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Judgment
PER SUDHIR KUMAR, JUDICIAL MEMBER:
This appeal by the revenue is directed against the order of the National Faceless Appeal Centre Delhi [hereinafter referred to as “Ld. NFAC)”] vide order dated 08-12-2025 pertaining to A.Y. 2023-24, arising out the assessment order dated 24-03-2025 under section 144 r.w.s. 144B of the Income-tax Act, 1961, (in short ‘the Act’).
The revenue has raised the following grounds in appeal as under:-
(i)The Ld. CIT(A) erred in law and on facts by deleting the addition without considering assessee failed produce complete correct information/accounts/documents in response to notice issued u/s 142(1). Such non production of information /accounts/ documents prevented the Assessing Officer (AO) from verifying the correctness and completeness of the accounts, which is a specific perquisite for rejection under section 145(3).
(ii)The Ld. CIT(A) erred in labeling the 8% estimation as arbitrary. The Revenue contends that the 8% rate is a standard legislative benchmark (analogous to the presumptive taxation scheme u/s 44D) used by the Department to estimate fair profit in cases where the Assessee fails to provide a transparent trail of expenses.
(iii)The Ld. CIT(A) erred in dismissing the non-response to notices u/s 133(6). The inability of the assessee to ensure verification from its own alleged parties /staff is a material fact that creates a cloud over the genuineness of the transactions justifying the rejection of the books of accounts.
(iv)If the CIT(A) relied on documents that were not produced before the AO during the assessment proceedings (despite the notice u/s 142(1), the Ld. CIT(A) has erred in not providing the AO a remand opportunity, thereby violating the principles of Rule 46A of the Income Tax Rules.
(v)The appellant craves leave to add alter or amend any/ all of the grounds of appeal before or during the course of the hearing of the appeal.
The brief facts of the case are that the assessee filed the return of income for A.Y.2023-24, on 12-10-2023 declaring total income 89,16,550/-. The, case of the assessee was selected for scrutiny under CASS for the following reason;
“The assessee has filed certain specific new business codes including other services (21000 series) and have shown very low profit in comparison to total revenue from operations. There is a possibility that assessee has inflated its expenses in order to reduce its profit/ taxable income. Therefore, the reason for the low net profit shown may be verified.”
Notice under section 143(2) of the Act was issued on 19-06-2024. The Assessing Officer completed the assessment after making the addition of Rs. 7,97,73,582/-the 8% Estimated income on the total turnover after rejecting the books of account under section 145(3) of the Act. According to Assessing Officer the notices under section 133(6) of the Act was issued to the few persons but no response was received to the department from them.
Aggrieved the order of the ld. AO the assessee preferred the appeal before the Ld. NFAC, who vide his order dated 08-12-2025 partly allowed the appeal of the assessee. The Ld. CIT(A) observed in his order as under:
5.4I have carefully considered the assessment order, appellant’s submissions, and evidences furnished.
The Assessee’s business primarily involves providing HR outsourcing services, and the gross receipts largely represent reimbursements for salaries and statutory dues. These are pass-through costs and not actual income. The application of 8% of the gross receipts without excluding pass-through reimbursements results in an inflated and distorted income estimate. The Assessee also refers to the decision in Sargam Cinema vs. CIT (328 ITR 513 SC), where the Supreme Court held that books of accounts cannot be rejected arbitrarily without identifying specific defects.
Upon examination of the facts, I find that the AO has not pointed out any specific defects in the books of accounts maintained by the Assessee, nor has he provided any rational basis for rejecting the audited books. The rejection of books of accounts is an extreme step and should only be taken when there are clear and material discrepancies. In the present case, the AO's decision to reject the books is without sufficient evidence or basis. Therefore, I am inclined to accept the Assessee’s contention that the rejection of books of accounts is unjustified and unwarranted.
Further, the estimation of income at 8% of the gross receipts is without any rational basis, especially considering that the Assessee’s business model involves significant pass- through costs. The AO has not made any attempt to distinguish between gross receipts and actual income, nor has any comparable industry data or analysis been provided to justify the 8% estimation. The application of a fixed percentage without proper justification is arbitrary and not supported by facts.
