Introduction
The present case, Principal Commissioner of Income Tax (Central) -1 v. M/s Forum Sales Pvt. Ltd.[i] revolves around an appeal filed by the Revenue under s. 260A of the Income-tax Act, 1961 (‘Act’) against an order of the Income Tax Appellate Tribunal (‘ITAT’). The appeal is directed against M/s Forum Sales Pvt. Ltd. (‘Assessee’), regarding various additions made to its income by the assessing officer (‘AO’). The central issue in contention pertains to the legitimacy of these additions, specifically concerning the estimation of unaccounted profits, disallowance of expenses, inflated purchases, deemed dividends, and cash found and seized. The Delhi High Court (‘DHC’) emphasized the need for proper justification in rejecting entries from the books of account.
Brief Facts
The Assessee, a company engaged in various business activities including corporate gifting solutions was subject to a search, seizure, and survey operation under s. 132/133A of the Act, conducted on the AMQ group of companies, including the office premises of the Assessee.
The Assessee filed its income tax return (‘ITR’) declaring income for the assessment year (‘AY’) 2014-15.
The AO passed an order under s. 143(3) of the Act, assessing the income of the Assessee by making the following additions to the total income of the Assessee:
i. Addition of Rs.42,53,909 on account of estimation of unaccounted profit.
ii. Addition of Rs.19,05,653 on account of disallowance of expenses.
iii. Addition of Rs.9,30,49,222 on account of inflated purchases.
iv. Addition of Rs.51,72,955 on account of deemed dividend under s. 2(22)(e).
v. Addition of Rs.1,00,000 on account of cash found and seized.
The Assessee appealed before the Commissioner of Income-Tax (Appeals) [‘CIT(A)’], who partly allowed the appeal by deleting various additions made by the AO. The CIT(A) deleted the addition on account of disallowance of expenses and inflated purchases clarifying that the AO has failed to raise any objection regarding the genuineness of the books of accounts and also deleted the addition on account of cash found and seized as an addition was already made in hands of one Mr. Moin Akhtar Qureshi.
Both the Assessee and the Revenue preferred cross-appeals before the ITAT. The ITAT partly allowed the appeal of the Assessee and dismissed the appeal of the Revenue.
The Revenue filed the present appeals before the DHC challenging the order of the ITAT.
Held
The DHC dismissed the appeal filed by the Revenue, concluding that no substantial question of law arose from the appeal, thereby upholding the decision of the ITAT to delete the additions made by the AO.
It emphasized the requirement under s. 145(3) of the Act, stating that the AO must reject the books of account before proceeding to make additions on an estimation basis.
It was noted that in this case, the AO failed to reject the books of account of the assessee and proceeded to make additions based on estimation without proper justification.
The DHC established that rejection of books of account is essential before resorting to best judgment assessment and held that the AO's additions were based on surmises and conjectures.
Our Analysis
By emphasizing the necessity of rejecting books of account before resorting to best judgment assessment, the DHC underscored the importance of procedural fairness and transparency in income tax assessments. Furthermore, the DHC’s analysis delved into the findings of the ITAT, which echoed concerns about the AO's approach and supported the deletion of additions made to the Assessee's income. This analysis served to reinforce the DHC’s conclusion that no substantial question of law arose from the appeals and justified the dismissal of the Revenue's case.
End Note
[i] 2024 SCC OnLine Del 1457 dated 01.03.2024.
Authored by Nitish Solanki, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.