Facts of the Case

The assessee filed an income tax return declaring income of ₹6,27,480 for AY 2013-14. The case was selected for scrutiny due to low net profit despite high turnover.

  • Purchases: ₹80.30 crore
  • Sales: ₹77.01 crore
  • Declared Gross Profit: ₹9.88 lakh (~0.13%)

During assessment:

  • Notices were issued to 20 sundry debtors; 19 did not respond, and 1 denied transactions.
  • The assessee failed to respond to a show-cause notice regarding rejection of books.

Consequently:

  • The Assessing Officer (AO) invoked Section 145(3) and rejected books of accounts.
  • Gross profit was estimated at 2% of gross sales.

Issues Involved

  1. Whether rejection of books of accounts under Section 145(3) was justified?
  2. Whether estimation of gross profit at 2% of sales was arbitrary?
  3. Whether Central Sales Tax (CST) should be excluded while calculating gross profit?
  4. Whether High Court can interfere in concurrent findings of fact?

Petitioner’s Arguments (Assessee)

  • AO failed to consider CST component, which forms part of cost and impacts profit margin.
  • GP estimation at 2% was erroneous and based on manufacturer margins instead of wholesale trade.
  • All transactions were through banking channels, hence rejection of books unjustified.
  • ITAT failed to properly exercise its role as final fact-finding authority.

Respondent’s Arguments (Revenue)

  • There were concurrent findings by AO, CIT(A), and ITAT.
  • Sundry debtors failed to confirm transactions, making sales unverifiable.
  • Assessee failed to provide comparative data of similar wholesale businesses.
  • Appeal essentially sought re-appreciation of evidence, which is not permissible in High Court.

Court’s Findings / Order

The Delhi High Court held:

  • AO rightly rejected books under Section 145(3) due to:
    • Non-verifiable transactions
    • Lack of debtor confirmations
    • Extremely low profit ratio
  • Estimation of 2% gross profit was reasonable based on available material.
  • ITAT correctly held that taxes (including CST) are already factored into gross profit estimation.
  • No perversity found in concurrent findings of AO, CIT(A), and ITAT.
  • No substantial question of law arose, hence appeal dismissed.

Important Clarifications

  • High Courts will not interfere where there are concurrent factual findings unless perversity is shown.
  • While estimating gross profit, statutory taxes like CST are considered part of overall expenditure.
  • Failure to substantiate transactions (e.g., debtor confirmations) can justify rejection of books.
  • Assessee must provide comparable industry data when disputing GP estimation.

Sections Involved

  • Section 145(3) of the Income Tax Act, 1961 – Rejection of Books of Accounts
  • Income Tax Assessment Provisions relating to Estimation of Gross Profit

 Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:3750-DB/58916092022ITA3322022_213206.pdf


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