2015 (10) TMI 992 - AT - Income Tax

Estimation of net profit rate of 6% by CIT(A) - net profit rate @ 12.5% applied by the A.O - Held that - It is an admitted position that the assessee is engaged in the business of civil contacts for Government agencies. We have also noted that while assessee did not, at assessment stage, produce any evidences in support, such as bills and vouchers, of the ledger entries. The assessee s claim before the CIT(A) has been that, the version of the Assessing Officer is not correct, (the assessee) has maintained complete books, which are audited and complete details including bank account and bills and vouchers were furnished . If that is the case, and the assessee is indeed in a position to substantiate the claim for expenditure, the expenses incurred by the assessee should be allowed. In this view of the matter, we deem it fit and proper to remit the matter for fresh adjudication by the Assessing Officer in the light of such evidences, in support of expenditure, as he may be in a position to produce. In case, of course, he cannot produce the bills and vouchers partly, the disallowance to that extent will have to be sustained by the Assessing Officer. Let all these aspects be examined afresh, after providing due and fair opportunity of hearing to the assessee, in accordance with the law and by way of a speaking order. We direct so. - Decided in favour of assessee for statistical purposes.

Issues:
1. Disallowance of depreciation and interest paid to partners in estimating income.
2. Reasonableness of net profit rate applied in assessing income.
3. Rejection of books of accounts by Assessing Officer.
4. Discrepancy in expenses claimed without supporting documents.
5. CIT(A) restricting estimated income to 6% of contract receipts.

Issue 1: Disallowance of depreciation and interest paid to partners in estimating income
The assessee raised grievances regarding the disallowance of depreciation and interest paid to partners in estimating income. The Ld. CIT(A) upheld the rejection of books of accounts but restricted the estimated income to 6% of contract receipts. The CIT(A) reasoned that the estimation of income by the Assessing Officer was on the higher side and referred to similar cases where a 6% net profit rate was applied. The CIT(A) concluded that the income should be estimated at 6% of gross receipts, resulting in a taxable income of a specific amount without allowing further deductions for depreciation, interest to partners, or salary to partners.

Issue 2: Reasonableness of net profit rate applied in assessing income
The Assessing Officer applied a net profit rate of 12.5% on contract receipts to estimate the income of the assessee. The AO justified this decision based on the absence of supporting documents for claimed expenses and the necessity to estimate income for the assessee to carry out works. However, the CIT(A) found the 12.5% estimation to be on the higher side and reduced it to 6% based on similar cases. The AO's decision to reject books of accounts and estimate income at 12.5% was deemed fair and reasonable by the AO, considering the peculiar features of the case.

Issue 3: Rejection of books of accounts by Assessing Officer
The Assessing Officer rejected the books of accounts as the assessee failed to produce primary documents to prove the genuineness of claimed expenditures. The AO observed that the majority of expenses were paid in cash, and primary documents like vouchers and bills were missing. Consequently, the AO adopted an income of 12.5% of contract receipts, citing precedents from the ITAT, Hyderabad.

Issue 4: Discrepancy in expenses claimed without supporting documents
The Assessing Officer noted that the assessee could not produce bills, vouchers, or necessary documentary evidence to substantiate claimed expenses during the assessment. The AO found that the books of accounts were of no use as primary documents were missing, leading to the rejection of the same and the adoption of income at 12.5% of contract receipts.

Issue 5: CIT(A) restricting estimated income to 6% of contract receipts
The CIT(A) upheld the rejection of books of accounts but reduced the estimated income to 6% of contract receipts. The CIT(A) considered the facts of the case and relied on similar cases where a 6% net profit rate was applied. The matter was remitted back to the Assessing Officer for fresh adjudication based on supporting evidences of expenditure, with a direction to examine all aspects afresh and provide a speaking order.

In conclusion, the Tribunal allowed both appeals for statistical purposes and directed a fresh adjudication by the Assessing Officer based on the evidences provided by the assessee to substantiate claimed expenses.

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