2018 (2) TMI 1653 - AT - Income Tax

Rejection of books of accounts - N.P. determination - Held that - Nothing comes from the revenue s side to controvert the CIT(A) s detailed findings extracted in preceding paragraph. We thus find no substance in revenue s argument seeking to revive Assessing Officer s action rejecting assessee s books followed by estimation of net profits @ 25% in the impugned assessment year. Revenue s two substantive grounds in the instant appeal are therefore declined.

Summary

Issues Involved:
1. Rejection of the assessee’s books under section 145(3) of the Income-tax Act, 1961.
2. Estimation of net profits at 25% of total sales by the Assessing Officer.

Detailed Analysis:

1. Rejection of the Assessee’s Books under Section 145(3):
The Assessing Officer (AO) rejected the assessee’s books of accounts under section 145(3) of the Income-tax Act, 1961, citing discrepancies such as incorrect project labor expenses and unverified completion of work. The AO observed that the labor expenses for the 6th and 7th floors were not consistent and that the bills for the 4th floor were dated prior to those for the 3rd floor, indicating clerical errors. Additionally, the assessee failed to provide month-wise expenditure details or phase-wise work reports from the Municipal Corporation or a certified engineer. The AO concluded that the payments made through cheques were insufficient to prove the genuineness of the transactions.

The CIT(A) reversed the AO's decision, stating that the AO did not point out specific discrepancies during the assessment proceedings. The CIT(A) noted that the assessee provided detailed break-ups of construction activities, invoices, and measurement sheets from contractors, which tallied with the books of accounts. The CIT(A) concluded that the rejection of books under section 145(3) was unwarranted as there was no evidence of bogus expenditures or understated sales.

2. Estimation of Net Profits at 25% of Total Sales:
The AO estimated the net profits at 25% of the total sales, amounting to ?58,32,000, based on the alleged discrepancies in the books of accounts. The CIT(A) found this estimation to be unsubstantiated, noting that the assessee had shown an overall profit of 11.66% on the total turnover of ?5.21 crores for the entire project. The CIT(A) highlighted that the AO did not provide a comparable case to justify the 25% profit estimation and that the assessee had followed the percentage completion method consistently.

The CIT(A) acknowledged that while the labor payments were not fully verifiable, there was no evidence of inflated claims. To address potential revenue leakage, the CIT(A) disallowed 10% of the labor expenses, amounting to ?2,67,767, instead of the AO's higher estimation.

Conclusion:
The tribunal upheld the CIT(A)’s findings, rejecting the AO’s action of rejecting the books of accounts and estimating net profits at 25%. The tribunal noted that the assessee had consistently followed the percentage completion method and that there were no significant discrepancies in the books of accounts. The tribunal cited the jurisdictional High Court’s judgment in CIT vs. Vikram Plastic & Ors, which supports that invoking section 145 is unsustainable without pointing out specific defects in the regularly maintained books of accounts.

Final Judgment:
The appeal by the revenue was dismissed, and the CIT(A)'s order was upheld, confirming the disallowance of ?2,67,767 in labor expenses while rejecting the higher profit estimation by the AO.