2010 (8) TMI 991 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 4,47,817 u/s 40A(2)(b) by adopting a higher gross profit rate.
2. Defects in accounts and estimation of net profit.
3. Appropriateness of the net profit estimation by CIT(A).
4. Consideration of facts, nature of business, and explanations provided by the appellant.

Summary:

Issue 1: Addition of Rs. 4,47,817 u/s 40A(2)(b)
The AO made an addition of Rs. 4,47,817 by estimating a gross profit rate of 10.95% on the turnover declared by the assessee, focusing on payments made to four sub-contractors covered u/s 40A(2)(b). The AO found various infirmities in the dealings with these sub-contractors, including lack of infrastructure and experience, and concluded that the sub-contracts were a sham arrangement to reduce tax liability. Consequently, the AO rejected the book results and applied an average GP rate of 10.95% from the last three years.

Issue 2: Defects in Accounts and Estimation of Net Profit
The AO's rejection of the book results was based on the fall in GP rate and the nature of sub-contracts. The CIT(A) accepted the alternative contention of the assessee regarding the application of net profit rate and directed the AO to apply a net profit rate of 1% over and above what was declared by the assessee on total receipts. The CIT(A) noted that the appellant's explanation for the fall in GP rate due to increased turnover and change in the nature of contracts was plausible.

Issue 3: Appropriateness of Net Profit Estimation by CIT(A)
The CIT(A) found that while the AO rejected the entire books of account, the matter primarily fell under the domain of s. 40A(2)(b). The CIT(A) concluded that the appellant's declared results needed to be estimated, and applying a net profit rate of 1% over the declared rate was justifiable. The CIT(A) considered the significant increase in turnover and change in contract nature, which justified the fall in GP rate.

Issue 4: Consideration of Facts, Nature of Business, and Explanations Provided
The Tribunal noted that the assessee had not raised any ground of appeal challenging the rejection of book results. However, it acknowledged the difference in contract nature and increased turnover as reasons for the fall in GP rate. The Tribunal emphasized that non-reporting of transactions with concerns covered u/s 40A(2)(b) could be attributed to the auditors and not a ground to reject the assessee's version. The Tribunal also highlighted that the AO did not make an effort to prove that the expenditure was excessive or unreasonable.

Conclusion:
The Tribunal modified the orders of the authorities below and restricted the addition to Rs. 50,000, considering the facts and circumstances of the case, the increased turnover, and the nature of contracts. The appeal of the assessee was partly allowed.