2022 (6) TMI 80 - AT - Income Tax

Rejection of books of accounts - profit estimation of the contract business- HELD THAT - AO had examined and cross-verified the books of accounts, bills, vouchers and confirmation of accounts etc. pertaining to the year under consideration that were produced by the assessee in the course of the assessment proceedings before him. Although the AO had not brought on record any irregularity or defect in the books of accounts, but had rejected the same, for the reason, that as the assessee in the course of proceedings before the ITSC, Kolkata for the earlier years i.e AYs. 2006-07 to 2012-13 had on a suo-motto basis rejected his books of accounts, therefore, the opening and closing balances of different ledger accounts pertaining to his books of accounts for the year under consideration i.e AY 2014-15 could not be relied upon. AO except for harping on his aforesaid contention, i.e, the opening and closing balances of different ledger accounts pertaining to the books of accounts of the assessee for the year under consideration could not be verified by him, had not brought on record any such specific or material defect in the books of accounts on the basis of which the deducing of the correct profits of the assessee s business for the aforesaid reason was jeopardized. Interestingly, if the observations of the AO are to be accepted, then, it would mean that once an assessee is visited with search proceedings, and he after considering the incriminating documents unearthed during the course of such proceedings comes forth with a disclosure either regards his modus operandi or unaccounted income, then, in all the subsequent years despite there being no iota of evidence that the assessee had continued with his malpractices and modus operandi to generate unaccounted income, it is to be presumed otherwise and has to be made to suffer because of his chequered past. By no means such an incomprehensible and baseless observation of the AO can be accepted. Also, we concur with the view taken by the CIT(Appeals) that even otherwise as the net profit rate disclosed by the assessee during the year under consideration, as demonstrated by him, was better than those of other similarly placed assessee s of his trade line and was commensurate with that prevailing in the industry, therefore, no adverse inferences on the said count itself i.e as regards the profit disclosed by him was liable to be drawn. As regards the reference to the Standard Operating Rate (SoR) by the AO to support his conviction that the income of the assessee from his contract business was justifiably determined by applying a net profit rate @10% to the gross contract receipts for the year under consideration, we are unable to concur to the same. As claimed by the ld. AR, and rightly so, as the SoR for works contracts fixed by the Government departments merely indicates the estimated price of the inputs and expenses and also an estimate of the physical quantity that would be required for execution of the contract, the same, thus, considering manifold factors is too far from the ground realties to have justified earning of a profit margin @10% of the gross contract receipts by the assessee. We, thus, in terms of our aforesaid observations and concurring with the well reasoned view taken by the CIT(Appeals) that there was no justification on the part of the AO in rejecting the books of accounts of the assessee and estimating his income from the contract business @10% of the gross contract receipts, uphold his order - Revenue appeal dismissed.

Summary

Issues Involved:
1. Rejection of books of accounts for the assessment year 2014-15.
2. Estimation of net profit rate at 10% of gross contract receipts.
3. Validity of assessing income for AY 2014-15 when the appeal for AY 2013-14 is pending.
4. Claim of depreciation allowance and financial charges after estimation of income.

Detailed Analysis:

1. Rejection of Books of Accounts:
The Assessing Officer (AO) rejected the books of accounts for AY 2014-15 on the basis that the assessee had voluntarily rejected his books of accounts for AYs 2006-07 to 2012-13 before the Income-tax Settlement Commission (ITSC). The AO argued that the correctness of the opening and closing balances of different ledger accounts for AY 2014-15 could not be relied upon. However, the CIT(Appeals) noted that the AO did not identify any specific irregularities or defects in the books of accounts, bills, vouchers, and confirmations for AY 2014-15. The CIT(Appeals) emphasized that each year's assessment is separate and must be based on the facts and circumstances of that year. The rejection of books for previous years does not automatically justify rejection for subsequent years unless specific defects are identified.

2. Estimation of Net Profit Rate at 10%:
The AO estimated the net profit rate at 10% of the gross contract receipts for AY 2014-15, based on the rate voluntarily declared by the assessee for AYs 2006-07 to 2012-13 before the ITSC. The CIT(Appeals) found this approach unjustified, noting that the AO did not provide any cogent reasons or comparable instances to support the 10% rate for AY 2014-15. The CIT(Appeals) observed that the assessee's books were subjected to tax audit and no specific defects were found. The CIT(Appeals) further noted that the net profit rate declared by the assessee was commensurate with industry standards and better than other similarly placed entities.

3. Validity of Assessing Income for AY 2014-15:
The AO's argument that the appeal for AY 2013-14 was pending and thus the assessment for AY 2014-15 should be influenced by it was dismissed by the CIT(Appeals). The CIT(Appeals) reiterated that each year's assessment is independent and must be based on its own facts and circumstances.

4. Claim of Depreciation Allowance and Financial Charges:
The assessee claimed entitlement to depreciation allowance and deduction on account of interest and finance charges after the estimation of income. However, since the CIT(Appeals) allowed relief on the first two grounds, these claims became infructuous and were not separately addressed.

Conclusion:
The appeal filed by the department was dismissed. The CIT(Appeals) concluded that the AO had no justification for rejecting the books of accounts or estimating the net profit rate at 10% for AY 2014-15. The CIT(Appeals) emphasized that assessments must be based on the specific facts and circumstances of each year, and unsupported extrapolation from previous years is not permissible. The Tribunal upheld this view, noting the lack of specific defects or irregularities in the books of accounts for AY 2014-15 and confirming that the net profit rate declared by the assessee was in line with industry standards.