2012 (9) TMI 188 - AT - Income Tax

Rejection of books of account by AO - assessee has claimed huge expenditure against the gross receipts of civil works - Held that - As there exists substantial and significant discrepancies in the supporting material and the books of account and the assessee has also failed to produce the relevant supporting evidence for claim of expenses. Thus it is manifest from the record that the books of account of the assessee for these two years do not reflect the true and correct picture of affairs and financial results - against assessee. Addition under the head other sources - Held that - It is clear from the nature of the receipt that the said admitted income from interest on bank deposits interest on income tax refund interest received on loans and miscellaneous income cannot be treated as business income and therefore in our opinion the authorities below have rightly treated the same as income from other sources - against assessee. Direction to the AO to estimate the profit at 10% on the contract receipts and to allow depreciation - Held that - As in the earlier years in similar circumstances profit rate of 12.5% was applied by the Tribunal thus the years under consideration no reason for not applying a similar rate - to maintain the principle of consistency the earlier decision of this tribunal is followed and accordingly hold that the profit rate could be at 12.5% of the gross receipts and further claim of depreciation is allowed - Order to modify the order of CIT(Appeals) - partly in favour of assessee. Disallowance at 20% of the total payments made to the sub contract on estimate basis - Held that - Disallownace was made as that all the vouchers are self-made and in some of the cases there were no vouchers in supporting the claim and in some of the vouchers the name of the recipient is not there. In view of the these facts and circumstances the inflation of payment cannot be ruled out and therefore the entire claim of the assessee cannot be accepted. As revenue has not disputed the execution of the work through sub contract and the profit ratio admitted by the assessee is not substantially low the estimation of disallowance need to be curtailed to 10% - partly in favour of assessee.

Issues:
1. Rejection of books of account for assessment years 2003-04 and 2004-05.
2. Treatment of income from interest and miscellaneous sources for the assessment year 2003-04.
3. Estimation of profit on gross receipts and allowance of depreciation for assessment years 2003-04 and 2004-05.
4. Disallowance of expenditure made to subcontractors on an estimate basis for the assessment year 2005-06.

Analysis:

1. Rejection of Books of Account (2003-04 and 2004-05):
The Assessing Officer (AO) observed substantial discrepancies in the supporting material and books of account of the assessee, particularly in relation to expenses claimed against gross receipts. The vouchers lacked essential details like description of items purchased, payment mode, and payee information. The AO found discrepancies in amounts, lack of supporting evidence for wages, and absence of sitewise break-up of work-in-progress. Consequently, the AO rejected the books of account and estimated profit at 12.5% clear of depreciation. The CIT(Appeals) upheld the rejection but reduced the estimated profit to 10% and allowed depreciation. The ITAT concurred with the lower authorities, emphasizing the failure of the assessee to provide adequate supporting evidence and justify discrepancies, leading to the rejection of the books of account.

2. Treatment of Income from Interest and Miscellaneous Sources (2003-04):
The assessee admitted income from various sources, including interest on bank deposits, income tax refund, loans, and miscellaneous sources, totaling Rs. 4,44,577. The AO treated this income as 'income from other sources,' which was confirmed by the CIT(Appeals). The ITAT agreed with the lower authorities, stating that the nature of the receipts indicated they could not be considered as business income, thereby upholding the treatment as 'income from other sources.'

3. Estimation of Profit and Depreciation (2003-04 and 2004-05):
The AO estimated profit at 12.5% of gross contract receipts for the relevant years, which the CIT(Appeals) reduced to 10% and allowed depreciation. The ITAT referred to a previous tribunal decision in a similar case, where a profit rate of 12.5% was considered reasonable. To maintain consistency, the ITAT upheld a profit rate of 12.5% and allowed depreciation from the estimated profit, modifying the CIT(Appeals) order accordingly.

4. Disallowance of Expenditure to Subcontractors (2005-06):
The AO disallowed 20% of payments made to subcontractors on an estimate basis due to self-made vouchers and lack of supporting documents. The ITAT acknowledged the potential inflation of payments but reduced the disallowance to 10% considering the admitted profit ratio and lack of dispute regarding work execution through subcontractors. Consequently, the ITAT partly allowed the assessee's appeal for the assessment year 2005-06.

In conclusion, the ITAT upheld the rejection of books of account, treatment of income from interest and miscellaneous sources, estimation of profit, and disallowance of expenditure to subcontractors as per the detailed analysis provided for each issue involved in the judgment.

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