2025 (4) TMI 540 - AT - Income Tax

Estimation of income @ 6% by rejecting the books of accounts of the assessee - HELD THAT - AO cannot reject the books of accounts merely for the reason of un-substantiating the claim of loss on works contract at Hyderabad Branch when all other evidences filed by the assessee goes to prove that the books of accounts maintained by the assessee are verifiable and there is no adverse comments in the books of accounts maintained by the assessee either from the AO or from the Auditor. To this extent we cannot uphold the reasons given by the AO for rejection of books of accounts. Estimation of profit - AO without any valid reasons simply estimated 6% profit on total contract receipts even though the assessee s financial results shows the profit in this line of business ranging from 4.1% to 5%. Since the assessee s own financial results is acceptable and in fact the AO has accepted the financial results of assessee for earlier assessment year in our considered view the AO should have adopted the assessee s financial results for earlier years to estimate the profit for the impugned assessment year. Thus we direct the AO to estimate 5% profit on total contract receipts including other receipts and interest income which is equal or similar to the profit declared by the assessee for earlier assessment years. Accordingly the appeal of the assessee is allowed.

ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment was whether the rejection of the books of accounts by the Assessing Officer (AO) and the subsequent estimation of profit at 6% of the gross contract receipts were justified. The Tribunal also considered whether the assessee had sufficiently substantiated the loss claimed at the Hyderabad Branch and whether the estimation of profit should align with the financial results of previous years.

ISSUE-WISE DETAILED ANALYSIS

Rejection of Books of Accounts and Estimation of Profit at 6%

Relevant Legal Framework and Precedents: The Income Tax Act allows for the rejection of books of accounts if they are not credible or if there is a failure to substantiate claims. In such cases, the AO may estimate income based on a reasonable percentage of gross receipts.

Court's Interpretation and Reasoning: The Tribunal found that the AO rejected the books of accounts primarily because the assessee failed to substantiate the loss claimed at the Hyderabad Branch. However, the Tribunal noted that the AO did not provide any observation regarding the incorrectness of the books or the financial results declared by the assessee. The Tribunal emphasized that rejection of books should not be based merely on the inability to substantiate a specific claim if the overall books are verifiable and audited without adverse comments.

Key Evidence and Findings: The assessee provided evidence of compliance with the notice issued under Section 142(1) of the Act, including bills and vouchers related to the Hyderabad Branch. The Tribunal observed that the AO did not make any adverse comments on the overall books of accounts or the audit report.

Application of Law to Facts: The Tribunal concluded that the AO's rejection of the books was not justified as the assessee had complied with the requirements to the extent possible and maintained verifiable books. The Tribunal also found that the AO's estimation of profit at 6% lacked a basis or comparison with similar businesses.

Treatment of Competing Arguments: The assessee argued that the estimation should align with previous years' financial results, which showed a profit range of 4.1% to 5%. The Revenue supported the AO's estimation, citing the lack of complete information from the assessee. The Tribunal sided with the assessee, emphasizing the need for a justified basis for any estimation.

Conclusions: The Tribunal directed the AO to estimate the profit at 5% of the total contract receipts, reflecting the profit declared by the assessee in previous years, rather than the arbitrary 6% initially determined by the AO.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: The Tribunal stated, "In our considered view, the Assessing Officer cannot reject the books of accounts merely for the reason of un-substantiating the claim of loss on works contract at Hyderabad Branch when all other evidences filed by the assessee goes to prove that the books of accounts maintained by the assessee are verifiable."

Core principles established: The rejection of books of accounts must be based on substantial evidence of incorrectness or lack of credibility. Estimation of profit should be grounded in comparable data or historical financial results of the assessee.

Final determinations on each issue: The Tribunal concluded that the AO's rejection of the books was unwarranted and that the estimation of profit should be revised to 5%, aligning with the assessee's historical financial performance. The appeal was partly allowed, providing relief to the assessee by adjusting the profit estimation to a more reasonable figure based on past financial data.

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