2018 (2) TMI 881 - HC - Income Tax

Rejection of books of accounts - G.P. Rate determination - Held that - In the present case, it is quite evident that the Assessee had maintained the books of accounts. On that score, the ITAT is correct, however, the proceedings before the Assessing Officer and his order would reveal that there are gaps with respect to the materials sought but omitted to be produced. These related to various aspects of the Assesee s road contract construction activity such as (i) specific contracts entered into with sub-contractors/ labour contractors/suppliers; (ii) absence of any supporting primary materials such as invoices disclosing quantities purchased; (iii) the muster rolls or any other such materials or documentary evidence (including payment made to ESI, PPF on account of sub-contractors-even if by the contractors) to the workmen involved; (iv) any other proof of the quantities or materials utilized and their relative costs. The court also notices that the Assessing Officer s order undoubtedly reflects that queries were made from various sub-contractors, however, as to what was stated by them or what material was produced by them has not been discussed at all. The court is of the considered view that the ITAT and the CIT(A) rather superficially examined the material and set aside the findings of the Assessing Officer. At the same time, the Assessing Officer s order also is incomplete. In the peculiar circumstances, the matter is remitted to the CIT(A), who shall render fresh findings on the entire subject matter

Summary

Issues:
1. Rejection of Assessee's books of accounts by Assessing Officer
2. Application of Gross Profit Rate by Assessing Officer
3. Lower Appellate Authority's decision to set aside Assessing Officer's order

Issue 1: Rejection of Assessee's books of accounts by Assessing Officer:
The Assessing Officer rejected the Assessee's books of accounts for the assessment years 2007-08, 2008-09, 2009-10, and 2010-11 due to the Assessee's failure to maintain stock registers and other primary documentary evidence. The AO imposed a Gross Profit (GP) Rate of 5% for three years and 3.5% for AY 2008-09 under Section 145, leading to disputes regarding the correctness of the rejection.

Issue 2: Application of Gross Profit Rate by Assessing Officer:
The Assessing Officer applied a GP Rate of 5% and 3.5% for different assessment years instead of the rates claimed by the Assessee. The Commissioner of Appeals disagreed with the AO's decision, emphasizing that the rejection of books of accounts should be based on substantial evidence and that the AO should have provided the Assessee with an opportunity to rebut before estimating profits. The CIT(A) held that the AO's rejection was unjustified and deleted the additions made by the AO.

Issue 3: Lower Appellate Authority's decision to set aside Assessing Officer's order:
The ITAT, in its judgment, noted that the Assessing Officer did not provide specific findings on why correct profits could not be deduced from the Assessee's maintained books of accounts. The ITAT relied on precedent and held that the absence of a stock register alone was insufficient grounds for rejecting the books of accounts. The ITAT rejected the Revenue's appeals and allowed the Assessee's appeals for the two assessment years. However, the High Court observed that both the ITAT and CIT(A) superficially examined the material and remitted the matter back to the CIT(A) for fresh findings after considering all relevant materials.

In conclusion, the High Court partly allowed the appeals, emphasizing the importance of substantial evidence and proper justification for rejecting books of accounts. The court highlighted the need for a thorough examination of materials before making decisions and remitted the matter to the CIT(A) for a comprehensive review.