2015 (6) TMI 490 - AT - Income Tax

Revision u/s 263 - CIT has considered the assessment order to be erroneous and prejudicial to the interests of revenue appears to be the rate of profit adopted by AO, which according to ld. CIT, should have been 12.5% on main contract and 8% on sub-contract works as against 10% and 7% respectively by AO - Held that - When AO is of the opinion that books of account are unreliable, the discretion is with him to reject the books of account and estimate the profit at a rate which is according to AO is reasonable considering the nature of business carried on by assessee. Once such decision is taken by AO, who is the best judge of the situation, then, ld. CIT cannot interfere with such decision of AO to substitute his own opinion on the rate of profit adopted by exercising power u/s 263 of the Act. Moreover, once the books of account are found to be unreliable and rejected resulting in estimation of profit, AO is not required to enquire or examine the individual items of expenditures or other issues as pointed out by ld. CIT since estimation of profit usually takes care of such deficiencies in the books. In the aforesaid circumstances, ld. CIT cannot hold the assessment order to be either erroneous and prejudicial to the interests of revenue so as to revise the same u/s 263 of the Act. Accordingly, we set aside the impugned order of ld. CIT and restore the assessment order. - Decided in favour of assessee.

Summary

Issues:
Assessment order under section 263 of the Income Tax Act, 1961 for the Assessment Year 2009-10.

Analysis:
The appeal was against an order passed by the Commissioner of Income Tax (CIT) under section 263 of the Income Tax Act, 1961. The assessee, a partnership firm engaged in civil contract works, had filed its return declaring total income for the relevant assessment year. The Assessing Officer (AO) estimated the income after rejecting the books of account due to unverifiable expenses. The AO adopted a profit rate of 10% for main contracts and 7% for subcontracts. The CIT found the assessment order erroneous and prejudicial to revenue due to various reasons, including lack of material for profit estimation and insufficient examination of expenses. The CIT set aside the assessment order for a de novo assessment.

The assessee contended that the rejection of books of account justified the profit estimation by the AO, and the CIT's interference was unwarranted. The Tribunal considered the nature of the business, where a significant portion of contracts was on a subcontract basis, and expenses were mainly incurred in cash with self-made vouchers. The AO's estimation of profit based on gross receipts was deemed reasonable given the circumstances. The Tribunal opined that once the books were rejected, the AO was not obligated to scrutinize individual expenses further. Therefore, the CIT's intervention to revise the assessment order under section 263 was deemed inappropriate.

The Tribunal concluded that the CIT's reasons for finding the assessment order erroneous and prejudicial to revenue were not valid. As such, the Tribunal allowed the appeal, setting aside the CIT's order and restoring the original assessment order. The decision was based on the principle that the AO's discretion in estimating profits after rejecting unreliable books should not be substituted by the CIT's opinion, especially when the estimation reasonably addressed the deficiencies in the books of account.

In summary, the Tribunal overturned the CIT's decision under section 263, emphasizing that the AO's estimation of profit after rejecting unreliable books was valid and did not warrant further scrutiny of individual expenses. The Tribunal's decision highlighted the importance of the AO's discretion in such cases and upheld the original assessment order for the Assessment Year 2009-10.