2016 (9) TMI 1325 - AT - Income Tax

Rejection of account books u/s. 145(3) - computing the net profit from contract business by applying net profit rate of 8% on the gross receipts as contemplated u/s. 44AD - Held that - In the instant case, the authorities below have applied the net profit rate of 8% on gross receipts as per section 44AD which section does not apply to the present case, as the assessee is not a civil contractor but is engaged in the business of electro-mechanical and civil engineering contractor and carried out the erection of Extra High Voltage Overhead transmission lines, installation of underground EHV power cables, Microbe and telecom towers, repair and maintenance of EHV transmission and distribution equipments for electrification. The turnover of the present assessee exceeds the sum of ₹ 40 lacs which bars the application of section 44AD or the profit rate prescribed therein. Therefore, the conclusion reached by AO to apply the profit rate as contemplated u/s. 44AD cannot be supported. CIT(A) has justified the profit rate of 8% after considering the results of assessment year 2006-07 in the instant case for A.Y. 2003-04, which is not appropriate. The profit rate applied by the authorities below is not based on correct appreciation of facts or any rational. In order to justify the best judgment assessment, support could be derived from the previous history of the assessee and the comparable cases of the same line of business. We deem it expedient in the interest of justice to restore the matter to the file of AO for deciding the issue afresh in view of the observations made in the body of this order. Accordingly, the appeal of the assessee deserves to be allowed for statistical purposes.

Issues Involved:
1. Rejection of books of accounts under section 145(3) of the Income Tax Act.
2. Application of net profit rate of 8% under section 44AD of the Income Tax Act.
3. Onus on the appellant to produce subcontractors before the Assessing Officer.
4. Confirmation of penalty imposed under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):
The assessee, engaged in electro-mechanical and civil engineering contracting, filed its return of income declaring a total income of ?16,79,304/-. The Assessing Officer (AO) found discrepancies in the books of accounts, particularly in the payments made to subcontractors. Notices issued to subcontractors for verification were either unresponded or returned, leading the AO to reject the books under section 145(3) of the Act. The Tribunal noted that while mere non-response from subcontractors cannot be the sole ground for rejection, the assessee failed to discharge its onus to justify the expenditures. Thus, the AO was justified in rejecting the books of accounts due to unverified expenditures.

2. Application of Net Profit Rate of 8% under Section 44AD:
The AO applied an 8% net profit rate on gross receipts as per section 44AD, which was contested by the assessee. The Tribunal found that section 44AD was not applicable as the assessee's turnover exceeded ?40 lakhs and the nature of business was not purely civil contracting. The Tribunal criticized the AO's reliance on section 44AD and emphasized that the profit rate should be based on rational and factual analysis, considering the previous history and comparable cases. The AO's method was deemed inappropriate, and the matter was remanded for fresh assessment.

3. Onus on the Appellant to Produce Subcontractors:
The Tribunal upheld that the burden of proof was on the assessee to produce subcontractors or provide confirmations for the payments made. The AO's deep investigations and repeated opportunities given to the assessee to justify the expenditures were noted. The assessee's failure to produce confirmations or credible evidence justified the AO's rejection of the accounts.

4. Confirmation of Penalty under Section 271(1)(c):
The penalty imposed by the AO under section 271(1)(c) was also contested. Since the quantum appeal was restored to the AO for fresh assessment, the Tribunal similarly restored the penalty matter for reconsideration based on the revised quantum assessment. The penalty appeal was allowed for statistical purposes, aligning with the decision on the quantum addition.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, remanding the matter to the AO for fresh assessment. The AO was directed to re-evaluate the books of accounts and expenditures, ensuring a rational basis for any profit estimation. The penalty issue was also remanded for reconsideration based on the new quantum assessment. The decision emphasized the need for a thorough and fact-based approach in assessing the correctness of accounts and the applicability of profit rates.

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