INCOME TAX OFFICER WARD-2(1), FARIDABAD V. PRAHLAD, PALWAL

ITA 42/DEL/2024

AI Insights

The case involves an appeal by the Income Tax Officer against the decision of the Commissioner of Income Tax (Appeals), which had resulted in significant tax relief for the respondent, Prahlad, a government civil contractor. The primary issues revolved around the rejection of the books of accounts and the subsequent application of a net profit rate, which subsumed various disallowances including those for non-deduction of TDS and violations of section 40A(3). The Tribunal scrutinized the application of section 145(3) and the method of estimating income, ultimately finding that the CIT(A) had not correctly applied the law in rejecting the books of accounts.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 47307 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-04-2025
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: F
• Assessment Year: 2020-2021
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HARPREET KAUR HANSRA
• Keywords: Set aside; Business income; Depreciation; Rejection of books of accounts; Bogus purchase; Capital expenditure; Principle of natural justice; TDS; Capital asset converted into stock in trade; Non-deduction of tax; Bogus
• Section: 144; 143(3); 143(2); 13; 145; 28; 40A(3); 40(a)(ia); 145(3); 20

Judgement Text

" 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘F’: NEW DELHI BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER AND SHRI AVDHESH KUMAR MISHRA, ACCOUNTANT MEMBER ITA No.42/Del/2024, A.Y. 2020-21 Income Tax Officer, Ward-2(1), Aaykar Bhawan New C.G.O.Complex, Block-B,Faridabad Vs. Prahlad, House No. 1516, Ward No. 14, Mandkola, Palwal, Haryana, 121103 PAN: DBRPP8267F (Appellant) (Respondent) Appellant by Ms. Harpreet Kaur Hansra,Sr.DR Respondent by None Date of Hearing 19/02/2025 Date of Pronouncement 09/04/2025 ORDER PER AVDHESH KUMAR MISHRA, AM This appeal, filed by the Revenue, for the Assessment Year (hereinafter, the ‘AY’) 2020-21, is directed against the order dated 07.11.2023 passed by the Commissioner of Income Tax (Appeals), NFAC, New Delhi [hereinafter, the ‘CIT(A)’]. 2. Following grounds have been raised by the Revenue: - “1.The Ld. CIT(A) erred on facts in deleting the addition on account of unsubstantiated purchases of Rs.2,12,26,191/- and treating it as subsumed in estimated addition of Rs.13,38,765/-. 2. CIT(A) erred in invoking provisions of section 145(3) to reject Books of accounts even when the prevalent facts did not require rejection simply because purchases to the extent of Rs.2,12,26,191/- were found to be inflated. ITA No.42/Del/2024 Prahlad 2 3. CIT(A) erred in deleting the addition of Rs.96,94,500/- u/s 40(a)(ia), for admitted failure to deduct tax on labour charges. 4. CIT(A) erred in deleting the addition of Rs.2,40,000/- for admitted violation of Provisions of Sec 40A(3).” 3. The relevant facts giving rise to this appeal are that the appellant assessee,Government Civil Contractor, filed its Income Tax Return (hereinafter ‘ITR’) on 13.02.2021 declaring income of Rs.47,35,490/-. The record shows that the assessee has worked only for Municipal Corporation of Gurgaon (Har.). The case was picked up for complete scrutiny. During the course of assessment proceedings, the Assessing Officer (hereinafter, the ‘AO’) noticed that the assessee has inflated his purchases by Rs.2,12,26,191/-; therefore, he disallowed the same. Further, the AO noticed that the assessee had made payment without deducting tax at source (TDS)on contractual payments of Rs.3,23,15,000/- made to labour sub- contractors in contravention to section 40(a)(ia) of the Income Tax Act, 1961 (hereinafter, the ‘Act’). The AO therefore, disallowed 30% of Rs.3,23,15,000/- amounting to Rs.96,04,500/- and added back to the returned income. Further, the AO also noticed that the assessee had made payments, in excess of Rs.10,000/- in cash at a time, in violation of the provisions of Section 40A(3) of the Act. Hence, he also disallowed Rs.2,40,000/- on this score. 3.1 The relevant part of the assessment order is extracted hereunder: - “3.7. Point-wise rebuttal of reply of the assessee including analysis of any case low relied upon ITA No.42/Del/2024 Prahlad 3 i. The books of account of the assessee for the AY under question was audited by a certified Chartered Accountant, Moreover, the assesses has furnished the details of GST and non-GST purchases made by him during the relevant previous year. After considering the GST and Non- GST purchases, when excess purchase was pointed out to the assessee and was requested to explain the same, the assessee came up with a new idea for estimation of his income as per section 146(3) of the Act. Only at the eleventh hours of the assessment proceedings, the assessee has requested to reject his