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2025 (4) TMI 1218 - AT - Income TaxRejections books of account u/s 145(3) after detecting some discrepancies in the books - addition on GP rate of 12.5% on receipts as appearing in Form 26AS - HELD THAT - The assessee has in the regular business of contract and all along he has declared the income at GP of 10.64% and net profit of about 5% in the past. Therefore if there are any discrepancies in the information contained in the Form 26AS it has to be dealt properly instead of rejecting the books. Further if there are cash payments it has to be dealt as per law and not estimate the income. This is not the first year of operation to adopt such pattern of estimation. In our view the findings of ld. CIT(A) to the extent of estimate the income @ 12.5% of the gross receipt is not proper and it should be based on the past performance and reasonable basis. We observed that the assessee had declared the net profit @ 5.09% in the previous AY therefore it should be 5% and ld. CIT(A) has observed that the books are not complete so he proceeded to add 2% for that purpose. If that be the case the proper income estimation should have been at 7% of the gross receipts after reconciliation of books receipt and Form 26AS. Therefore we are inclined to direct the AO to estimate the income of the assessee @ 7% of the reconciled gross receipt for the year under consideration. Accordingly the ground no.1 raised by the department is dismissed and ground no 3 raised by the assessee in CO is partly allowed. Separate addition on account of disallowance of sundry creditor on estimate basis - HELD THAT - We observed that the tax authorities have rejected the books of account and estimated the income of the assessee. As held by the Hon ble Allahabad High Court in Banwarilal Basheshwar 1997 (5) TMI 37 - ALLAHABAD HIGH COURT once the books are rejected and resorted to estimate the income no further disallowance can be made. Therefore we do not see any reason to disturb the findings of CIT(A). In the result ground no.2 raised by the revenue is dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal were:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of rejection of books of account and estimation of gross profit at 12.5% Legal Framework and Precedents: Section 145(3) empowers the AO to reject the books of account if they do not comply with the provisions of the Act or are found to be incorrect or unreliable. The AO may then estimate the income on a reasonable basis. However, the estimation must be founded on proper inquiry and reconciliation, especially in cases involving complex business transactions such as construction contracts. Court's Interpretation and Reasoning: The AO rejected the books due to discrepancies between the assessee's books and the TDS reflected in Form 26AS, including unrectified TDS returns and denial of debit notes by concerned parties. The AO estimated income by applying a GP rate of 12.5% on contract receipts as per Form 26AS. The CIT(A) partially sustained this estimation but acknowledged that the books were incomplete and allowed a 2% addition over the historical GP rate. The Tribunal observed that the AO's rejection was premature and lacked proper opportunity for reconciliation. The assessee's business involved mobilization advances, running payments, and billing practices that naturally caused discrepancies in TDS reporting and Form 26AS entries. The assessee had explained these discrepancies, supported by additional evidence before the CIT(A). The Tribunal noted that the past years' GP was around 10.46% with net profit around 5%, and that the AO's approach of outright rejection and estimation without thorough reconciliation was not justified. Key Evidence and Findings: The assessee's explanation of mobilization advances, running payments, and billing cycles accounted for the discrepancies with Form 26AS. The Tribunal highlighted the assessee's consistent profit margins in previous years and the absence of any hard and fast rule mandating a 12.5% GP rate. Application of Law to Facts: The Tribunal held that the AO should have sought proper reconciliation and given the assessee opportunity to rectify discrepancies before rejecting the books. The Tribunal directed the AO to estimate income at 7% of reconciled gross receipts, comprising 5% net profit plus 2% for incomplete books, instead of the 12.5% GP rate applied. Treatment of Competing Arguments: The Revenue emphasized the discrepancies and lack of rectification in TDS returns, while the assessee explained the nature of contract payments and prior consistent profit margins. The Tribunal sided with the assessee's explanation and past record, criticizing the AO's mechanical rejection and estimation. Conclusion: The Tribunal dismissed the Revenue's ground on this issue