2015 (6) TMI 199 - AT - Income Tax

Trading addition - rejection of book result U/s 145(3) - AO estimated the N.P. rate @ 10% - Held that - The A.R. himself admitted before the Assessing Officer that Section 145(3) are squarely applicable in the case of assessee. The assessee has shown current outstanding liability as on 31/3/2008 at ₹ 70,83,850/-, which was more than 30% of expenditure under the head of salary and wages and also pending for more than three months, which is not possible in contractor line. The assessee s claim that, it did not receive the amount from the BSNL, therefore, wages were outstanding, which was received later on but the assessee has not submitted any evidence regarding the payment from the BSNL later on except written reply and also further subsequent withdrawal from the bank account and reimbursement of the salary and wages in cash. Therefore, learned CIT(A) was not right in holding that defects pointed out by the Assessing Officer cannot be ground of rejection of books of account U/s 145(3) of the Act. There is no justification by the learned CIT(A in confirming the addition of ₹ 1 lac without confirming the rejection of book result U/s 145(3) of the Act. The defects pointed out by the Assessing Officer are sufficient to reject the book result. However, we find that AO had estimated the income higher side and had not compared the past history of the case and also had not made any comparison with another case of similar line of business. Therefore, we confirm the addition @ 6% net profit subject to interest and remuneration to the partners. The Assessing Officer is directed to recalculate the income as per above findings given by the Bench. - Decided partly in favour of revenue.

Summary

Issues involved:
- Rejection of book result under Section 145(3) of the Income Tax Act, 1961
- Estimation of income and trading addition
- Deficiencies in maintaining books of account
- Discrepancies in expenses and outstanding liabilities
- Comparison of current year's profit with the previous year

Analysis:

Rejection of book result under Section 145(3):
The case involved an appeal by the department against the CIT(A)'s order for A.Y. 2008-09. The Assessing Officer rejected the book result under Section 145(3) due to various deficiencies in maintaining accounts, such as lack of proper vouchers for petty cash expenses, incomplete stock register, and unverified expenses. The Assessing Officer estimated the net profit rate at 10%, resulting in a significant addition to the income.

Estimation of income and trading addition:
The CIT(A) allowed the appeal, emphasizing that the higher trading result in the current year compared to the previous year was crucial. The CIT(A) held that the deficiencies pointed out by the Assessing Officer were not sufficient to invoke Section 145(3) and cited relevant case laws supporting this view. An ad hoc addition of Rs. 1,00,000 was upheld to address any potential income leakage due to identified shortcomings.

Deficiencies in maintaining books of account:
The department argued that the deficiencies in maintaining books of account, including discrepancies in stock valuation and unverified expenses, justified the rejection of the book result under Section 145(3). The Assessing Officer contended that these defects were significant in the case of a civil contractor.

Discrepancies in expenses and outstanding liabilities:
The assessee defended the maintenance of accounts, stating that all transactions were supported by internal vouchers, and outstanding liabilities were due to delayed payments from clients. The assessee argued that the Assessing Officer had not identified any specific unverifiable payments or bogus transactions, challenging the substantial trading addition made.

Comparison of current year's profit with the previous year:
The assessee highlighted the improvement in net profit rate from the previous year, supported by increased turnover. The assessee cited case laws where courts ruled that a better gross profit compared to the previous year could negate the need for additional income estimation. The Tribunal directed the Assessing Officer to recalculate the income at a 6% net profit rate, considering interest and remuneration to partners.

In conclusion, the Tribunal partly allowed the revenue's appeal, emphasizing the importance of a comparative analysis of profit rates and addressing deficiencies in maintaining books of account while determining income estimation.