books of accounts and to estimate his income. The assessee has never requested this unit prior to the issue of show cause notice dated 16.09.2022 to reject his books of account as per section 145(3) of the Act and estimate his income accordingly When the assessee was pointed out about the claim of excess purchase over and above the GST and non-GST purchases, the assessee came up with a new idea and requested to estimate his income. If the books of accounts are not in the possession of the assessee, he would have not furnished any details in respect of purchases made and for other issues. However, in the instant case the assesse has submitted the details of GST purchase like copy of GST return, copy of invoices, E-way bills, ledger copies (for three parties), comparison of gross receipt, net profit & gross profit for the past 3 years, details of non-GSTR purchases, copy of invoices for GST and non-GST purchases along with the details of payments made to them and details of month wise salary payments. In the above circumstances, when the books of accounts of the assessee was audited by a qualified Chartered Accountant and the assessee has also furnished the above required details, it can neither be said that the assessee did not maintain his books of accounts nor it can be said that he is not in the possession of the books of accounts. Hence, the claim of the assessee that he is not in the possession of his books of accounts due to death of his accountant late Sidharth Bansal is an afterthought and it is devoid of any merits. Accordingly, the request of the assessee to reject his books as per section 145(3) of the IT Act and to estimate his income is found not acceptable. Further, the assessee placed reliance on the judgments as mentioned in para 3.5 (iii) above. The same are perused carefully and found not to be acceptable as the facts of the instant case are entirely different from ITA No.42/Del/2024 Prahlad 4 those cases which have been relied by the assessee. Further, the assessee requested vide his letter dated 23.09.2022 to the Unit Head of the Assessment Unit to give direction/guidance u/s 144A of the Income Tax Act, 1961, to invoke provisions of section 145(3) of the Income Tax Ad. 1961 which was forwarded to the Range Head on the very same day. The Range Head of this unit on 27.00.2022 has given the following directions u/s 144A of the Act. 1. Being the data of High Risk Billers received from the CBIC and the CASS Rationale highlighted to verify the genuineness of purchases, on the above CASS criteria. The FAO is directed to arrive the correctness of purchase and consider GST input credit after due consideration of the assesse's submissions, explanations and evidences produced. 2. 40a(ia)-AO shall cross verify the payments and allow if Assessee satisfies the proviso as per the Income Tax Act. For the above issues FAO shall take due consideration of all the suggestions and modifications of the Review Unit, if any. The above directions of the Range Head are binding on the assessing officer and the same have been duly considered. On duly following the above directions of the Unit Head, scrutiny assessment in the instant case is hereby concluded as under: ii. Claim of excess purchases in profit and loss account for the AY under consideration, the assessee claimed total purchase to the tune of Rs. 19,05,12,454/-, In response to this unit SCN. dated 17.08.2022 the assessee responded on 02.09.2022 and stated that total purchase shown in the profit and loss account was inclusive of labour payments amounting to Rs. 3,23,15,000/- and also requested to treat the total purchase as Rs. 15,81,97,454/-, as discussed at Para 3.2.3.(c) above. Further in response to this unit additional SCN dated 16.09.2022 the assessee stated in his reply dated 21.09.2022 that his total GST purchase was Rs. 10,04,46,754/- during the year. The assessee also submitted copies of GSTR-2A returns in support of his claim. The assessee also accepted that after reducing the capital expenditure of ITA No.42/Del/2024 Prahlad 5 Rs.5,05,460/- (Purchase of Maruti Swift Car), his eligible GST purchase was Rs. 9,99,41,294/-. However, in order to provide natural justice to the assessee. depreciation on above capital expenditure of Rs.5,05,460/- is being granted to the assessee @ 5% as the car was purchased in the month of February, 2020. With respect to non-GST purchases of Rs. 3,70,29,969/- for purchasing items like sand, mud, stone, crush, small stones etc., the assessee has submitted copies of bank statements reflecting payments, sample invoices and confirmation letters from parties. Considering the reply of the assessee that construction activity cannot be carried out without sand, mud, stone, crush, small stones etc., claim of non-GST purchase has been considered by adopting a fair