2024 (8) TMI 114 - HC - Income Tax

Revision u/s 263 - AO rejected the books of accounts and estimated a net profit of 6% on the gross receipts of the assessee to which the other incomes were added - CIT u/s 263 found the assessment erroneous for not considering sundry creditors and unverified tax deductions - HELD THAT - In the present case, the Assessing Officer had estimated the gross profit at 6% of the total receipts and had completed the assessment after adding the income from other sources also. The sundry creditors, as is seen from the explanation offered by the assessee before the Commissioner for the subject assessment year, came to Rs. 3,44,84,318/-; out of which, the liability in the previous year was Rs. 1,92,98,140/-. Hence the sundry credit claimed by the assessee came to Rs. 1,51,86,178/-. Obviously, this was not noticed by the AO and presumably the same was not accounted in the total receipts, as undisclosed income. If the sundry credits are not explained properly, then disclosing that in the books of accounts would amount to a device employed to suppress the income received, as a credit taken by a third party, with whom the assessee had a transaction. In the present case, the assessee was a works contractor as is disclosed from Annexure-2 order u/s 263 of the Act , who had executed contracts awarded by various State government departments. There is no question of the credit being attributed to any of the awarders; which even if existing, there was no difficulty in establishing the same. We also have to notice that in the assessment order, the assessee has income from different sources; from a firm, house property and other sources. Hence, the income declared by the assessee is not solely from the contract work. When the assessment made is of income from one single source, if the total contract receipts are taken to estimate the gross profit, necessarily there cannot be any further additions made. In consonance with the reservation made by us, while dealing with Prasad Construction Co. 2016 (4) TMI 1180 - PATNA HIGH COURT applied to the present case; if the gross receipts are taken, on which the net profit is assessed, the entire receipts are not reflected, then definitely there is scope for addition, to the receipts. The sundry creditors, if not explained will have to be added to the contract receipts before the net profit is assessed or otherwise added in the income from other sources, bringing in that quantum, as unexplained income. Hence, either way, whether the unexplained sundry credits are added to the contract receipts or as income from other sources definitely the tax payable by the assessee would be higher than that paid by a mere estimation of net profit; looking at the quantum returned, on which no explanation was sought. We also have to notice that in the present case the Commissioner under Section 263 of the Act had also reckoned non-payment of tax deducted at source. Essentially, the Commissioner has found the order to be erroneous for reason of non payment into the treasury, of the tax deducted at source having not been verified and also the sundry creditors having not been examined; the latter of which ground results in the finding that the estimation of profit on the contract receipts alone would be an erroneous exercise and it causes prejudice to the interest of the revenue. We find absolutely no reason to interfere with the order of the Commissioner and set aside the order of the Tribunal answering the questions of law against the assessee and in favour of the Revenue - The order of the Tribunal setting aside the order under Section 263 of the Act is annulled.

Summary

Issues:
1. Scope of further additions after estimating profits of a business post rejection of books of accounts.
2. Commissioner's power under Section 263 of the Income Tax Act to revise assessment order based on erroneous findings by Assessing Officer.

Analysis:

Issue 1:
The Assessing Officer estimated profits of a works contractor after rejecting the books of accounts due to failure to produce bills and vouchers of materials purchased. The net profit was set at 6% on gross receipts, including other incomes. The respondent argued that once books are rejected, no further additions can be made. Case laws like Malabar Industrial Co. Ltd. vs. CIT were cited to support this stance. The court analyzed similar cases and emphasized that when gross receipts are considered for profit estimation, any undisclosed income like unexplained sundry credits must be added to prevent income suppression. The failure to explain sundry credits could lead to higher tax liability, justifying the Commissioner's intervention.

Issue 2:
Under Section 263 of the Income Tax Act, the Commissioner found the assessment order erroneous due to unverified tax deductions at source and unexamined sundry creditors. The court agreed with the Commissioner's findings, stating that the estimation of profit solely on contract receipts was erroneous and prejudicial to revenue. The court upheld the Commissioner's order, annulling the Tribunal's decision and directing the Assessing Officer to complete the assessment. The judgment favored the Revenue, emphasizing the importance of proper verification and examination to prevent tax evasion and ensure accurate assessment.

In conclusion, the judgment clarified the scope of further additions post-rejection of books of accounts and affirmed the Commissioner's power to revise assessment orders based on errors and prejudice to revenue. The decision highlighted the need for thorough examination and verification to maintain tax integrity and prevent income suppression.