2014 (1) TMI 1266 - AT - Income Tax

Rejection of books of accounts Estimation of income 8% on gross receipts Held that - In case of certain expenses the bills and vouchers were not produced at all while in case of a large number of expenses only self made vouchers were produced - The assessee was also asked to submit complete addresses and PAN of the trade creditors - Since the expenses claimed by the assessee are not fully verifiable, the correctness of the books of account of the assessee was not satisfied thus, the lower authorities are justified in rejecting the books of account of the assessee. Wherever the gross contract receipts exceed Rs. 40 lakhs the provisions of section 44AD are not applicable - Therefore, the profit can be estimated either at lower than 8% or above 8% depending upon the factual situation - for the purpose of estimating the profit various factors such as the profit ratio of the assessee in the earlier year, profit ratio of the similarly placed traders in the same locality, demand for the product, availability of labourers, raw materials, etc., and the time gap available for executing the contract work, etc., have to be taken into consideration thus, reference to earlier order of this Tribunal for the purpose of estimating the profit is justified - Income of the assessee has to be estimated at 8% on main contract and 5% on subcontract receipts thus, the Assessing Officer is directed to estimate the income of the assessee at 8% on main contract receipts and at 5% on subcontract receipts. Addition made u/s 68 of the Act Unexplained credits Held that - It is for the assessee to provide the explanation for cash credits, when the assessee has not pleaded that the cash credits came out of the past intangible additions, it would not be open to the Tribunal to hold that the cash credits would be covered by such additions Relying upon CIT vs. G. M. Chennabasappa 1958 (9) TMI 78 - ANDHRA PRADESH HIGH COURT - The omission to claim set off of past intangible additions against cash credits would give rise to a presumption that the former amounts were not available for set off - When the alternate plea that tangible additions in the past could take care of cash credits of current year is not taken at the earlier stage and no materials are placed on record to substantiate the same, rejection of such plea would be justified - The availability of funds representing the intangible additions should be quantified not with reference to what the assessee offered for taxation but what was actually adopted in assessments for taxation - the assessee failed to show how the addition u/s 68 is related to estimated income - the assessee s contention on telescoping on addition towards unexplained credit on the addition made towards business income is rejected and the addition made u/s. 68 is sustained in its entirety Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Rejection of books of account and estimation of income at 8% on gross receipts.
2. Addition made under section 68 of the Income-tax Act, 1961, and the issue of telescoping.

Detailed Analysis:

1. Rejection of Books of Account and Estimation of Income at 8% on Gross Receipts:

Facts and Arguments:
- The assessee, deriving income from contract works, filed a return showing income of Rs. 3.32 crores on total contract receipts of Rs. 56.43 crores, reflecting a net profit margin of 5.3%.
- The Assessing Officer (AO) noted discrepancies in the books of account, including unverifiable expenses and self-made vouchers, leading to the rejection of the books under section 145(3) of the Act.
- The AO estimated the profit from contract receipts at 8%, resulting in a net profit computation of Rs. 4.51 crores.

Tribunal's Findings:
- The Tribunal upheld the rejection of the books of account, citing the non-verifiability of expenses and the absence of addresses and PANs for certain trade creditors.
- The Tribunal referenced prior cases (Krishnamohan Constructions, K.C. Reddy Associates, Sri Srinivasa Constructions, and M. Bhaskar Reddy) and section 44AD to justify the 8% profit estimation.
- It was noted that profit ratios can fluctuate based on various factors such as location, availability of raw materials, and market demand.

Conclusion:
- The Tribunal directed the AO to estimate the income at 8% on main contract receipts and 5% on subcontract receipts, consistent with prior Tribunal decisions and section 44AD provisions.

2. Addition Made Under Section 68 and Issue of Telescoping:

Facts and Arguments:
- The AO made an addition of Rs. 1,10,07,392 under section 68 for unexplained cash credits in the names of Ms. Devi Indukuri and Mr. Nandyala Bhaskar Reddy.
- The assessee argued that once income is estimated, no further additions should be made, relying on the judgment of Indwell Constructions (232 ITR 776).

Tribunal's Findings:
- The Tribunal distinguished between the estimation of business income and the treatment of unexplained cash credits under section 68.
- It emphasized that the burden is on the assessee to explain the nature and source of the cash credits, including the creditworthiness of the parties and the genuineness of the transactions.
- The Tribunal cited several judgments (CIT v. Maduri Rajaiahgari Kistaiah, CIT v. Devi Prasad Viswanath Prasad, and others) to support the view that unexplained cash credits can be treated as income from undisclosed sources, separate from the estimated business income.

Conclusion:
- The Tribunal rejected the assessee's contention on telescoping and sustained the addition under section 68 in its entirety, emphasizing the need for the assessee to provide satisfactory explanations for the cash credits.

Final Order:
- The appeal of the assessee was partly allowed, with the Tribunal upholding the rejection of books of account and the estimation of income at 8% on main contract receipts and 5% on subcontract receipts.
- The addition under section 68 was sustained, rejecting the argument for telescoping.

Order pronounced in the open court on 9th January, 2013.