stand. However, the assessee has claimed total purchase of Rs. 19,05,12,454/- in the return of income filed for the A.Y.2020-21. Further vide letter dated 02.09.2022, the assessee stated that above purchase includes labour payment of Rs. 3,23,15,000/- and hence actual purchase is Rs. 15,81,97,454/-. Considering the above submissions of the assessee for total purchases, excess purchase of the assessee for the AY under question has been worked out as the below table: Total purchase claimed in the profit and loss account including labour payment of Rs. 3,23,15,000/- (as stated by the assessee) (In Rs.) 19,05,12,454/- Total GST purchase claimed in his submission dated 21.00 2022 Total non-GST purchase claimed in his submission dated 21.09.2022 Labour charges Total claim of purchase including labour payments 9,99,41,294/- 3,70,29,969/- 3,23,15,000/- 16,92,86,263/- Total claim of excess purchase of the assessee 2,12,26,191/- From, the above it is very clear that the assessee has claimed excess purchase to the tune of Rs. 2,12,26,191/- (Rs. 19,05,12,454- 16,92,86,263/-) in order to reduce his tax liability. The assessee was requested to furnish details of total purchases of Rs. 19.05,12,454/- ITA No.42/Del/2024 Prahlad 6 shown in the return of income but the assessee has submitted explanation and evidences to the extent of Rs. 16,92,86,263/-only which includes the labour charges of Rs.3,23,15,000/-, GBT purchase of Rs.9,99/41,294/- and non-GST purchase of Rs.3,70,29,969/- and hence the excess purchase to the extent of Rs. 2.12.26,191/-remains unexplained. The assessee has also not stated anything about the above difference amount of Rs. 2.12,26,191/-. The assesse could not provide any explanation and evidences in support of his claim of purchase to the extent of Rs.2,12,26,191/, even after providing him considerable time and ample opportunities as discussed at Para 2. In view of the discussions made in preceding paras, unexplained purchases amounting to Rs. 2,12,26,191/-is hereby disallowed and added back to the income returned by the assesse for the AY-2020-21. iii. Non-deduction of TDS With respect to the issue of labour payments amounting to Rs. 3,23,15,000/- made to five self-help group heads (as stated by the assessee). The assesse made payments as under: 1. BrahmawatiRs.91,97,500/- (paid on 25.06.2019) 2. Rishi RajRs. 91,97,500/-(paid on 25.06.2019) 3. Leela DeviRs. 70,00,000/-(paid on 17.06.2019) 4. Padam SinghRs 35,00,000/-(paid on 17.06.2019) 5. Indrajeet SainiRs. 35,00,000/-(paid on 17.06.2019) It can be seen that, the significant amount (much more than the limit specified as per section 1940 of the Income Tax Act, 1961) had been paid to the above persons and nature of the above payment can only be considered as 'Sub-contract payment\", hence, provisions of section 40(a)(ia) is applicable in this case. The assessee himself, during Video Conference conducted on 12.09.2022, had accepted that the labour charges were paid through banking channels but TDS was not deducted thereon, which is in violation of section 40(a)(ia) of the Income Tax Act, 1961. Hence, 30% of the sub contract payments of Rs. 3,23,15,000/- amounting to Rs. 96,04,500/- is hereby disallowed and added back to the returned income of the assesse ITA No.42/Del/2024 Prahlad 7 iv. Violation of section 40A(3) of the Act. On perusal of details, it was noticed that the assessee had made rental payments of Rs. 2.40,000 response to this unit SCN dated 17.08.2022, the assessee submitted his reply on 02.09.2022 stating that TDS provisions are not applicable on the above payments as they were within the limit. Further, during the course of scrutiny proceedings, the assessee had requested for personal hearing through Video Conference and the same was accorded and scheduled on 12.09.2022 at 04:00 PM. During the Video Conference, the assessee was asked about the mode of rental payment in response, Anjali Aggarwal, who represented the case of the assessee, accepted that it was paid in cash, which is in violation of section 40A(3) of the Act. With respect to the rental payment, the assessee stated that rental payments were made on regular basis and no payments were made in excess of Rs. 10,000/-, however, the assessee failed to provide any documentary evidence in support of his statement, hence, in absence of any evidences the above explanation of the assessee is found not acceptable. Accordingly, Rs. 2,40,000/- is hereby disallowed u/s 40A(3) of the Income Tax Act, 1961 and added back to the returned income of the assessee for the AY-2020-21.” [Emphasis was supplied by us.] 3.2 Aggrieved, the assessee filed appeal before the CIT(A); who rejected the books of accounts under section 145(3) of the Act and applied a Net Profit Rate (NP) @ 3.00% as against 2.35% declared by the assessee, which resulted relief of Rs.2,97,96,653/- to the assessee. The Ld. CIT(A) further held that since the income had been worked out by applying NP rate; therefore, disallowance made under section 40(a)(ia) and 40A(3) of the Act got subsumed. Accordingly, he deleted other disallowances of Rs.96,04,500/- and Rs.2,40,000/- made under section 40(a)(ia) and 40A(3) of the Act. ITA No.42/Del/2024 Prahlad 8 4. Before us, the assessee was not represented by anyone. 