2023 (4) TMI 36 - AT - Income Tax

Estimation of profits - Estimation of income @8% on main contracts and 4% on sub-contracts - non rejection of books of accounts - HELD THAT - . In the present case on hand, if the AO is not satisfied with the explanation given by the assessee, he should have rejected the books of accounts and estimated the profit, according to the facts of the case. The AO ought to have disallowed the quantum of expenditure for which the assessee failed to produce documentary evidence. But the AO failed to do so and he simply without rejecting the books, estimated the profit @8% on main contracts and 4% on sub contracts, which is not permissible under the law. CIT(A) has erred in confirming the order of the AO and arriving at a conclusion that if some vouchers / evidence pertaining to the claim of the assessee are not satisfactorily established before the AO, the AO is not empowered to estimate the profits of the assessee without rejecting the books of accounts. AO ignoring the established provision u/s 145(3), estimated the profit without rejecting the books. Decided in favour of assessee.

Summary

Issues:
The judgment involves appeals filed by the assessee against the orders of Commissioner of Income Tax (Appeals) for the Assessment Years 2013-14 to 2016-17, concerning additions made by the Assessing Officer (AO) without rejecting the books of accounts under section 145(3) of the Income Tax Act, 1961.

Summary:
The assessee, a partnership firm, filed its return of income for the relevant years. Following a survey operation, the AO made additions for unexplained cash credits and estimated income without rejecting the books of accounts. The CIT(A) partly allowed the appeal, deleting the cash credit addition but confirming the income estimation. The assessee then appealed to the Tribunal, challenging the estimation of profits without book rejection.

The Appellate Tribunal noted that the AO's estimation without book rejection was not permissible under the law, citing decisions by various High Courts. The Tribunal emphasized that the AO should have disallowed expenditures for which no documentary evidence was provided, rather than estimating profits. As the AO failed to follow proper procedure, the Tribunal allowed the assessee's appeal for all the assessment years.

In conclusion, the appeals filed by the assessee were allowed for the Assessment Years 2013-14 to 2016-17, as the estimation of profits without rejecting the books of accounts was deemed invalid by the Tribunal.