2022 (9) TMI 343 - AT - Income Tax

Rejection of books of accounts u/s 145 - adopting the net profit at the rate of 10% of the gross contract receipt - HELD THAT - We are unable to comprehend the observation of the AO, who had rejected the books of account of the assessee for the year under consideration and estimated his income from the contract business @10% of gross contract receipts, for the reason that as the assessee in his application filed before the ITSC, Kolkata for the preceding years i.e AYs. 2006-07 to 2012-13 had admitted certain defects and irregularities in his books of accounts, therefore, it was to be presumed that he would have continued with such accounting malpractices and irregularities in the subsequent years too. Our aforesaid conviction is all the more fortified by the fact that the AO had after calling for and examining the books of accounts of the assessee for the year under consideration a/w bills, vouchers, confirmations etc. had not referred to even a single instance of any such defect or irregularity which would have evidenced that the assessee even during the year under consideration had continued with the accounting malpractices that were adopted by him in the preceding years. Presumption drawn by the AO that that as the assessee had indulged into accounting malpractices in the preceding years, therefore, he would have continued with the same in the succeeding years in the absence of any supporting evidence cannot be subscribed on our part. Interestingly, if the observation of the AO is to be accepted, then, it would mean that once an assessee is visited with search proceedings and he after considering the incriminating documents unearthed during the course of such proceedings comes forth with a disclosure of his unaccounted income, then, in all the subsequent years despite there being no iota of evidence that the assessee had indulged in any such nefarious activities for garnering unaccounted income it is to be so presumed because of his chequered past. By no means such an incomprehensible observation of the AO can be accepted. As regards the reference to the Standard Operating Rate (SoR) by the AO to support his conviction that the income of the assessee from his contract business was justifiably determined by applying a net profit rate @10% to the gross contract receipts for the year under consideration, we are unable to concur with the same. As claimed by the ld. AR, and rightly so, as the SoR for works contracts fixed by the Government departments merely indicates the estimated price of the inputs and expenses and also an estimate of the physical quantity that would be required for execution of the contract, the same, thus, considering manifold factors is too far from the ground realties to have justified earning of a profit margin @10% of the gross contract receipts by the assessee. Concurring with the well-reasoned view taken by the CIT(Appeals) that there was no justification on the part of the AO in rejecting the books of accounts of the assessee and estimating his income from the contract business @10% of the gross contract receipts, uphold his order. - Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145 of the Income Tax Act, 1961.
2. Estimation of net profit at 10% of gross contract receipts.
3. Admission of additional evidence under Rule 46A of the Income Tax Rules, 1963.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145:

The AO rejected the books of accounts for AY 2013-14 on the grounds that the assessee had previously rejected his books for AYs 2006-07 to 2012-13 and had offered to declare his income at 10% of gross contract receipts. The AO argued that the opening and closing balances for AY 2013-14 could not be relied upon due to these prior admissions. However, the CIT(A) found that the AO did not identify any specific defects or irregularities in the books, bills, vouchers, or confirmations for AY 2013-14. The CIT(A) emphasized that each year's assessment is separate and must be based on the facts and circumstances of that year. The CIT(A) concluded that the mere rejection of books in previous years does not justify rejection in subsequent years without specific defects or irregularities. This view was upheld by the Tribunal, which noted that the AO failed to provide any material evidence of defects in the books for AY 2013-14.

2. Estimation of Net Profit at 10% of Gross Contract Receipts:

The AO estimated the assessee's income at 10% of gross contract receipts based on the assessee's prior admission before the ITSC for AYs 2006-07 to 2012-13. The CIT(A) disagreed, stating that the AO did not provide any cogent material to justify this estimation. The CIT(A) pointed out that the AO's reliance on the assessee's past admissions and the Standard Operating Rate (SoR) was not sufficient to estimate the net profit rate for AY 2013-14. The Tribunal concurred, noting that the AO's estimation was based on pure guesswork and lacked supporting evidence. The Tribunal upheld the CIT(A)'s decision to vacate the addition made by the AO.

3. Admission of Additional Evidence under Rule 46A:

The assessee sought to admit additional evidence in the form of comparable cases where net profit rates of 3.87% and below were accepted. The CIT(A) rejected this application, stating that the conditions under Rule 46A were not fulfilled. The CIT(A) noted that the assessee did not demonstrate that he was prevented by sufficient cause from producing this evidence before the AO. The Tribunal upheld the CIT(A)'s decision, agreeing that the additional evidence did not meet the criteria for admission under Rule 46A.

Conclusion:

The Tribunal dismissed the revenue's appeal and upheld the CIT(A)'s order, which found no justification for rejecting the books of accounts or estimating the net profit at 10% of gross contract receipts for AY 2013-14. The Tribunal also dismissed the assessee's cross-objection regarding the rejection of additional evidence, as it was rendered academic by the dismissal of the revenue's appeal. The same conclusions and directions were applied to the appeals and cross-objections for AY 2014-15.