5. We therefore, have heard the Senior Departmental Representative (hereinafter, the ‘Sr. DR’) at length who contended that the Ld. CIT(A) had applied NP rate without any categorical finding on rejection of books of accounts under section 145(3) of the Act. She submitted that the Ld. CIT(A) had discussed various case laws, etc. to justify that the rejection of books of accounts under section 145(3) of the Act should have been better recourse in the present case as facts & circumstances of present case were quite similar to various case laws mentioned in the impugned order. But nowhere, the Ld. CIT(A) had rejected the books of accounts under section 145(3) of the Act in para 6.1 to 6.14 of the impugned order. The Ld. Sr. DR submitted that the Ld. CIT(A) had not rejected the books of accounts under section 145(3) of the Act but had specifically used the word “liable”, which indicates that he has rejected the books of accounts under section 145(3) of the Act though he had not pointed out any defects in books accounts of the assessee other than what highlighted by the AO. She further contended that the justification given by the Ld. CIT(A) for application of NP rate without categorical rejection of books of accounts under section 145(3) of the Act is devoid of any merit particularly when the AO had found the assessee had claimed bogus expenses to evade taxes and there was inconsistency in NP rate. ITA No.42/Del/2024 Prahlad 9 5.1 The Ld. Sr. DR pointed out para 3.7 (underlined above) of the assessment order wherein the AO had categorically held that the assessee ensured compliance and furnished details/documents based on books of accounts till he was not cornered with show-cause notice proposing specific disallowances/additions. She highlighted the AO’s finding wherein it was categorically held that the assessee had made the request for rejection of books of accounts and application of average Gross Profit (GP) rate of past three years as a tactical move so that specific disallowances/additions should not be made. She submitted that the purpose of rejection of books accounts under section 145(3) of the Act was never to derive any benefit by the assessee or overcome the specific disallowances/additions. She also pointed out that the assessee GP rate had doubled in past three years from 4.26% to 8.87% (para 6.13 of the impugned order); therefore, its average would not serve the purpose. She therefore, questioned the applicability of average GP/NP rate by the Ld. CIT(A) by submitting that the Ld. CIT(A) had not given any justification for that. Further, she reiterates that the Ld. CIT(A) had not given categorical finding wherein he had rejected the books of accounts of the assessee. 5.2 The Ld. Sr. DR contended that the AO had made specific additions/ disallowances on accounts of bogus purchases, disallowances under section 40(a)(ia) and 40A(3) of the Act. The Ld. Sr. DR, quoting the provisions of Section 145(3) of the Act, submitted that the Ld. CIT(A) had erred in ITA No.42/Del/2024 Prahlad 10 upholding the NP rate of 3.00% without rejecting books of accounts and in view of the fact that there was extreme fluctuation in profit rates over the years in assessee’s own case. She also contended that the Ld. CIT(A) had not reversed the finding of the AO as far as non-rejection of books of accounts and bogus purchases were concerned. She therefore, prayed for setting aside of the impugned order and restoring of the assessment order. She submitted that there was huge margin in municipal contract works. 6. We have heard the Sr. DR and have perused the material available on the record. We have gone through the impugned order and are of the considered view that the Ld. CIT(A) has not given categorical finding on rejection of books of accounts under section 145(3) of the Act. The Ld. CIT(A) has specifically used the word “liable” as under: 6.1 In such circumstances, as discussed hereinabove, the books of accounts of the appellant were liable to be rejected and the income of the appellant computed by the AO by applying the best judgement method instead of making separate disallowances in respect of various expenses debited in the profit and loss account, more particularly when the AO has not disputed that the appellant was engaged only in the business of civil construction work awarded by the government agency i.e. Municipal Corporation of Gurgaon, and the work had also been successfully executed by the appellant and payment received, as reflected in the certificate issued to such effect. …….. 