and partly allowed the assessee's cross objection, directing income estimation at 7% of reconciled gross receipts. Issue 2: Deletion of additions on account of unexplained sundry creditors, depreciation, salary, rent, and software expenses Legal Framework and Precedents: When books are rejected and income estimated, further disallowances on specific expenses generally cannot be made, as held by the Allahabad High Court in CIT vs. G.S. Tiwari. Additions under section 68 for unexplained sundry creditors are permissible if the creditors are not satisfactorily explained. Court's Interpretation and Reasoning: The AO made additions on various heads including unexplained sundry creditors amounting to over Rs. 2.29 crore, excessive depreciation claims, salary payments without evidence of services rendered, rent without agreements, and capitalizing software expenses. The CIT(A) deleted all these additions on the ground that once income is estimated on gross profit basis after rejecting books, no separate additions are warranted. Key Evidence and Findings: The AO's notices under section 133(6) to creditors remained unserved or unanswered. However, the CIT(A) and Tribunal noted that the AO's approach of making separate additions after rejecting books and estimating income was inconsistent with judicial precedents. Application of Law to Facts: The Tribunal relied on the principle that separate additions are not justified once books are rejected and income is estimated on a reasonable basis. The Tribunal upheld the CIT(A)'s deletion of these additions. Treatment of Competing Arguments: The Revenue cited case law supporting additions for unexplained creditors and disallowances for unsupported expenses. The assessee relied on judicial decisions disallowing double additions post book rejection. The Tribunal aligned with the latter. Conclusion: The Tribunal dismissed the Revenue's ground and upheld deletion of all such additions. Issue 3: Addition under section 68 on account of unsecured loans Legal Framework and Precedents: Section 68 requires the assessee to prove the identity, creditworthiness, and genuineness of parties from whom unexplained cash credits or loans are received. Failure to do so results in addition to income. Courts have held that the department can pierce the corporate veil to determine sham or illusory transactions. Court's Interpretation and Reasoning: The AO added Rs. 1.02 crore to income on account of unsecured loans whose genuineness was doubted due to non-compliance with notices and lack of timely evidence. The CIT(A) deleted most of the addition after the assessee filed confirmations, PAN details, ITRs, and balance sheets before the appellate authority, but sustained a small portion where cash deposits were suspicious. The Revenue argued that the CIT(A) erred in accepting evidence not furnished during assessment and failing to direct verification by the AO. The Tribunal noted that the assessee had filed additional evidence before the CIT(A), who considered the remand report and allowed opportunity for rebuttal by the AO. The Tribunal found no reason to disturb the CIT(A)'s detailed findings, especially since the AO had not challenged the additional evidence post remand. Key Evidence and Findings: Confirmations with PAN, bank statements, and financial statements filed before the CIT(A) supported the genuineness of loans. The AO's notices under section 133(6) remained unresponded during assessment but were addressed at the appellate stage. Application of Law to Facts: The Tribunal held that evidence filed before the CIT(A) and considered with AO's remand report sufficed to discharge the assessee's burden. The Tribunal declined to revert to the original assessment findings where evidence was lacking. Treatment of Competing Arguments: The Revenue stressed procedural lapses and non-compliance during assessment, while the assessee emphasized the detailed verification and acceptance at appellate stage. The Tribunal favored the latter. Conclusion: The Tribunal dismissed the Revenue's ground and upheld the CIT(A)'s deletion of the majority of the addition under section 68, sustaining only a minor addition where evidence was lacking. Issue 4: Cross objections by the assessee The assessee raised several grounds including jurisdictional challenges related to notices issued under section 143(2). The Tribunal did not adjudicate the jurisdictional issue but considered other grounds on merit. Since most issues were decided in favour of the assessee in the Revenue's appeal, the Tribunal dismissed the assessee's cross objections except for one ground relating to estimation of income, which was partly allowed as discussed above. 3. SIGNIFICANT HOLDINGS The Tribunal established the following core principles and final determinations:
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