2018 (2) TMI 1641 - AT - Income Tax

Rejection of books of accounts - N.P. estimation - Held that - There is not even a single specific instance quoted in assessee s books indicating the stated irregularities. We afforded ample opportunities to DR to refer to any findings on record which could indicate that the same suffered from all the said specific shortcomings. There is no such material referred before us in support of assessment findings. It thus turns out to be a case wherein learned Assessing Officer proceeded to reject assessee s books of accounts without even dealing with all the specified parameters disclosed therein. We further find in page no.7 of the CIT(A) s order that the assessee s net profit rate is @ 2.82% as against 1.43% and 2.0% in assessment year 2007-08 and 2008-09; respectively. As held in CIT Vs. Vikram Plastic 5, 00, 000/- despite upholding assessee s books of accounts. No reason to interfere with the learned CIT(A) s above extracted findings granting part relief to the assessee.

Summary

Issues:
1. Rejection of books by the Assessing Officer under section 145(3) of the Income-tax Act.
2. Estimation of net profits on self-executed contract work, sublet contract work, and black metal sales.
3. Challenge to the CIT(A)'s action restricting the addition of ?5,00,000 in the assessment.

Issue 1: Rejection of Books under Section 145(3):
The Assessing Officer rejected the books of the assessee due to various reasons, including lack of quantitative details, estimation basis for work-in-progress, subletting without proper agreements, transactions with specified persons under section 40A(2)(b), and inadequate maintenance of records. However, the CIT(A) reversed this decision, stating that the rejection lacked specific instances of false presentation through the books. The CIT(A) emphasized that without concrete evidence, invoking section 145(3) would be unjust. The judgment cited the principle that section 145 should not be applied without material proving inflated expenses or suppressed sales, as per the Hon'ble jurisdictional High Court's ruling. Despite upholding the books, the CIT(A) made a lump-sum addition of ?5,00,000 to avoid revenue loss, which was deemed reasonable given the circumstances.

Issue 2: Estimation of Net Profits:
The Assessing Officer estimated net profits on self-executed contract work, sublet contract work, and black metal sales at 8%, 5%, and 5% respectively, based on section 44AD guidelines. The CIT(A) found the AO's estimation lacking specific instances or comparative cases to support the higher profit margins. The CIT(A) held that surmises cannot replace facts and rejected the estimations as being on the higher side. Despite this, to prevent revenue loss, the CIT(A) upheld an addition of ?5,00,000. The judgment highlighted the importance of factual evidence in estimating profits and criticized the lack of specific instances to justify the Assessing Officer's figures.

Issue 3: Challenge to CIT(A)'s Action:
The assessee's cross-objection in the assessment year 2010-11 contested the CIT(A)'s decision to restrict the addition to ?5,00,000. The CIT(A) had upheld this addition despite finding the rejection of books unjustified and the profit estimations excessive. The judgment noted that the assessee chose not to press this cross-objection further due to the adjudication on the main appeals and the minimal amount involved. As a result, the cross-objection was dismissed.

In conclusion, the Appellate Tribunal ITAT Rajkot dismissed the revenue's appeals and the assessee's cross-objection related to the rejection of books, estimation of net profits, and challenges to the CIT(A)'s decisions. The judgment emphasized the need for specific instances and factual evidence to support assessments under the Income-tax Act, ultimately upholding the CIT(A)'s decision to restrict additions and dismiss the appeals.