The Income Tax Appellate Tribunal has clarified that the rejection of a taxpayer’s books of accounts under Section 145(3) of the Income-tax Act, 1961, requires more than mere non-submission of documents. It must be grounded in specific defects or evidence of mala fides, and procedural fairness under Rule 46A must be respected even in cases of delayed filing due to compelling circumstances.
The Verdict
The Revenue’s appeal was dismissed. The Tribunal held that the Assessing Officer erred in rejecting the assessee’s books of accounts under Section 145(3) without identifying specific defects, and in making additions under Section 68 without disproving the source of loans. The Tribunal also upheld the CIT(A)’s admission of additional evidence under Rule 46A, finding that the assessee had shown sufficient cause for delay due to health emergencies and lack of reasonable time.
Background & Facts
The assessee, M/s Kurele Packaging Pvt Ltd, filed its return for A.Y. 2021-22 declaring a gross profit of 4.67%. The Assessing Officer, conducting a search under Section 132, found no incriminating material. Despite this, the AO proceeded to pass an ex parte assessment under Section 144, rejecting the books of accounts and making three additions: (1) Rs. 5.11 crore under Section 68 as unexplained credit, (2) Rs. 1.03 crore as understated gross profit by estimating it at 8% of turnover under Section 145(3), and (3) disallowance of claimed expenses due to non-production of supporting documents.
The assessee appealed to the Commissioner of Income Tax (Appeals), who admitted additional documents submitted for the first time on appeal, including bank statements, loan agreements, and medical records showing the director’s severe Covid-19 infection during the assessment period. The CIT(A) deleted all additions, finding no specific defects in the books and noting the absence of incriminating material from the search. The Revenue appealed to the Tribunal.
The Legal Issue
The central legal questions were: (1) Whether the rejection of books of accounts under Section 145(3) is justified solely on the ground of delayed submission of documents, without evidence of specific defects or mala fides? (2) Whether the admission of additional evidence under Rule 46A of the Income-tax Rules, 1962, is permissible when the assessee demonstrates sufficient cause for non-production before the Assessing Officer?
Arguments Presented
For the Petitioner
The assessee’s counsel argued that the books were not inherently unreliable. The AO had not pointed to any specific irregularity in the ledger entries, voucher numbering, or accounting practices. The delay in document submission was due to the director’s critical illness during the assessment period, which rendered the firm unable to compile voluminous records in time. The Tribunal was reminded that the search under Section 132 yielded no incriminating material, undermining the AO’s presumption of unexplained credit. The CIT(A) had rightly considered the historical GP trend - 4.60% in A.Y. 2019-20 and 3.92% in A.Y. 2018-19 - which supported the reasonableness of the declared profit.
For the Respondent
The Department contended that the assessee had ample opportunity to produce documents during the assessment proceedings and failed to do so. It argued that Rule 46A strictly prohibits admission of evidence at appellate stage unless the assessee proves sufficient cause, which was not established. The AO’s estimation of gross profit at 8% was justified under Section 145(3) as a reasonable estimate where books were not maintained properly. The unexplained credits under Section 68, the Department argued, were presumed to be income unless the assessee proved both the identity and creditworthiness of the lenders, which it allegedly failed to do.
The Court's Analysis
The Tribunal rejected the Department’s rigid interpretation of Rule 46A. It noted that the CIT(A) had duly confronted the additional evidence with the Assessing Officer, who, despite being given an opportunity, remained silent on the substance of the documents and the reasons for delay. > "The AO... made no comments on the additional evidences as well as the reasons furnished by the assessee which prevented it from making submissions before the AO such as Directors being infected with Covid-19 and lack of reasonable time to file voluminous documents." This silence, the Tribunal held, amounted to tacit acceptance of the explanation.
On Section 145(3), the Tribunal emphasized that rejection of books is not automatic upon non-production of documents. > "The rejection of the books of accounts was uncalled for... having found no specific defects in the books." The Tribunal cited the consistent historical GP rates and the absence of any material irregularity to conclude that the AO’s estimation was arbitrary. The Tribunal also noted that Section 68 additions require the Department to disprove the source of funds, not merely demand proof from the assessee. Since the loans were secured bank loans and carry-forwards from prior years, and no incriminating material emerged from the search, the addition under Section 68 was unsustainable.
What This Means For Similar Cases
This decision reinforces that the rejection of books under Section 145(3) must be based on demonstrable defects - such as fictitious entries, inconsistent accounting, or evidence of fabrication - not procedural lapses alone. Practitioners should now routinely argue that the burden lies on the Department to identify specific irregularities, not merely to assert non-compliance. The Tribunal’s acceptance of Covid-related delays as sufficient cause under Rule 46A sets a precedent for future appeals where health emergencies or logistical constraints hinder timely compliance. However, this protection is not absolute; it applies only where the assessee provides credible, documented reasons and the Department fails to rebut them substantively. Tax officers must now document their objections to additional evidence with precision, or risk losing the challenge on appeal.