6.6 It is seen that since in this case, the AO had noted the discrepancies in the various figures and the appellant had neither filed the reconciliation nor the bills and vouchers in respect of the expenses debited in the profit and loss account, as such, in view of the provisions of section 145(3) of the Act, books of account of the appellant were liable to be rejected and his income liable to be estimated. ITA No.42/Del/2024 Prahlad 11 The decision part of impugned order indicates that the Ld. CIT(A) has rejected the books of accounts under section 145(3) of the Act and thereafter, he has applied the NP rate.Now the issue before us is that whether the CIT(A), in case the AO has not rejected books of accounts under section 145(3) of the Act, is empowered to reject books of accounts under section 145(3) of the Act. 6.1 The section 145 of the Act reads as under: “Method of accounting. 145. (1) Income chargeable under the head \"Profits and gains of business or profession\" or \"Income from other sources\" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144. 6.2 As per section 145(3) of the Act, following circumstances under which the AO 'may' make best judgement assessment as provided under section 144 of the Act are as under: ITA No.42/Del/2024 Prahlad 12 (i) when the AO is not 'satisfied' about correctness or completeness of 'accounts' of the assessee; or (ii) where the method of accounting provided in section 145(1) of the Act has not been regularly followed; or (iii) where income has not been computed in accordance with the standards notified under sec 145(2) of the Act. 6.3 In section 145(1) of the Act, while making it mandatory to compute the income under head 'business & profession' or 'Income from other sources' based on cash or mercantile system of accounting being regularly followed by the assessee, the word 'shall' have been specifically used to make it mandatory leaving no discretion to use any another method of accounting which is not being regularly followed. Whereas in section 145(3) of the Act, the word 'may' have been deliberately used in a discretionary/directory context because the word 'may' as used in 145(3) of the Actis intricatelylinked to the AOs satisfaction also about the correctness of accounts in the very same section. A critical examination of language of this section along with principles of harmonious construction would make it clear that powers of the AO to invoke 145(3) of the Act is merely declaratory/discretionary and not mandatory, where the legislature had no intention to prescribe the mandatory rejection of books of accountsin each & every case where some specific entry in accounts have been found to be bogus/inflated or unverifiable but largely the accounts maintained as per ITA No.42/Del/2024 Prahlad 13 mandate of section 145(1) r/w 145(2) of the Act. That is why the word 'may' have been used at one place and 'shall' at another place in the same section of the Act. Thus, it is obvious that the word; ‘shall’ and ‘may’ have been chosen in the Act distinctively with their natural meaning. The provision using the word 'shall' would be mandatory whereas the one using the word 'may' would only be directory/discretionary. If it were not to be read so, it may lead to other consequences. 6.4 The business income is computed in accordance with the provisions of section 28 to 44DB of the Act as these are enabling provisions to allow certain type of allowances/claims/expenditures etc. In case any disallowance of any/few specific claim(s) of expenditure, would mandatorily lead to invocation of 145(3) of the Act, then these sections would be rendered otiose because, then by estimation of income under best judgment after rejection of accounts being mandatory would not entail specific disallowance/addition for violations of any of sections from 28 to 44DB of the Act. In such situation, these sections would lose their relevance. Further, it would also be difficult to pinpoint which section assessee made an incorrect claim and whether the amount involved in the incorrect claim is duly embedded in the income determined as best judgement under section 144 of the Act. In case specific disallowance/addition for violations of any of sections from 28 to 44DB of the Act are not made after invocation of 145(3) of the Act and determining of income as best judgement under section 144 of the Act, then ITA No.42/Del/2024 Prahlad 14 such incorrect claim may also get insulated from various consequences; such as penalties and prosecutions, thereby making these sections not only inapplicable but also diluting/diminishing the penal consequences of those sections of the Act. 6.5 