2019 (4) TMI 278 - AT - Income Tax

Method of accounting - Rejection of books of account - Mercantile system OR cash system of accounting - HELD THAT - As noticed that the basis of rejections of the books of account and the method of accounting by the assessing officer was that the books of accounts of the assessee did not match with audited accounts and therefore, the genuineness of the expenditure could not be ascertained. The contention of the assessee is that the assessee has been following the same method and the assessing officer in other years had accepted the books results. There is no reason to adopt a different method and reject books of account, it is contention of the assessee that all the queries of AO were duly explained. This contention of the assessee is not acceptable under the facts of the present case. The AO in his order has pointed out specific defects which in our view are sufficient to reject of books of accounts. Therefore, no interference is called for in the finding of the Authorities below. - Decided against assessee Profit estimation - AO suggesting that the assessee is earning profit @8%- as submitted by assessee submitted that appellant is a Development Authority which work for execution of social welfare housing schemes of State Government, therefore earning profit cannot be applied that the a civil contractor - HELD THAT - In the present case the assessing officer has mechanically applied @ 8% treating the assessee as a civil contractor without looking into fact that the assessee has also been carrying out social welfare schemes for EWS under aegis of the government of M.P. Therefore, the profit rate as applied by the assessing officer and confirmed by the Ld. CIT(A) cannot be sustained. Looking to the facts of the case and the fact that assessee is also carrying out Social Welfare Schemes. We restrict this profit @ 4%. - Decided partly in favour of assessee. Claim of set off brought forward losses of previous years - HELD THAT - We find that before the ld. CIT(A) this ground was raised by the assessee, however no finding is given by the ld. CIT(A). Therefore, considering the facts, we deem it proper to restore ground No.2 & 6 to the file of the ld. CIT(A) for decision a afresh. Ld. CIT(A) is hereby directed to decide this issue in accordance with law.

Issues Involved:
1. Method of accounting adopted by the assessee.
2. Non-consideration of the return filed by the assessee disclosing a loss.
3. Rejection of books of accounts under Section 145(3) of the Income Tax Act.
4. Estimation of net income at 8% on the gross turnover.
5. Matching of books of accounts with audited accounts and genuineness of expenditure.
6. Non-consideration of brought forward losses for set-off.
7. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Method of Accounting Adopted by the Assessee:
The assessee contended that it was following the cash system of accounting, which was confirmed by the statutory auditor in the tax audit report. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld that the assessee was following the mercantile system, which the assessee argued was incorrect. The Tribunal found that the assessee had been following the same method of accounting in past years, and the Assessing Officer (AO) had accepted the book results in those years. However, the Tribunal upheld the AO's rejection of the books of accounts due to specific defects pointed out.

2. Non-Consideration of the Return Filed by the Assessee Disclosing a Loss:
The assessee argued that the CIT(A) did not consider the return filed disclosing a deficit of ?5,53,41,624/- and the correct position of brought forward losses. The Tribunal noted that the CIT(A) overlooked the return position based on audited accounts and the tax audit report. The Tribunal directed the CIT(A) to decide this issue afresh.

3. Rejection of Books of Accounts Under Section 145(3) of the Income Tax Act:
The AO rejected the books of accounts due to discrepancies such as ledger entries not matching with the audited accounts and unascertained genuineness of expenditures. The assessee argued that these were clerical mistakes rectified during the audit. The Tribunal found the AO's specific defects sufficient to reject the books of accounts and upheld the AO's decision.

4. Estimation of Net Income at 8% on the Gross Turnover:
The AO estimated the profit at 8% of the gross receipts, treating the assessee as a civil contractor. The assessee contended that it was a non-profit organization working on social welfare schemes and not on a commercial basis. The Tribunal found the AO's application of 8% profit rate mechanical and excessive. Considering the assessee's involvement in social welfare schemes, the Tribunal restricted the profit rate to 4%.

5. Matching of Books of Accounts with Audited Accounts and Genuineness of Expenditure:
The AO observed discrepancies in the books of accounts, such as unentered vouchers and totaling errors. The assessee explained that these were rectified during the audit process. The Tribunal upheld the AO's rejection of the books of accounts based on these specific defects.

6. Non-Consideration of Brought Forward Losses for Set-Off:
The assessee argued that the CIT(A) did not consider the brought forward losses for set-off against the current year's income. The Tribunal found that the CIT(A) did not provide a finding on this issue and directed the CIT(A) to decide it afresh in accordance with the law.

7. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Income Tax Act:
The assessee contended that the initiation of penalty proceedings was incorrect as there was no concealment or furnishing of inaccurate particulars of income. The Tribunal noted that the AO had not imposed any penalty and dismissed this ground as premature.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes. The Tribunal upheld the rejection of the books of accounts but modified the profit estimation rate from 8% to 4%. The issues regarding the method of accounting and brought forward losses were remanded to the CIT(A) for fresh consideration. The ground related to penalty proceedings was dismissed as premature. The order was pronounced in the open court on 28.03.2019.

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