2012 (12) TMI 1 - AT - Income Tax

Estimation of net profit - rejection of books of accounts - failure to produce the books of accounts - difference of opinion - third member decision - held that - It is not in dispute that the assessee maintained books of account and they were duly audited under section 44AB of the Act. In fact the Legislature places an obligation on the assessee, whose turnover is above Rs. 40,00,000/-, to maintain proper books and to obtain a tax audit report. It is not the case of the assessee, at any stage, that it has not maintained the books of account. Once it is not disputed, either by the assessee or by the Revenue, that assessee maintained books of account, the next issue to be considered is whether the AO can arbitrarily reject the book results and estimate the profit in the event of non-production of bills and vouchers. Assessee merely made a statement that the books of account were impounded by the local police but no evidence, whatsoever, was furnished to support the plea. The learned counsel submitted before me that the premises was seized in November 2005 but the attachment was lifted on 24.01.2006. If the attachment was lifted by a court order it could not have been difficult for the assessee to produce some evidence in that regard but no such evidence was produced. The duty of the Third Member is only to appreciate the orders passed by the respective Members to find out as to which order is more reasonable and the Third Member cannot reappraise the matter in any other manner. AO has discretion to either reject the books of account and estimate gross profit or to consider the books and may make specific additions by considering as to whether the expenditure claimed is reasonable or not. The AO having chosen the second option, the Appellate Tribunal cannot substitute its opinion to that of the AO, unless it is pointed out that in the process of adopting the option he had arbitrarily made the additions which have no rational basis. Separate disallowance of expenditure is permissible, by taking into consideration the reasonableness of the claim under various heads such as purchase, labour charges, etc. Addition sustained by the Id. CIT(A) under various Acts confirmed - Decided against the assessee.

Issues Involved:
1. Non-production of books of account by the assessee.
2. Ad-hoc disallowances made by the Assessing Officer (AO) under various heads.
3. Application of Section 44AD of the Income-tax Act, 1961.
4. Estimation of net profit rate.
5. Depreciation claim on Road Roller.
6. Powers of the Tribunal in reviewing the AO's decision.

Detailed Analysis:

1. Non-production of Books of Account:
The assessee, a civil contractor, was unable to produce its books of account during the assessment proceedings, claiming they were impounded by the local police in a criminal case involving a partner's husband. Despite multiple opportunities, the assessee failed to provide any documentary evidence to support this claim. The AO noted that the books were not available for verification and proceeded with ad-hoc disallowances.

2. Ad-hoc Disallowances by AO:
The AO made ad-hoc disallowances ranging from 10% to 20% under various heads due to the non-verifiability of expenses. The disallowed amounts were:
- Purchases of Materials: 10% (Rs. 8,86,567)
- Labour Charges: 10% (Rs. 2,96,332)
- Office Expenses, Vehicle Repairs & Maintenance, Travelling & Conveyance, Postage & Telephone: 15% (Rs. 19,388)
- Miscellaneous Expenses including Hire Charges, Rent of Road Roller Repair & Maintenance: 20% (Rs. 21,223)
- Depreciation on Road Roller: Rs. 32,000

3. Application of Section 44AD:
The assessee argued that in the absence of books of account, the net profit should be estimated under Section 44AD of the Income-tax Act, 1961, at 8% of the gross receipts. However, the CIT(A) rejected this contention, stating that Section 44AD is not applicable as the total receipts exceeded Rs. 40 lakhs.

4. Estimation of Net Profit Rate:
The Tribunal considered whether the net profit should be estimated at a specific rate or whether the disallowances made by the AO should be upheld. The Judicial Member suggested estimating the net profit at 10% of the gross receipts before depreciation and interest on partners' capital. The Accountant Member disagreed, emphasizing that the AO's disallowances were reasonable and based on the material available.

5. Depreciation Claim on Road Roller:
The AO disallowed the depreciation claim of Rs. 32,000 on the Road Roller, as the assessee failed to provide proof of purchase and mode of payment. The Accountant Member upheld this disallowance, noting that the assessee could not substantiate the genuineness of the purchase.

6. Powers of the Tribunal:
The Tribunal's powers under Section 254 of the Income-tax Act were discussed. The Accountant Member cited that the Tribunal should not act as a court of first instance to decide factual aspects not addressed by the lower authorities. The Tribunal can only interfere if the lower authorities' decisions are perverse or arbitrary. The Third Member agreed with the Accountant Member, emphasizing that the AO's method of making specific disallowances was reasonable and not arbitrary.

Conclusion:
The majority view upheld the order of the CIT(A) confirming the addition of Rs. 12,55,520 made by the AO under various heads. The Tribunal concluded that the separate disallowance of expenditure by the AO was permissible, considering the reasonableness of the claims under various heads. The appeal of the assessee was dismissed.

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