As per the language of section 145(3) of the Act, satisfaction of the AO envisaged is specifically qua the correctness of the accounts, or the method of accounting regularly followed as per accounting standards only. It is not qua the non-applicability of other provisions of the Act related to allowance of expenditure claimed in accounts or assessment of income. The satisfaction of correctness and completeness of accounts or otherwise, is qua the accounts only. The meaning of expression 'accounts' as used in section 145 of the Act is very wide and encompasses as a whole gamut of things and not being restricted to the itemized entries alone. If any itemized entry being part of accounts, does not pass the test of an eligible expenditure under section 28 to 44DB of the Act, it does not ipso-facto mandatorily also mean that the accounts itself are incorrect/incomplete. Normally, the accounts are kept with the perspective of running business as per business principles for computing the profits, whereas the allowability of expenditure for computing income would always be on the touchstone of the provisions of the Act for determination of income chargeable to tax for that year. Therefore, any expenditure incurred and claimed in accounts but not allowable under the Act due to lack of corroboratory evidence, cannot by itself render the ITA No.42/Del/2024 Prahlad 15 accounts as incorrect/incomplete, necessarily requiring rejection of books of accounts under section 145(3) of the Act. Further, the expression correctness/completeness of accounts is in context of maintenance of accounts by the assessee, entries made in it and being presented to the AO, whereas correctness of the claim of expenditure is all about testing such claim under various provisions of the Act. For that, the AO conducts investigations/enquiry and also examines the details, documents, submissions etc. produced/ furnished/gathered during the assessment proceedings and then take a final call based on the material available before him. Under the Act, the AO’s assessment powers are wide enough and beyond the scope of determination of income only. Therefore, when the AO makes an assessment, it is not just a mechanical exercise of computing income based on such accounts but a whole due process of application of mind having regards to entire facts and circumstances of the casevis-à-vis applicability of various provisions of the Act. 6.6 The obligations of the AO under the Act for purpose of making assessment are much wider than the discretion given to the AO to invoke the powers under section 145(3) of the Act, which he may exercise only if he is not satisfied about the correctness or completeness of books of accounts, which enable him to compute the income in the manner of best judgement. The mere fact that AO is not satisfied about correctness/completeness of accounts, it does not snatch away his power under the Act to make ITA No.42/Del/2024 Prahlad 16 assessment as per other provisions of the Act after making verification of claims made in the ITR. The AO can still reach a conclusion that by restricting the claim not allowable under regular provisions of the Act, the resulting assessment would be the most appropriate instead of the best judgement under section 144 of the Act. This is the whole concept and idea behind any best judgement assessment also. Best judgement under section 144 of the Act is part of assessment procedure and it is to be applied only when the AO is satisfied that otherwise correct income is not computable. In fact, the language of section 143(2) and 143(3) of the Act which give power to the AO to embark upon the due process of assessment obligates the AO to ensure that there is no understatement of income or claim of excessive loss and thereby make assessment of 'Total Income or Loss' of that year. 6.7 Neither section 143(3) nor 144 of the Act mandates that the AO has to make assessment after invocation of section 145(3) of the Act, if some bogus expenses had been claimed or any of the claims found excessive or income found understated because invoking powers under section 145(3) of the Act in each and every case is mandatory. During assessment, the AO consider not only entries of the books of accounts but also upon any other relevant material comesinto his fore through any modes; such as search/survey/information gathered/obtained from any person as well as income(s)/expense(s) not found recorded in books of accounts. Under such circumstances, though the accounts will technically be rendered as incorrect ITA No.42/Del/2024 Prahlad 17 or incomplete for any particular year. If rejection of books of accounts would become mandatory after specific disallowance/addition for violations of any of sections from 28 to 44DB of the Act, then assessees would be benefitted if their