ITAT Mumbai Reverses Book Rejection, Deletes Multiple Additions in Deepika A. Mehta Case for AY 1992-93

Overview of the Dispute

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, adjudicated cross-appeals filed by the assessee and the Revenue in the matter of Deepika A Mehta Vs DCIT (ITAT Mumbai) pertaining to Assessment Year 1992-93. The Tribunal partly allowed the assessee's appeal while dismissing the Revenue's cross-appeal entirely. This matter had reached the Tribunal for the third time, having undergone multiple rounds of litigation over the years, making it a significant case on several procedural and substantive aspects of income tax law.

The Assessment Order under challenge, dated 29.12.2017, had been framed under Section 144 read with Section 254 of the Income Tax Act, 1961, pursuant to directions issued by the Tribunal in ITA No. 1889/Mum/2012 and ITA No. 6164/Mum/2012 for AY 1992-93.

Key Issues Before the Tribunal

The assessee raised the following substantive grounds before the Tribunal:

  1. Rejection of books of account under Section 145(3)
  2. Addition of Rs. 14,90,103 under Section 69 on account of unexplained investments
  3. Addition of Rs. 2,01,61,000 based on a group disclosure made by Harshad S. Mehta
  4. Addition of Rs. 29,343 on account of unexplained receipts
  5. Disallowance of interest expenditure — claim of Rs. 2,05,00,000 versus AO's allowance of Rs. 9,08,273
  6. Addition of Rs. 42,49,266 arising from mismatch in ledger balances between the books of Harshad S. Mehta and the assessee
  7. Levy of interest under Section 234D of the Income Tax Act, 1961

Additionally, the assessee raised two extra grounds:

  • Addition of profit from partnership firm M/s. Sunrise Enterprises amounting to Rs. 3,12,253
  • Levy of interest under Section 234A and Section 234B

The Revenue, in its cross-appeal, challenged:

  • The CIT(A)'s deletion of Rs. 24,70,66,313 relating to unexplained investment and trading in shares
  • The CIT(A)'s directions regarding allowability of interest expenditure

Issue 1: Rejection of Books of Account under Section 145(3)

The AO's Grounds for Rejection

The Assessing Officer had rejected the assessee's books of account citing several reasons:

  • The books were not audited as mandated under Section 44AB of the Income Tax Act, 1961
  • Certified copies of bank statements had not been submitted
  • Books were written several years after the close of the relevant previous year, not contemporaneously
  • Most entries related to transactions with closely related persons such as Harshad Mehta and Ashwin Mehta
  • Cross-verification of entries was practically impossible given the passage of over twenty-three years

Tribunal's Analysis

The Tribunal examined the scope of Section 145(3), which reads:

"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."

On a plain reading of this provision, the Tribunal held that non-audit of accounts under Section 44AB cannot, by itself, serve as a valid ground for rejecting books of account. The relevant penal consequences for non-audit may separately apply, but that does not automatically render the books liable to rejection under Section 145(3).

Regarding the non-availability of certified bank statements, the Tribunal noted that this ground was factually incorrect. The original Assessment Order dated 28.2.1995 for AY 1992-93 itself recorded:

"In absence of any detail provided by the assessee, the department had to collect the information from the following sources: Reserve Bank of India — Details of all bank accounts of the assessee, all over India, along with details of all receipts & payments for the period 01.04.1991 to 31.05.1992."

Since the Department had already obtained all bank account details during the first round of assessment proceedings, the AO's assertion that certified bank statements were unavailable was contrary to the facts on record.