2020 (8) TMI 322 - AT - Income Tax

Rejection of books of accounts of assessee invoking the provisions of Section 145(3) - HELD THAT - Assessee Company has purchased few materials locally on urgent basis in cash or part payment made for the same in cash which constitutes 1.15% only of total revenue and 1.30% of total material purchased by the assessee Company during the relevant year. These materials were used in projects only. The material purchased in cash or part payment made in cash is fully supported by invoices or vouchers. The same invoices were produced during the assessment proceeding. Each payment duly supported by the external invoices. Hence, this is incorrect contention that these are supported by internal vouchers only. Rejection of books of account on the basis of insignificant defects in all respect, is not justified and books of account deserves to be accepted. Before invoking the provisions of Section 145(3) of the Act, the AO has to bring on record material on the basis of which he has arrived at the conclusion with regard to correctness or completeness of the accounts of the assessee or the method of accounting employed by it. In the instant case, it was not the case that the assessee had not followed either cash or mercantile system of accounting. It was also not the case that the Central Government had notified any particular accounting standard not followed by assessee. Hence, the second part of sub-section (3) of section 145 would not apply to the instant case. Addition on estimation basis by applying NP rate of 8% subject to depreciation and interest - HELD THAT - Assessee company declared income of ₹ 35,10,760/- after depreciation of ₹ 5,31,296/- and finance or interest expenses of ₹ 40,75,834/-. Thus, company has shown gross income of ₹ 81,17,890/- i.e. 6.68% of gross contractual receipt of ₹ 12,16,08,395/- which is significant looking to second year of the operation in the contract business and particularly when the contracts were awarded by private parties in remote area. There is no justification for estimation of income made by the AO @ 8% of gross contractual receipts. Separate receipts on account of consultancy income and estimated income after deduction of certain expenses - HELD THAT - We direct the AO to allow deduction of 40,75,384/- instead of ₹ 29,84,683/- as interest cost while income derived according to net profit formula. Disallowance treating the late deposit of employee contribution as income u/s 2(24)(x) read with section 36(1)(va) - HELD THAT - It is clear that entire contributions received from the employees have been deposited before filing of return of income u/s 139(1) of the Act. Accordingly, no disallowance is warranted - Appeal of the assessee is allowed.

Issues Involved:
1. Rejection of books of accounts by invoking Section 145(3) of the Income Tax Act, 1961.
2. Addition of income on estimation basis by applying a Net Profit (NP) rate.
3. Disallowance of expenses related to late deposit of employee contribution to EPF under Section 2(24)(x) read with Section 36(1)(va).

Detailed Analysis:

1. Rejection of Books of Accounts:
The Assessing Officer (AO) rejected the books of accounts of the assessee for the Assessment Years (AYs) 2013-14 and 2014-15 by invoking Section 145(3) of the Income Tax Act, 1961. The AO's grounds for rejection included:
- Total labour expenses of ?86,77,822/- were mostly paid in cash and hence not verifiable.
- Some material expenses were also paid in cash and supported by internal vouchers, making them unverifiable.

The assessee contended that the same set of books was maintained in AY 2013-14 as in AY 2012-13, where the ITAT Jaipur Bench had ruled in favor of the assessee, stating that insignificant defects in supporting evidence do not warrant rejection of books of accounts under Section 145(3). The Tribunal noted that the assessee had maintained comprehensive records of labour expenses, which were produced during the assessment proceedings. Additionally, the material purchased in cash was fully supported by invoices or vouchers.

The Tribunal concluded that the rejection of books of accounts based on insignificant defects was not justified. The AO had not brought any material on record to prove the incorrectness or incompleteness of the accounts or the method of accounting employed by the assessee.

2. Addition of Income on Estimation Basis:
The AO estimated the income from the contract business at 8% of the gross construction receipts, subject to separately allowable depreciation and interest. For AY 2013-14, the AO assessed income on an estimated basis at ?73,17,520/- against the declared income of ?35,10,760/-, resulting in an addition of ?37,99,760/-. The CIT(A) upheld this estimation.

The Tribunal observed that the assessee had declared a gross income of ?81,17,890/-, which constituted 6.68% of the gross contractual receipts. Given the competitive nature of the industry and the fact that the assessee was new in the business, the Tribunal found no justification for the AO's estimation of income at 8%. The Tribunal directed the AO to allow the full finance cost of ?40,75,834/- instead of ?29,84,683/- and concluded that the profit declared by the assessee at 6.62% was reasonable.

3. Disallowance of Expenses Related to Late Deposit of Employee Contribution to EPF:
The AO disallowed ?73,780/- for AY 2013-14 and ?87,777/- for AY 2014-15 on account of late deposit of employee contribution to EPF under Section 2(24)(x) read with Section 36(1)(va). The CIT(A) confirmed this disallowance.

The Tribunal noted that the entire contributions received from employees had been deposited before the filing of the return of income under Section 139(1) of the Act. Citing various judicial pronouncements, including decisions from the Rajasthan High Court and the Supreme Court, the Tribunal held that no disallowance was warranted as the deposits were made within the permissible time frame.

Conclusion:
The Tribunal allowed the appeals of the assessee for both AYs 2013-14 and 2014-15. The rejection of books of accounts was deemed unjustified, the estimation of income at 8% was found unreasonable, and the disallowance of expenses related to late deposit of employee contribution to EPF was overturned. The Tribunal directed the AO to accept the books of accounts and the declared income of the assessee.

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