Case summary, Income Tax

Whether the order of ITAT confirming the inapplicability of Section 145(3) while ignoring the AO’s assessment and rejection of the assessee’s books of accounts justified?

Case: CIT v. Ajay Kumar Gupta, Delhi High Court

This case is clubbed with CIT v. Rajiv Gupta

Listen to the summary of CIT v. Ajay Kumar Gupta, Delhi High Court

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  • This judgement is one of the handful of judgements passed by a High Court in 2019 where the standard of evidence has been discussed in relation to disallowance of receipt and expenditure in connection with business or profession.

See more Profit and Gains of Business or Profession cases where the expense has been disallowed for want of evidence.

  • Both the assessees carry on different businesses but were connected to the same case because the AO alleged that both of them had provided accommodation entries against the bogus purchase of silver and gold from one Bamalwa Group based out of Kolkata. The involvement of the assessees with Bamalwa Group came in the light because of a search and seizure operation was conducted on the premises of Bamalwa Group.
Accommodation entries cases

See more accommodation entries cases in relation to PGBP.

  • The income tax returns filed by both the assessees in AY 1999-99 were picked up for scrutiny.
  • AO gave several opportunities to the assesses to reveal the identity of the buyers who had bought these silver items, but they failed to do so. Hence, AO invoked section 145(3) which empowered him to reject the book of accounts.
  • The CIT(A) and ITAT rejected the AO’s stand and held that Section 145(3) was inapplicable in the given fact situation.
  • Hence, Revenue filed two separate appeals which were admitted in 2005 and 2006 and both of which were disposed of through this common judgement.

Revenue’s Arguments

Revenue argued that the alleged sale of silver by the assessees to Bamalwa Group was fictitious and concocted. Revenue placed before the Court the following evidence to sustain AO’s decision to reject the books of accounts of the assessees:

  • Assessees were unable, on five separate occasions, to provide details (including names and addresses) of their end customers of silver.
  • In respect of cash memos produced as evidence of cash sales of silver by the assessees, they were able to provide details of purchasers in less than 0.5% of the cash memos.
  • Assessees had evidence of the purchase of silver from MMTC and Customs Department but no evidence of purchase from Bamalwa Group.
  • Assessees were unable to provide details on how huge amount of silver was transported from Bamalwa’s depots to Delhi.

Assessees’ Arguments

Assessees argued that High Court sitting to adjudicate an Income Tax Appeal, should not accept Revenue’s appeal where both CIT(A) and ITAT has made concurrent findings against the rejection of books of accounts by the assessee.  

High Court’s Holding

Justice Muralidhar (see judge analytics) wrote the judgement for the Court

  1. ITAT and CIT(A) erred in ignoring the “exhaustive” evidence put forth by the AO.
  2. The case made by the assessees cannot be compared with the situation in CIT vs Jindal Dyechem Industries Pvt Ltd on facts and also because the amount involved in the current case was way higher than the amounts involved in Jindal Dyechem.

The case of the Revenue draws support from the judgement of the Supreme Court in Kachwala Gems Jaipur vs. Joint Commissioner of Income Tax, in that the assessees who submit false books of accounts run the risk of being assessed on the best judgement basis

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