2021 (12) TMI 300 - AT - Income Tax

Rejection of books of accounts - NP rate determination - higher NP determination - HELD THAT - As assessee has maintained cash book, ledger, journal, purchase and sales register, bank book, salary wages register. The books of accounts have been maintained during the course of business. All the receipts are vouched. Books of accounts have been audited and a copy of audit report u/s 44AB has been furnished along with return of income. The auditors have not given any adverse remarks regarding the maintenance of the books of accounts. During the course of assessment proceedings, the books of account were produced before the A.O. and no serious defect was pointed out. In view of this the A.O. was not justified in rejecting the books accounts. Rejection of books of account is no ground for application of higher net profit even if books of accounts are rejected on one or the other ground, this in itself does not give liberty to the A.O. for making trading addition unless something specific is pointed out. There is no case for applying higher NP rate. There is totally no justification for making any trading addition. The ld. CIT(A) has given part relief out of the addition made by the AO. The ld. CIT(A) has not given any cogent reason for not accepting the assessee s plea completely. The ld. CIT(A) has held that the AO should be considered and taken into the account the explanation furnished by assessee in respect of fall in NP rate instead of simply applying the NP rate. But the ld. CIT(A) further has not substantiate for applying the GP rate of 3.70% without pointing out any specific defect or commenting on the expenditure debited in P L A/c specifically. Average rate of last two years can be applied in case of GP application only. But where application of NP rate is concerned then you have to pointed out specific defect for the expenditure debited in P L A/c which has not been done by the ld. AO as well as ld. CIT(A). Therefore, considering the totality of the facts and circumstances, we direct to delete the addition sustained by the ld. CIT(A) Addition u/s 69 r.w.s. 115BBE - HELD THAT - CIT(A) has himself held that addition u/s 69 cannot be made on the basis estimate - AO did not bring any evidence on record to substantiate his claim that the assessee has made more investment in house construction then what was explained him. The submission of the assessee was only on estimated basis. CIT(A) has confirmed the addition on the basis of source of investment not explained by the assessee for construction. Before the AO the assessee has also submitted that the cash withdrawal of family members during the financial year 2010-11 to 2013-14 when the construction was started and completed. During the financial year 2013-14 then the house was on the finishing stage and payments of many vendors were made after completion of construction was not considered by the AO and CIT(A) which are more than ₹ 16,15,000/-. AO has not given credit for more than 14,45,165/- only because withdrawals were after completion of the house. The payments were made after the completion. Therefore without making any further enquiry the claim of the assessee could not be rejected and addition so sustained on this account for ₹ 892473/- deserves to be deleted. Therefore, in view of the principles of natural justice as well as considering the totality of facts and circumstances, we direct to delete the addition sustained qua this issue. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Sustaining the addition of ?15,34,087 out of ?30,63,237 made by the AO by applying the NP rate of 3.70% as against 2.30% declared by the assessee and invoking the provisions of Section 145(3) of the Income Tax Act, 1961.
2. Sustaining the addition of ?8,92,473 out of ?43,17,473 made by the AO under Section 69 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Sustaining the Addition of ?15,34,087 out of ?30,63,237:

The assessee, an individual earning income from engineering job work, filed a return declaring a total income of ?30,23,330. The AO completed the assessment determining total income at ?1,04,53,410 by adding ?30,63,237 based on a net profit (NP) rate of 5.11% from the previous year, as opposed to the declared NP rate of 2.30%. The AO invoked Section 145(3) of the Income Tax Act, 1961, citing discrepancies such as the absence of a stock register and quantitative tally of closing stock.

The assessee argued that maintaining a stock register was impractical due to the nature of job work and that all receipts were vouched and audited without adverse remarks. The assessee highlighted additional expenses and increased depreciation, which justified the lower NP rate. The CIT(A) provided partial relief but did not fully accept the assessee's explanations.

The Tribunal observed that the assessee maintained comprehensive books of accounts, which were audited and produced during the assessment. The AO's rejection of these accounts was deemed unjustified, especially since the gross profit rate was consistent with the previous year despite increased receipts. The Tribunal noted that specific defects in the accounts were not pointed out, and the additional expenses incurred were legitimate. Consequently, the Tribunal directed the deletion of the addition sustained by the CIT(A) for ?15,29,150.

2. Sustaining the Addition of ?8,92,473 out of ?43,17,473:

The assessee constructed a residential house and the AO adopted the cost of investment at ?1,64,25,000 based on a report submitted for obtaining a bank loan. The AO considered only ?49,13,200 of the ?69,13,200 bank loan as utilized for construction, treating the balance as unexplained and adding ?43,17,473 under Section 69 of the Act. The CIT(A) reduced this addition to ?8,92,473, considering the report as an estimate and not concrete evidence.

The Tribunal noted that the assessee, being a contractor, supervised the construction personally, saving costs on supervision and contractor's margin. This personal supervision and direct material purchases resulted in significant cost savings. The Tribunal emphasized that the AO did not consider post-completion payments and contributions from family members, which were substantial.

The Tribunal concluded that the AO's addition was based on estimates without concrete evidence. The CIT(A) also failed to consider all relevant factors, including post-construction payments. Therefore, the Tribunal directed the deletion of the addition sustained by the CIT(A) for ?8,92,473.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the deletion of the additions sustained by the CIT(A) for both issues. The order was pronounced in the open court on 30th July 2021.