2019 (7) TMI 739 - AT - Income Tax

Ad-hoc disallowance of 25% of construction expenses - AO rejected the books of accounts u/s 145 - CIT(A) who has restricted the disallowance to 10% - HELD THAT - AO instead of estimating the income on the basis of some reasonable and proper criteria being GP or NP has resorted to make disallowance of expenses which is not a permissible course of action under the provisions of section 145(3) r.w.s. 144. It is settled principles of law that after rejection of books of account, the income of the assessee should be based on average GP declared by the assessee in the preceding years or the prevailing GP in the same trade or business. In the case in hand, since it is the first year of reporting the income by the assessee, therefore, the past history of the GP is not available and hence the only option for making the estimation of income of the assessee is to adopt reasonable and proper GP/NP prevailing in the industry. Since the assessee is in the business of real estate and construction, therefore, the provisions of section 44AD also provides guidance for estimation of income. Since the income of the assessee is required to be estimated on some reasonable and proper basis, therefore, in the facts and circumstances of the case, we set aside this issue to the record of the AO for estimation of income by applying a proper and reasonable basis of GP/NP. Needless to say that the assessee be given proper opportunity of hearing before passing the afresh order. Disallowance of indirect expenses - AO has made disallowance of 20% of the said expenses for want of supporting evidence - HELD THAT - Assessee has failed to produce the books of account as well as the supporting bills and vouchers regarding claim of indirect expenses. AO consequently made the disallowance of 20% of the indirect expenses which was confirmed by the CIT(A). Though there is a failure on the part of the assessee to substantiate its claim, however, once the claim is found to be reasonable and by nature all the expenses itself reveals that the said expenditure was incurred for the purpose of the business of the assessee then the disallowance of 20% without giving any basis is highly arbitrary. Since the issue of best judgement on the basis of estimation of income of the assessee has been set aside to the record of the AO, accordingly this issue is also set aside to the record of the AO to reconsider and decide afresh after giving a proper opportunity of hearing. We may clarify if the income of the assessee is estimated applying GP Rate then only issue of disallowance of indirect expenses arises. On the other hand, if the income of the assessee is estimated on the basis of NP Rate then no question of disallowance of indirect expenses arises. Addition made u/s 68 - assessee was asked to furnish the confirmation of the loan / cash creditors - AO also issued notices u/s 133(6) calling information from the loan creditors - HELD THAT - Since the assessee has now explained the reasons of discrepancy in recording the transactions in the books of account which could be verified from the bank statement of the assessee as well as loan creditors, therefore, this issue requires a proper verification and examination at the level of the AO. Accordingly, in the facts and circumstances of the case, we set aside this issue to the record of the AO for conducting a proper verification by taking into consideration the bank statement of the assessee as well as loan creditors for reconciliation of the discrepancy as noted during the assessment proceeding. Needless to say that the assessee be given proper opportunity of hearing before passing afresh order. - Appeal of the assessee is allowed for Statistical purposes.

Summary

Issues Involved:
1. Trading addition by disallowing 25% of construction expenses.
2. Disallowance of 20% of total indirect expenses.
3. Addition of ?9 lacs under Section 68 of the IT Act for unexplained cash credits.

Detailed Analysis:

1. Trading Addition by Disallowing 25% of Construction Expenses
The assessee, engaged in real estate and construction, filed a return declaring an income of ?4,93,870/-. The case was selected for scrutiny, and notices were issued under Sections 143(2) and 142(1) of the IT Act. Due to non-compliance, the AO issued a show cause notice and eventually disallowed 25% of the construction expenses, totaling ?73,49,533/-, due to the non-production of books of account and supporting vouchers. The CIT(A) reduced this disallowance to 10%.

The assessee argued that the books of account, subject to audit under Section 44AB, were misplaced but ledger accounts were provided. The AO's rejection of the books under Section 145(3) was not challenged, but it was contended that the AO should have framed the assessment under Section 144 for best judgment assessment. The Tribunal observed that the AO should estimate income based on reasonable criteria like GP/NP rates instead of disallowing expenses. Since this was the first year of reporting, past GP rates were unavailable. The Tribunal set aside the issue to the AO for income estimation based on industry standards, providing the assessee an opportunity for a hearing.

2. Disallowance of 20% of Total Indirect Expenses
The assessee claimed indirect expenses of ?1,38,490/-. The AO disallowed 20% of these expenses for lack of supporting evidence, which the CIT(A) confirmed. The assessee argued that the expenses, amounting to 0.56% of the turnover, were reasonable. The Tribunal noted the failure to produce supporting documents but found the 20% disallowance arbitrary. The issue was set aside to the AO for reconsideration, aligned with the estimation of income based on GP/NP rates. If income is estimated on NP rates, the disallowance of indirect expenses would not arise.

3. Addition of ?9 Lacs Under Section 68 of the IT Act
During the assessment, the AO noted discrepancies in loans from various persons. Notices under Section 133(6) were issued, and discrepancies were found between the books and confirmations. An addition of ?9 lacs was made under Section 68 for unexplained credits. The CIT(A) confirmed this addition.

The assessee explained that discrepancies were due to cross-entries in the books, with loans shown under incorrect names but traceable to the correct bank accounts. For instance, a loan shown under Shri Prakash Chand Jain was actually received from Smt. Vidya Devi Jain. The Tribunal found the explanation plausible and set aside the issue to the AO for verification against bank statements and loan creditors' records, ensuring proper reconciliation and providing the assessee an opportunity for a hearing.

Conclusion:
The appeal was allowed for statistical purposes, with all issues set aside for fresh consideration by the AO, ensuring proper verification and adherence to judicial principles. The order was pronounced in open court on 04/07/2019.