2012 (10) TMI 99 - AT - Income Tax

Rejection of books of account - Held that - As the A.O. noticed that the assessee has failed to furnish basis of valuation of work in progress particularly under the circumstances where the assessee followed cash method in respect of project/builder activities. Raw material in the form of gittis etc. are supported by self-made vouchers as noted by the CIT(A). Apart from the non-maintenance of the stock register, various mistakes noted by the A.O. coupled with law G.P. in the year under consideration. Thus the A.O. has correctly rejected the books of account invoking section 145(3) and the CIT(A) has rightly confirmed the order of the A.O - against assessee. Reduction of G.P. rate from 10.7%d to 8% by the CIT(A) - Held that - CIT(A) noticed that the A.O. has erred in applying trading result of the A.Y. 2005 - 06 to trading result for A.Y. 2006-07 without considering the facts and submissions that the results were not comparable in both the years. However, the CIT(A) followed the judgement of Hon ble Madras High Court in the case of CIT vs. A. Vajjiram & Bros. 2008 (8) TMI 528 - MADRAS HIGH COURT in respect of applying the profit rate of 8% as supported by the statutory rate provided u/s.44AD of the Act. There are good reasons for estimating the profit by this 8% rate of profit even in case of big contractors having turnover more than Rs.40 lacs. The assessee as well as the Revenue both have failed to point out how this rate of 8% applied by the CIT(A) was unreasonable. There are no material on record based on which a different rate can be applied at this stage for estimation of the profit. Thus considering comparative position of profit declared by the assessee in F.Ys. 2003-04, 2004-05 & 2005-06, 8% rate estimated by the CIT(A) is most reasonable. No infirmity in the order of CIT(A) - against revenue.

Summary

Issues Involved:
1. Rejection of books of account.
2. Estimation of Gross Profit (G.P.) rate by the Assessing Officer (A.O.) and its subsequent modification by the Commissioner of Income Tax (Appeals) [CIT(A)].

Detailed Analysis:

1. Rejection of Books of Account:

The assessee, a builder and contractor, maintained a combined set of books for both activities but recognized revenue differently for each. The A.O. found several discrepancies, such as the absence of project-wise accounts, failure to furnish the bifurcation cost of flats, non-maintenance of stock and consumption registers, and instances of cash payments exceeding Rs.20,000. These issues led the A.O. to reject the books of account under section 145(3) of the Income Tax Act, 1961.

The CIT(A) concurred with the A.O.'s findings, noting that the expenses related to sand and gitti were supported only by self-made vouchers, making verification impossible. The CIT(A) upheld the rejection of the books of account due to the various mistakes pointed out by the A.O.

2. Estimation of Gross Profit (G.P.) Rate:

After rejecting the books of account, the A.O. estimated the Net Profit (N.P.) rate at 10.70% before depreciation and remuneration to the Director, resulting in an addition of Rs.20,08,684. The CIT(A) reduced this rate to 8%, drawing from the judgment of the Hon'ble Madras High Court in the case of CIT vs. A. Vajjiram & Bros., which supported an 8% profit rate when accounts are not properly maintained. The CIT(A) also referred to the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Prabhat Kumar, where a 12% N.P. rate was confirmed.

The assessee argued that the non-maintenance of a stock register alone should not lead to the rejection of the books of account, citing several judgments to support this claim. However, the Tribunal found that the A.O. had correctly rejected the books of account due to multiple discrepancies and a lower G.P. rate for the year under consideration.

The Tribunal also agreed with the CIT(A)'s estimation of an 8% profit rate, noting that this rate was reasonable given the comparative position of profit declared by the assessee in previous financial years and supported by the statutory rate under section 44AD of the Act. Both the assessee and the Revenue failed to provide a basis for a different rate, leading the Tribunal to uphold the CIT(A)'s order.

Conclusion:

The Tribunal confirmed the rejection of the books of account and upheld the CIT(A)'s estimation of an 8% profit rate, dismissing both the assessee's and the Revenue's appeals. The decision was pronounced in open court.