2016 (1) TMI 631 - AT - Income Tax

Estimation of business income - books of account have not been produced - tax audit report filed before him for the first time is marred with serious discrepancy like; securing of loan and deposit in cash are in question contravention of provisions of section 269SS and 269T of the Act - CIT(A) CIT(A) estimated the income @ 5.3% - Held that - From the audit report, it is not known whether the assessee had maintained any daily stock register for raw material and WIP and even if the same is maintained whether the valuation of the stock was done in accordance with accepted accounting standard and practices is not known. In the backdrop of error of such magnitude as observed by the CIT(A), we hardly find any justification to scale down the estimation made by the Assessing Officer. The statutory provision as per section 44AD of the Act entitles the assessee of relatively smaller size engaged in the eligible business including the impugned business to compute profits and gains of business of presumptive being equal to 8% of the total turnover or gross receipts. This is a provision of beneficial nature which seeks to reduce hardships and tax hassles. It overrides the normal provisions of section 28 to section 43C of the Act to unable the assessee to avail this alternative route for computation of taxable business income. The statutory percentage estimated at 8% of the total turnover or gross receipts though made available to the assessee of the smaller size i.e. having a turnover of ₹ 40,00,000/- is presumed to be based on empirical studies and analysis of sample of statistical datas to arrive at the fair estimate. The percentage prescribed cannot be deemed to be arbitrary or without any rational basis. Therefore, adopting a rate of 8% of the contract receipts, in our view, is in harmony with the statutory percentage which acts as a fair benchmark. There is no justification to adopt the profit percentage declared by the assessee himself in the preceding year in preference to the statutory percentage. - Decided in favour of revenue.

Summary

Issues Involved:
1. Correctness of relief granted by CIT(A) by adopting a profit percentage of 5.3% instead of 8% as estimated by the Assessing Officer.
2. Justification for the rejection of books of account and estimation of income by the Assessing Officer.
3. Validity of the CIT(A)'s partial relief and the appropriateness of the profit estimation.

Issue-wise Detailed Analysis:

1. Correctness of Relief Granted by CIT(A):
The Revenue challenged the CIT(A)'s decision to grant relief of Rs. 16,85,093/- by adopting a profit percentage of 5.3%, the same rate disclosed by the assessee in the preceding year, instead of the 8% estimated by the Assessing Officer. The CIT(A) adopted the profit percentage based on the value addition made to the opening Work-in-Progress (WIP). The CIT(A) observed that the Assessing Officer did not provide any reason or basis for adopting the 8% net profit rate and did not compare it with the profit ratio of preceding years or similar businesses. The CIT(A) concluded that the profit percentage should be consistent with the previous year unless justified otherwise.

2. Justification for Rejection of Books of Account:
The Assessing Officer rejected the books of account and estimated the net profit at 8% of the total turnover due to the absence of supporting evidence for the expenditure claimed and profits shown. The assessee failed to produce the audit report under section 44AB of the Act, leading the Assessing Officer to draw the inference that the accounts were not audited. The CIT(A) agreed with the Assessing Officer's findings that the assessee could not substantiate the reasonableness of the profits disclosed due to the lack of supporting books of account and corroborating evidence. The CIT(A) found defects in the tax audit report filed before him and justified the rejection of the books of account under section 145(3) of the Act.

3. Validity of CIT(A)'s Partial Relief and Profit Estimation:
The CIT(A) granted partial relief by adopting a profit percentage of 5.3%, considering the previous year's profit percentage and the same project being continued. The CIT(A) noted discrepancies in the direct expenses and the absence of WIP for one of the projects. The CIT(A) concluded that the direct expenses might be inflated, leading to an unreasonable profit disclosure. The CIT(A) relied on court decisions that profits can be estimated based on similar businesses or the assessee's previous financial results. However, the ITAT found that the CIT(A) erred in scaling down the estimation made by the Assessing Officer. The ITAT emphasized that the statutory provision under section 44AD of the Act prescribes an 8% net profit rate for civil contractors with a turnover of less than Rs. 40 lakhs, which acts as a fair benchmark. The ITAT held that the books of account were not produced, and the reasons given by the assessee were flimsy. The ITAT concluded that adopting the statutory percentage of 8% was justified and restored the order of the Assessing Officer.

Conclusion:
The ITAT allowed the appeal of the Revenue, upheld the grounds raised by the Revenue, and restored the order of the Assessing Officer. The ITAT found no justification for the CIT(A) to adopt the profit percentage of the previous year in preference to the statutory percentage of 8% as provided under section 44AD of the Act. The ITAT emphasized the importance of maintaining and producing books of account for accurate profit computation and found the reasons given by the assessee for non-production of documents to be insufficient.