2018 (1) TMI 1608 - AT - Income Tax

Rejection of books of accounts - estimation of net profit @ 8% - addition on the contract receipts - HELD THAT - Considering the various aspects recorded by the authorities below, the Bench are of the view that the rejection of books of account is justified. However, with regard to claim of estimation of net profit of business other than the grit business, the Bench find that the ld. CIT(A) has relied on the findings of the ITAT in the case of A.Y. 2010-11. However, in the decision for the A.Y. 2011-12, the ITAT has found that the declared profit of the assessee was more than 8% of the gross receipts subject to deduction on account of depreciation and interest, therefore, the addition was deleted. G.P. rate for the year under consideration was better than the earlier two immediate preceding years. Net profit @ 8% of gross receipts subject to further deduction on account of depreciation and interest are held to be reasonable. Such view has been held by the Hon ble Rajasthan High Court in the case of CIT Vs Jain Construction Co ors. 1999 (9) TMI 26 - RAJASTHAN HIGH COURT . In assessee s case, the net profit rate subject to deduction of depreciation and interest comes @8.09% of the gross receipts, which is more than 8%. Wherever even books of account are rejected by the Assessing Officer then also no trading addition is required to be made as held in the case of CIT Vs Gotan Lime Khanij Udhyog 2001 (7) TMI 19 - RAJASTHAN HIGH COURT . CIT(A) was not justified in sustaining the part addition in both business of the assessee. Hence, appeal of the assessee stands allowed.

Summary

Issues Involved:
1. Rejection of books of account and application of Section 145(3) of the Income Tax Act, 1961.
2. Estimation of net profit rate for contract business.
3. Estimation of net profit rate for grit business.

Detailed Analysis:

1. Rejection of Books of Account and Application of Section 145(3)
The Assessing Officer (AO) rejected the books of account for several reasons:
- No separate accounts for contract business and grit business.
- Lack of detailed day-to-day expenses and material consumption records.
- Major expenses were debited under a single head without proper vouchers.

The assessee argued that maintaining separate accounts was impractical due to the common nature of the business setup and expenses. The assessee also contended that most expenses were supported by bills, and the lack of stock registers should not lead to rejection of books. The assessee cited several judicial precedents supporting their position.

The ITAT held that the rejection of books of account was justified due to the various defects noted by the AO and CIT(A). However, it was also noted that in previous years, the same books of account were accepted without issue.

2. Estimation of Net Profit Rate for Contract Business
The AO estimated the net profit rate at 8% of the total contract receipts, resulting in an addition of ?77,16,268. The CIT(A) revised this to 5.1%, sustaining an addition of ?49,19,121.

The assessee argued that the estimation was unfair and not supported by past history or comparative cases. The assessee highlighted that in the assessment year (AY) 2011-12, the ITAT found the declared profit to be more than 8% of gross receipts, subject to depreciation and interest deductions. The assessee also pointed out an increase in depreciation due to new machinery purchases, which affected the net profit rate.

The ITAT noted that the gross profit rate for the year under consideration was better than the previous two years. Citing the Rajasthan High Court and ITAT precedents, the ITAT held that a net profit rate of 8% of gross receipts, subject to depreciation and interest deductions, was reasonable. In this case, the net profit rate, after such deductions, was 8.09%, which was deemed acceptable.

3. Estimation of Net Profit Rate for Grit Business
The AO estimated the net profit rate at 5.5% for the grit business, resulting in an addition of ?41,70,387. The CIT(A) revised this to 5.1%, sustaining an addition of ?38,67,086.

The assessee argued that the books of account were properly maintained and audited, with no material discrepancies pointed out by the AO. The assessee also maintained that common books of accounts for both businesses were practical and had been accepted in previous years.

The ITAT reiterated that the net profit rate of 8% of gross receipts, subject to depreciation and interest deductions, was reasonable. Given that the net profit rate after such deductions was 8.09%, no further trading addition was warranted.

Conclusion:
The ITAT allowed the appeal of the assessee, concluding that:
- The rejection of books of account was justified due to noted defects.
- The net profit rate of 8% of gross receipts, subject to depreciation and interest deductions, was reasonable and supported by past judicial decisions.
- No further trading addition was warranted as the net profit rate after deductions was already 8.09%.

Order:
The appeal of the assessee was allowed, and the order was pronounced in the open court on 24/01/2018.