2012 (5) TMI 436 - AT - Income Tax

Rejection of book of accoutns - Estimation of income at 5% of the gross turnover of the company - A.O. noticed that there are huge losses incurred by the assessee and the losses cannot be accepted as the projects undertaken by the assessee were having escalation clause - held that - The provision empowers the A.O. to reject the books of account and estimate income as provided under section 144 / 145 only if he is satisfied about the correctness and completeness of accounts of assessee or accounting standards notified have not been followed by the assessee. The assessee has maintained complete books of account including vouchers and also justified the increase in cost, reasons for suffering losses and also the fact that stock registers were maintained at the respective places. Just because the assessee has suffered losses, it does not mean that the assessee s books of account are to be rejected. Assessee has maintained complete books of account including vouchers and also justified the increase in cost, reasons for suffering losses and also the fact that stock registers were maintained at the respective places - The assessee also justified why it has suffered losses by giving detailed reasons including the escalation clause, cost of increase in material and difficulty in implementing the road projects in Naxal-hit areas as a new venture - Decided in favor of the assessee

Summary

Issues Involved:
1. Rejection of books of account and estimation of income.
2. Disallowance of various expenses (Infotech, Traveling, Postage, etc.).
3. Allowability of bad debts.
4. Payment of quarry royalty.
5. Disallowance under section 40A(3).
6. Temporary site installation expenses.
7. Unexplained transactions with 22 parties.
8. Statutory disallowance under section 40(a)(ia).

Detailed Analysis:

1. Rejection of Books of Account and Estimation of Income:
The Revenue contested the CIT(A)'s decision to reject the AO's estimation of income by rejecting the books of account. The AO had rejected the books due to incomplete details, unresponded notices, lack of stock register, and unexplained losses. The CIT(A) found that the AO's analysis was flawed and not based on operating margins. The CIT(A) noted that the losses were due to a mismatch in price adjustments and actual costs, and that the books of account were maintained correctly. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not provide sufficient evidence to reject the books and that the method of accounting was appropriate.

2. Disallowance of Various Expenses:
The CIT(A) restricted the disallowance of Infotech expenses to 5% from 20%, and similarly restricted the disallowance of Traveling and Postage expenses to 5%. The Tribunal agreed with the CIT(A) that the expenses were largely verifiable and that the AO's disallowance was excessive. The Tribunal partially allowed the assessee's appeal by deleting the 5% restriction on Infotech expenses but upheld the 5% disallowance on other expenses.

3. Allowability of Bad Debts:
The CIT(A) allowed the claim of bad debts amounting to Rs.1,64,87,000/-, stating that the debts were written off in the books of account and had been taken into account for determining income in previous years. The Tribunal upheld this decision, citing compliance with section 36(1)(vii) and relevant case law.

4. Payment of Quarry Royalty:
The CIT(A) allowed the payment of quarry royalty in cash, noting that payments to the government are exempt from disallowance under section 40A(3) as per Rule 6DD(b). The Tribunal upheld this decision.

5. Disallowance under Section 40A(3):
The CIT(A) found that the AO incorrectly disallowed 100% of certain cash payments instead of the prescribed 20%. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had already disallowed 20% of the expenses as required.

6. Temporary Site Installation Expenses:
The CIT(A) deleted the disallowance of Rs.1,06,72,800/- for temporary site installation expenses, noting that these expenses did not result in enduring benefits and were necessary for project completion. The Tribunal agreed, stating that even if considered capital expenditure, the amount would be eligible for 100% depreciation.

7. Unexplained Transactions with 22 Parties:
The CIT(A) deleted the addition of Rs.3,67,11,191/- related to unexplained transactions with 22 parties, as the assessee provided sufficient details and the AO did not find any evidence of bogus transactions. The Tribunal upheld this decision.

8. Statutory Disallowance under Section 40(a)(ia):
The Tribunal noted that this issue did not arise from the CIT(A)'s order as the estimation of income was rejected. The Tribunal directed the AO to verify the assessee's contention that the amounts disallowed were already included in the amounts disallowed by the assessee itself.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on most issues, rejecting the AO's rejection of books of account and excessive disallowances. The Tribunal allowed the assessee's partial appeal regarding Infotech expenses and directed the AO to verify the facts related to section 40(a)(ia) disallowance. The Revenue's appeals were dismissed, and the assessee's appeal was partly allowed.