Delhi High Court Disapproves Arbitrary 'Pick-And-Choose' Method for Rejecting Entries in Books of Account

Delhi High Court Disapproves Arbitrary 'Pick-And-Choose' Method for Rejecting Entries in Books of Account

The Delhi High Court has ruled that rejecting entries from accounting books using pick-and-choose method is an arbitrary practice that can lead to inaccurate calculations of an assessee's income.

The bench, comprising of Justices Yashwant Varma and Purushaindra Kumar Kaurav, made a finding that despite the Assessing Officer (AO) being provided with the necessary bills, vouchers, and addresses of the transacting parties, no effort was made to verify the authenticity of the alleged bogus or inflated bills.

The respondent-assessee sells gift items, pet treats, and conducts market research and surveys. They also offer commission-based services and provide corporate gifting solutions to various businesses.

Following a search, seizure, and survey operation conducted under Section 132/133A, the AMQ group of companies, including the office premises of the respondent-assessee, received a notice under Section 153A. This notice requires the respondent-assessee to file its income tax return for the six preceding years from the date of the search, covering the period from 2008–09 to 2013–14.

The respondent-assessee submitted its Income Tax Return (ITR) on November 30, 2014, declaring an income of Rs.66,53,882/- for the Assessment Year (AY) 2014–15. Following this, a notice under Section 143(2) was served on September 10, 2015, and another notice under Section 142(1), accompanied by a comprehensive questionnaire, was issued to the respondent-assessee on September 6, 2016.

Subsequently, the AO issued an order under Section 143(3), assessing the income of the respondent-assessee by adding to the total income for the relevant AY.

The assessee lodged an appeal before the CIT (A), who partially granted relief to the respondent-assessee. The CIT (A), noting the AO's failure to raise objections concerning the authenticity of the audited books of account, eliminated the additions pertaining to the disallowance of expenses and Rs.9,30,49,222 on account of inflated purchases.

The CIT (A) additionally determined that the inclusion of Rs.1,00,000 due to cash discovered and seized was done on a protective basis. Given the substantive addition already made, as mentioned by the AO, the CIT (A) ordered the deletion of this addition.

Both the assessee and the department filed cross-appeals before the Income Tax Appellate Tribunal (ITAT). The ITAT dismissed the department's appeal while partially allowing the assessee's appeal. The specific issue related to the addition based on the estimation of unaccounted profits was referred back to the AO with instructions to gather information from relevant parties regarding transactions conducted by the respondent-assessee during the relevant AYs.

The ITAT upheld the findings of the CIT(A) regarding the disallowance of expenses and inflated purchases. Notably, the AO had not identified any defects in the records maintained by the respondent-assessee, nor did he make any specific remarks questioning the genuineness of the expenses. As a result, the ITAT found no grounds to challenge the CIT(A)'s order.

The department argued that the expenses claimed by the respondent-assessee are either bogus or inflated, with the intention of significantly reducing the taxable income. Consequently, the additions made by the AO to the total income of the respondent-assessee are not tainted by any perversity, material illegality, or arbitrariness.

The respondent-assessee argued that the additions made by the AO were speculative and unsupported. They emphasized that the ledger containing detailed information about the parties, including their addresses, was provided to the AO to justify the expenses. However, the AO failed to diligently verify the genuineness of these expenses with the concerned parties. Importantly, there were no discrepancies in the books of account, and the AO did not formally reject the books. Consequently, the disallowance of purchases by the AO lacked justification and ran contrary to the provisions of the Income Tax Act. Both the ITAT and the CIT(A) rightly supported the respondent-assessee’s position.

The court emphasized that before proceeding to a best judgment assessment, the books of account must be formally rejected by the AO in accordance with the conditions specified in the Income Tax Act. This rejection is essential to ensure accurate computation of accounts, promoting transparency and precision in income assessment.

As a result, the court dismissed the department’s appeal.