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2013 (11) TMI 275 - AT - Income TaxValidity of the invocation of sec. 145(3) Rejection of books of accounts for non maintenance of stock records - Held that - The assessee is admittedly not maintaining any stock register, so that there is no basis to verify the material consumption, which constitutes a very significant part of its operating cost. Not only that, it is admittedly following the method of writing off its purchases for the year to the operating statement, treating the same as consumed . Now there is no basis to state that the material is actually consumed as soon as it is purchased, or that the assessee maintains no inventory thereof. The accounts as maintained are thus admittedly inconsistent with the actual, obtaining state of affairs, which the books of account of any entity or enterprise are supposed to reflect - The method has been followed from year to year, does not in any manner mitigate the defect, or justify its adoption Rejection of books u/s 145(3) of the Income Tax Act Decided in favor of Revenue. Assessment u/s 144 of the Income Tax Act Estimation of income by Revenue authorities Held that - The Tribunal has in such cases upheld profit rates varying from 8% upwards to as much as 20%, or even higher. In our view, a net profit rate of 10% on the assessee s contract receipt of Rs.360.86 lakh, i.e., involving material consumption, would be a reasonable estimate. Qua its labour receipt of Rs. 82.95 lakh, we consider a net profit rate of 20%, in view of a much lower base, as appropriate under the given facts and circumstances of the case. The A.O. is directed to work out the assessee s income for the year by applying the said percentages. No other addition is sustainable.
Issues Involved:
Invocation of section 145(3) of the Income-tax Act for estimation of income based on material consumption and profit rate. Detailed Analysis: 1. Invocation of Section 145(3) of the Act: The issue revolves around the validity of invoking section 145(3) of the Act by the Assessing Officer (A.O.). The appellant, a partnership firm, was found not maintaining a stock register, leading to uncertainty in material consumption verification. The A.O. rejected the method of accounting followed by the appellant as it did not reflect the actual state of affairs. The Tribunal upheld the A.O.'s decision, emphasizing the importance of accurate accounting practices in commercial enterprises. 2. Estimation of Income: The Tribunal addressed the estimation of income based on unreliable book results provided by the appellant. The A.O.'s application of material consumption rate for different periods within the same year was deemed incorrect. The Tribunal rejected the comparison with the appellant's book results from other years due to their unreliability and the varying proportion of profit from labor contracts. The Tribunal also criticized the A.O.'s estimation of material consumption at 36% and the addition made towards closing stock, highlighting the necessity of considering opening stock for profit determination. 3. Application of Presumptive Profit Rates: In determining the income, the Tribunal considered the presumptive profit rates under section 44AD for civil contractors. It suggested a net profit rate of 10% on the contract receipt and 20% on the labor receipt. The Tribunal referred to legal precedents and statutory guidelines to arrive at a reasonable estimate of income for the appellant. The A.O. was directed to calculate the income based on the prescribed percentages. 4. Dismissal of Cross-objection: The Tribunal dismissed the appellant's cross-objection as it was based on the rejection of the appellant's accounts under section 145(3) of the Act. The Tribunal found no merit in the argument regarding a specific bill being an advance bill and deemed the cross-objection inconsequential due to the upheld profit rate. The Tribunal concluded by partly allowing the Revenue's appeal and dismissing the appellant's cross-objection. This comprehensive analysis of the judgment highlights the key legal issues, the Tribunal's reasoning, and the final decision regarding the invocation of section 145(3) and the estimation of income in the case.
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