The Income Tax Appellate Tribunal, Kolkata, has clarified that the mere non-response to notices under Section 133(6) of the Income Tax Act cannot justify the wholesale rejection of an assessee’s books of accounts. This ruling reinforces the principle that assessment must be grounded in specific deficiencies, not procedural defaults.
Background & Facts
The Dispute
The appellant, Jaya Chandra, is a sole distributor of agricultural inputs including seeds, fertilizers, and plant saplings, authorized by ADMA India Pvt. Ltd., AMIT Biotech, and Crystal Crop Protection Pvt. Ltd. to participate in tenders floated by the West Bengal State Seed Corporation Limited (WBSSCL). Upon successful bidding, the appellant would route supply orders to the three authorized suppliers, who would then deliver goods to WBSSCL. The appellant’s role was that of a facilitator and intermediary in a structured supply chain.
Key Facts
- The appellant filed its return of income for AY 2022-23 on 11.10.2022, declaring total income of ₹2,86,92,950
- Total sales during the year: ₹38,31,82,335, of which ₹37,10,00,936 (over 96%) were to WBSSCL, a government entity
- Total purchases: ₹37,23,18,341 from three suppliers: ADMA India (₹16,24,17,517), AMIT Biotech (₹3,46,71,886), and Crystal Crop (₹71,38,041)
- The appellant submitted purchase invoices, e-way bills, transport documents, and audited books of accounts
- The tax auditor’s report did not raise any adverse observations on the books or record-keeping
- Certain invoices could not be produced, but the appellant provided all other corroborative documentation
Procedural History
- 11.10.2022: Return of income filed for AY 2022-23
- CASS Selection: Case selected under Computer Assisted Scrutiny Selection for: (i) creditors exceeding 50% of purchases, (ii) higher TDS receipts than ITR, (iii) high liability relative to income
- Statutory notices issued: Under Section 133(6) to four parties including WBSSCL and the three suppliers
- No response received: From any of the four parties to the Section 133(6) notices
- 22.03.2024: Assessing Officer (AO) rejected books of accounts under Section 145(3) and estimated profit at 8% of turnover (₹3,06,54,586)
- Net addition: ₹2,49,74,293 after allowing declared income of ₹56,80,293
- 22.09.2025: Commissioner of Income Tax (Appeals) upheld the AO’s order
- 17.02.2026: Hearing before ITAT Kolkata
- 15.04.2026: ITAT pronounced order
Relief Sought
The appellant sought deletion of the addition of ₹3,06,54,586 made by the AO and confirmed by the CIT(A), and restoration of the declared income of ₹2,86,92,950.
The Legal Issue
The central question was whether books of accounts can be rejected under Section 145(3) solely on the ground that third parties failed to respond to notices under Section 133(6), when the assessee has submitted sufficient corroborative evidence and the books have been audited without adverse findings.
Arguments Presented
For the Appellant
The appellant argued that the AO and CIT(A) erred in rejecting the books without identifying any specific defect in the accounting records. The appellant had submitted purchase invoices, e-way bills, transport records, bank statements, and audited financials. The non-response to Section 133(6) notices by third parties was beyond the appellant’s control and could not be used to penalize the assessee. Reliance was placed on CIT v. Smt. Poonam Rani (326 ITR 223, Delhi) and CIT v. Om Overseas (2009) 315 ITR 185 (P&H), which held that rejection of books requires concrete evidence of unreliability, not mere non-cooperation by third parties.
For the Respondent
The Revenue contended that the appellant failed to substantiate the genuineness of purchases and sales due to non-production of all invoices and non-response from suppliers. It argued that the AO was justified in estimating income under Section 145(3) as the books were not verifiable, and the high turnover to a single government entity raised suspicion.
The Court's Analysis
The Tribunal observed that the AO did not point out any specific defect in the maintenance or accuracy of the appellant’s books of accounts. The tax auditor had not raised any adverse comments, and the appellant had submitted substantial documentary evidence including e-way bills and transport records. The fact that the suppliers did not respond to notices under Section 133(6) was not attributable to the appellant, who had no legal authority to compel their compliance.
"The rejection of books of account without pointing out any defect is bad in law and cannot be sustained."
The Tribunal emphasized that Section 145(3) permits rejection only when the books are not maintained in accordance with generally accepted accounting principles or are otherwise unreliable. Mere absence of third-party confirmation does not equate to unreliability. The Tribunal distinguished this case from those where the assessee failed to maintain books or produced fabricated documents. Here, the appellant’s business model was transparent, the sales were overwhelmingly to a government entity, and the pattern of transactions was consistent over time.
The Tribunal further noted that the CIT(A) had merely reiterated the AO’s reasoning without independently evaluating the documents submitted. This constituted a failure to discharge the appellate duty under Section 250 of the Act.
The Verdict
The appeal was allowed. The ITAT set aside the order of the CIT(A) dated 22.09.2025 and directed the AO to delete the addition of ₹3,06,54,586 made under Section 145(3). The appellant’s declared income of ₹2,86,92,950 shall stand accepted. The AO is directed to pass a fresh order in conformity with this decision within 8 weeks.
What This Means For Similar Cases
Rejection of Books Requires Specific Defects, Not Third-Party Non-Cooperation
- Practitioners must argue that non-response to Section 133(6) notices cannot substitute for a substantive analysis of the assessee’s books
- The burden to prove unreliability lies with the Revenue; absence of third-party replies is not evidence of fraud or inaccuracy
- If the books are audited and no adverse remarks are made, rejection under Section 145(3) is legally unsustainable
Government Transactions Carry Inherent Credibility
- Sales to government entities like WBSSCL are inherently verifiable and reduce the risk of fictitious transactions
- High volume of transactions with a single government buyer supports the legitimacy of the business model
- Such patterns should be viewed as indicators of transparency, not suspicion
Appellate Authorities Must Conduct Independent Review
- CIT(A) cannot merely endorse the AO’s order without examining the evidence
- Appellate forums must apply their own mind and cannot act as rubber stamps
- Failure to independently evaluate documents renders the appellate order liable to be set aside
