground for rejection of books of account.

The brief facts of the case are that the assessee company is engaged in the manufacturing and sale of Khandsari (sugar). For the assessment year under consideration, the assessee has filed its return of Nil income but the A.O. under section 143(3) has completed the assessment on a total income of Rs.17,99,380/- by rejecting the books of account under section 145(3) of the Act. The additions of Rs.12,15,867/- and Rs.4,38,400/- respectively were made on estimate basis, which were upheld by the First Appellate Authority but the Tribunal has deleted the same. Being aggrieved, the department has filed the present appeal.

With this background, Sri D.D. Chopra, learned counsel for the department submits that net sale shown for the assessment year under consideration had been declined, as compared to previous assessment years’ sale. The explanation given by the assessee is not acceptable that business was conducted through wholesalers and only on receipt of sale figure from them, sale and expenses were recorded. The assessee was sending Khandsari to Commission Agent at distinctive places including Bengal, Assam and so on and against the consignment sent for sale in future, the assessee was obtaining substantial amount as advances from those commission agents. The assessee was counting for such consignments sale as and when those commission agents were sending sale notice detailing the actual amount of sale consideration and making necessary entries in the books of account. Notices under section 133(6) were sent, out of which, 12 did not respond. Even in the cases, where response was made, discrepancies were found. So, the explanation given by the assessee pertaining to anomalies was not accepted. In these circumstances, the A.O. has rightly invoked the provisions of section 145(3) and made the addition on estimate basis.

On specific query from the Bench, learned counsel for the department accepted that the assessee was following the same system of accounting from last ten years but for the reasons mentioned above, the books were rejected during the assessment year under consideration.

From the record, it appears that the books of account were properly audited, checked and no specific error was detected. Regarding non-compliance to notices sent to various parties under section 133(6), the assessee explained that the parties might have not received the notice or they were not experts in keeping the accounts in the manner as the A.O. likes. Sales were fully verifiable as the consignments had been dispatched along with forms as required under Sales Tax Act, and copies of challans, mandi tax vouchers, transport abilities etc. were also made available to the A.O. The assessee cannot be penalized specially when its books of account were properly audited and relevant vouchers were made available. The assessee cannot be held responsible for not submitting the proper reply by the buyers/commission agents.

Moreover, in the instant case, the A.O. has rejected the books of account and made the addition on estimate basis.

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