2013 (6) TMI 566 - AT - Income Tax

Enhancement of income - disallowance of expenses - Net profit adoption - Held that - In the absence of supporting material of the books of accounts i.e., bills and vouchers the assessing authority should have rejected books of account and should have framed assessment in terms of section 144 & 145 and for that AO must act honestly and not vindictively or capriciously because he must exercise judgment in the matter but from records it is evident otherwise. Thus a reasonable estimate can be made and the assessee might have made purchases without procuring bills and might have avoided sales tax and other government dues. It means that assessee might have earned a little higher profit than earlier years. As Tribunal has confirmed the application of net profit at 5.35% in earlier year i.e. in AY 2003-04 a reasonable net profit i.e. @ 8% will meet the end of justice. Accordingly direct the AO to re-compute the assessee s income after deleting all the additions as made by AO and enhanced by CIT(A) but restrict the addition only at 8% of gross contract receipts - appeal of assessee allowed partly.

Issues Involved:
1. Disallowance of 10% of expenses claimed under the head Purchase.
2. Disallowance of 10% of expenses claimed under the head Wages.
3. Disallowance of 20% of expenses claimed under heads Travelling & Conveyance, Other Indirect expenses, Entertainment, and Telephone & Mobile.
4. Addition on account of unexplained investment under Section 69 of the Income Tax Act.
5. Addition on account of alleged undisclosed drawings.
6. Jurisdiction of CIT(A) under Section 251 of the Income Tax Act.
7. Enhancement by CIT(A) by invoking the provisions of Section 68 of the Income Tax Act.

Analysis of Judgment:

1. Disallowance of 10% of expenses claimed under the head Purchase:
The assessee claimed expenses on purchases for executing electrical jobs/contracts at Rs. 76,08,627/-. The AO disallowed 10% of these expenses amounting to Rs. 7,60,963/- due to the assessee's failure to produce supporting vouchers. The CIT(A) further enhanced this disallowance by Rs. 67,02,331/-, disallowing the entire claimed expenditure under this head. The Tribunal noted that the assessee had produced complete books of account but without supporting vouchers. It was observed that the assessee, being a contractor with substantial contract receipts, could not have carried out the work without incurring purchase expenses. The Tribunal concluded that the disallowance and enhancement were not justified based on the facts and circumstances.

2. Disallowance of 10% of expenses claimed under the head Wages:
The assessee incurred wages expenses amounting to Rs. 24,61,458/-. The AO disallowed 10% of these expenses, totaling Rs. 2,56,145/-, due to the absence of supporting vouchers. The CIT(A) further enhanced the disallowance by Rs. 23,11,313/-, effectively disallowing the entire claimed expenditure under this head. The Tribunal found that the assessee had produced complete books of account but without supporting vouchers. It was noted that the assessee, being a contractor, could not have executed the work without incurring wages expenses. The Tribunal concluded that the disallowance and enhancement were not justified based on the facts and circumstances.

3. Disallowance of 20% of expenses claimed under heads Travelling & Conveyance, Other Indirect expenses, Entertainment, and Telephone & Mobile:
The assessee claimed expenses on travelling and conveyance at Rs. 1,86,970/-, entertainment at Rs. 2,15,685/-, telephone and mobile at Rs. 1,25,636/-, and other indirect expenses at Rs. 85,685/-. The AO disallowed 20% of these expenses, totaling Rs. 1,22,976/-, due to the absence of supporting vouchers. The CIT(A) further enhanced the disallowance by disallowing the entire claimed expenditure under these heads. The Tribunal noted that the assessee had produced complete books of account but without supporting vouchers. It was observed that the assessee, being a contractor, could not have executed the work without incurring these expenses. The Tribunal concluded that the disallowance and enhancement were not justified based on the facts and circumstances.

4. Addition on account of unexplained investment under Section 69 of the Income Tax Act:
The AO made an addition of Rs. 1,04,529/- on account of unexplained investment under Section 69 of the Act. The assessee explained that this amount was transferred by cheque from a current account maintained with Oriental Bank of Commerce. The Tribunal found that the assessee had provided a reasonable explanation for the source of this investment. Therefore, the addition was not justified.

5. Addition on account of alleged undisclosed drawings:
The AO made an addition of Rs. 4,08,960/- on account of alleged undisclosed drawings. The assessee explained that the amount transferred to this account was from another current account and that there was no concealment of account. The Tribunal found that the assessee had provided a reasonable explanation for these drawings. Therefore, the addition was not justified.

6. Jurisdiction of CIT(A) under Section 251 of the Income Tax Act:
The assessee contended that the CIT(A) acted unlawfully in assuming jurisdiction under Section 251 of the Act. The Tribunal found that the CIT(A) had enhanced the assessment without judiciously applying his mind to the issue. The Tribunal concluded that the CIT(A)'s action was arbitrary, unreasonable, and perverse.

7. Enhancement by CIT(A) by invoking the provisions of Section 68 of the Income Tax Act:
The CIT(A) enhanced the assessment by Rs. 60,63,926/- by invoking the provisions of Section 68 of the Act, treating certain deposits as unexplained cash credits. The Tribunal found that the assessee had provided a reasonable explanation for these deposits, showing that they were related to business transactions. The Tribunal concluded that the enhancement was not justified.

Conclusion:
The Tribunal concluded that the disallowances and enhancements made by the AO and CIT(A) were not justified based on the facts and circumstances of the case. It was observed that the assessee, being a contractor with substantial contract receipts, could not have executed the work without incurring the claimed expenses. The Tribunal directed the AO to re-compute the assessee's income by applying a reasonable net profit rate of 8% of gross contract receipts, instead of making arbitrary disallowances and enhancements. The appeal was partly allowed, and the order was pronounced in the open court on 18th June 2013.

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