Further, the Assessee claims that the AO has not discussed any of the documentation provided, nor has any explanation been given for disregarding the evidence. This is contrary to the requirements of a reasoned order and violates the principle of fair hearing. It is noted that the books were maintained in accordance with the Companies Act, duly audited u/s 44AB of the Act and no specific defect or irregularity has been pointed out by the AO. The AO neither raised any show-cause notice seeking explanation for any alleged discrepancy nor highlighted any violation of accounting standards. Mere non-verification from third parties u/s 133(6) (i.e., low-salary staff unable to respond individually) cannot be grounds to reject audited books.
In view of the facts discussed above & respectfully following the judicial decisions quoted by the appellant company, the appellant company’s contentions are accepted and the AO is directed to delete the addition of Rs.7,11,56,066/- by rejecting the books of accounts u/s 145(3) of the Act & treating 8% of gross receipts as business income. Accordingly, Grounds No. 3 & 4 are allowed.”
Being aggrieved the order of the Ld. NFAC the Revenue is in appeal before the Tribunal.
The Ld. DR submitted that the Assessing Officer could not examined the accounts of the assessee because accounts/ information was not produced in the compliance of the notice under section 142(1) of the Act by the assessee. He further stated that 8% estimated income on the total turnover was rightly applied by the Assessing officer. He also submitted that during the appeal proceedings remand opportunity was not provided to the Assessing Officer.
The Ld. AR of the assessee submitted that if the notices under section 133(6) of the Act was not complied then on that basis the books accounts cannot be rejected. He further submitted that the Assessing Officer issued the notices under section 133(6) of the Act on the sample basis and the assessee was explained before the Assessing Officer not to file the reply by those persons. He further submitted that to reject the books of account the Assessing Officer should bring out that there has been a clear infringement of any accounting principles, only assumptions basis the books of account cannot be rejected. He also submitted that in this case the Assessing Officer rejected the books of accounts on the assumptions, basis. Reliance is placed on the following judgement
Commissioner of Income tax -VIII v. Paradise Holidays [2010]195 Taxman 291 (Delhi) Hon’ble Delhi High Court
Commissioner of Income-tax-XII v. Smt. Poonam Rani [2010] 192 Taxman 167 (Delhi) Hon’ble Delhi High Court
ACIT(OSD), Range-10 New Delhi v. Gupta Jewellers Private Limited 2026 (6) TMI 1393 -ITAT Delhi
ITO, Ward-11 (1) Delhi v. Hari Govind Texfab (India) Pvt. Ltd. 2025(5) TMI 818
Commissioner of Income tax-(Central)-1 v. Manish Build Well Pvt. Ltd. ITA No. 928/2011 order dated 15, November 2011, Hon’ble Delhi High Court
We have heard the parties and perused the material available on record. We find that the Assessing Officer rejected the books of account maintained by assessee, without pointed out any specific defects in the books of account. The Assessing Officer rejected the books of account on the basis of that the parties against the notice under section 133(6) of the Act were issued did not complied the notices. In the case of ACIT(OSD), Range-10 New Delhi v. Gupta Jewellers Private Limited 2026 (6) TMI 1393 -ITAT Delhi the Co-ordinate bench held that the AO’s rejection of the books of account under section 145(3) of the Act is not legally tenable as no specific defects were pointed out. The Ld. CIT(A) rightly held that mere non-verification from the third parties under section 133(6) of the Act cannot be grounds to reject audited books.
In the present case the Assessing officer after verification found that some persons mentioned in the assessee reply are employed with various banks like PNB IDFC J&K Bank and also receiving their salaries from their employer with their TDS deducted. The detailed provided by the assessee verified by the Assessing Officer and their name and PAN numbers were same as furnished by the assessee. The ld. Assessing Officer observed in the order that assessee has provided list of more than 4000 persons, many persons of this list the annual salary payment as low at Rs.10,000/-. We observed that assessee company is providing the Human Resources outsourcing services and some persons are receiving very less salary, the details provided to the Assessing Officer was verified by him. The Ld. CIT(A) has rightly observed that the Assessing officer has not made any attempt to distinguish between model between gross receipts and annual income. The application of a fixed percentage without proper justification is arbitrary and not supported by facts. The Ld. CIT(A) has examined the issue in the correct perspective and rightly deleted the additions made by the Assessing Officer. The reasoning and findings of the Ld. CIT(A) while granting relief is on proper appreciation of the law expounded by the Judicial dicta. We do not find any reasons to interfere with the findings of the Ld. CIT(A). The appeal of the Revenue is liable to be dismissed and dismissed accordingly.
In the result, the appeal of the Revenue is dismissed.