search assessments are completed after rejection of books of accounts under section145(3) of the Act and not making any specific sections of the Act including section 28 to 44DB, 68, 69, to 69D, etc. of the Act. But it is not the intent and purpose of the statute. Due to non-inclusion of items coming to knowledge of the AO from any mode/source, yet he can make assessment based on such accounts without rejecting the books of accounts under section 145(3) of the Act and going ahead with making specific disallowances/additions under section 28 to 44DB, 68 to 69D of the Act as the case may be. This can never be the purpose of the statute to propagate the mischief which is otherwise sought to be plugged under that section of the Act.It is trite law that the statutory provisions must be interpreted in to further the intent and purposes of Act and avoid absurdity. All such absurdities can be averted only if the invocation of powers under 145(3) of the Act is held to be discretionary due to use of the word 'may' instead of 'shall'. 6.8 As per section 145 of the Act, it is for the AO to be satisfied about the correctness or completeness of the accounts of the assessee, or the assessee has not followed regular method of accounting provided in section 145(1) of the Act or the assessee has not computed his income in accordance with the ITA No.42/Del/2024 Prahlad 18 standards notified under section 145(2)of the Act. In the present case, neither the Ld. CIT(A) nor the AO has held that the assessee’s books of accounts are incorrect/incomplete or the assessee has not maintained his books of accounts as per regular followed method of accounting or the assessee’s income cannot be worked out in accordance with the notified standards. Before the Ld. CIT(A), books of accounts were not produced for examination. The Ld. CIT(A)has not recorded his categorical satisfaction about the incorrectness or incompleteness of the books of accounts of the assessee, or failure of the assessee to maintain his books of accounts as per the method of accounting provided in section 145(1) of the Act or the assessee has not computed his income in accordance with the standards notified under section 145(2) of the Act. It is for the AO to be satisfied about thecorrect income; (i) either by making specific disallowances/additions only if possible or (ii) by estimating income after rejecting the books of accounts. In the present case, the AO chose the first option and made specific disallowances/additions over the second option ofthe average Gross Profit rate addition after rejection of books of accountsunder section 145(3) of the Act. 6.9 In view of the above, we are of the considered opinion that the Ld. CIT(A) is not justified in applying NP rate after rejecting the books of accounts under section 145(3) of the Act particularly when the AO, on same sets of facts, has categorically held that the assessee, as tactical move, has ITA No.42/Del/2024 Prahlad 19 requested for application of average Gross Profit rate after rejection of books of accounts under section 145(3) of the Act to avoid specific disallowances. Rejection of books of accounts of the assessee by the Ld. CIT(A) therefore, is held unjustified. 7. Now, we are going to decide the appeal on merit. The first disallowance is in respect of unverifiable/unexplained purchases of Rs.2,12,26,191/-. The assessee has not brought any material on the record to contradict the finding of the AO. The genuineness of purchases of Rs.2,12,26,191/- was not established/demonstrated either before us or authorities below. We therefore, find no infirmity in the AO’s order in this regard. Therefore, the impugned order is set aside and the disallowance of purchases of Rs.2,12,26,191/- is sustained. 8. We gave thoughtful consideration of the facts of the case in entirety and we are of the considered opinion that the disallowances under sections 40(a)(ia) and 40A(3) of the Act are subsumed in purchases of Rs.2,12,26,191/- as it cannot be ruled that the payments made in contravention to the provisions ofsections 40(a)(ia) and 40A(3) of the Act might have not been done/embedded for/in such purchases. Accordingly, the impugned order is set aside in this regard. In view of the above reasoning, we also delete disallowances of Rs.96,94,500/- and Rs.2,40,000/- made in the assessment order for contravention to the provisions ofsections 40(a)(ia) and 40A(3) of the Act. ITA No.42/Del/2024 Prahlad 20 9. In the result, the Revenue’s appeal is partly allowed as above. Order pronounced in open Court on 09th April, 2025 Sd/- Sd/- (VIKAS AWASTHY) (AVDHESH KUMAR MISHRA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 09/04/2025 Binita, Sr. PS Copy forwarded to: 1. Appellant 2. Respondent 3. PCIT 4. CIT(Appeals) 5. CIT-DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "