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Facts
The assessee, a transport contractor, reported income of Rs. 22.18 lakhs. The Assessing Officer rejected its books of accounts under Section 145(3) due to discrepancies like unsigned vouchers, split payments to avoid Section 40A(3), and mismatch with cash book entries. Consequently, the AO estimated the net profit at 8% of the turnover, leading to an assessment of Rs. 1.29 crore, which was upheld by the CIT(A).
Held
The Tribunal upheld the rejection of the books of accounts as justified due to non-compliance with Section 145(3) conditions. However, it found the 8% net profit estimation to be excessive and, considering past profitability and judicial precedents, directed the AO to recompute the net profit at 5% of the turnover, allowing specified deductions.
Key Issues
1. Whether the rejection of books of accounts under Section 145(3) of the Income-tax Act, 1961 was justified. 2. Whether the estimation of net profit at 8% of the turnover was appropriate, or if a lower rate should be applied.
Sections Cited
143(3), 145(3), 145(1), 145(2), 40A(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI SANDEEP GOSAIN & SHRI GIRISH AGRAWAL
Assessment Year: 2014-15 Commercial Transport vs Assistant Commissioner of Organisation Income Tax - 27(1), 1st Floor, B 112, Navi Mumbai Arjun Centre, Govandi East, Mumbai - 400088 (PAN: AAGFC6565J) Appellant Respondent Present for: Assessee by : Mr. Subodh Ratnaparkhi, CA Revenue by : Mr. Virabhadra S. Mahajan, Sr. DR Date of Hearing : 25.09.2025 Date of Pronouncement : 23.12.2025 O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of CIT(A), National Faceless Appeal Centre (NFAC), Delhi vide order no. ITBA/NFAC/S/250/2025-26/1077843575(1), dated 26.06.2025 passed against the assessment order by ACIT, 27(1), Mumbai u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 31.12.2016 for AY 2014-15.
2. Grounds taken by the assessee are reproduced as under: “1. The Hon CIT(A) erred in upholding the addition of Rs.1,07,12,240/- made by the ld AO, as estimated income, after rejecting the books of accounts u/s 145(3) of the I.T Act 1961. The addition of Rs.1,07,12,240/- being not warranted by facts and in law may kindly be deleted.
The Hon CIT(A) erred in upholding the addition of Rs.1,07,12,240/- by rejecting the books of accounts u/s 145(3) of the I.T Act 1961, not appreciating the explanation of the appellant with regards to the apparent defects as well as not considering the quantum involved in the alleged defects, thereby making huge addition of Rs.1,07,12,240/-, which was not justified.”
Brief facts of the case are that assessee is a partnership firm engaged in the business as a transport contractor. Assessee filed its return of income on 15.09.2014 reporting total income at Rs.22,18,230/-. In the course of assessment, ld. Assessing Officer noted that assessee had reported sales of Rs.30,77,86,143/- against which lorry hire charges were accounted for Rs. 25,58,14,891/- and vehicle, tubes and tyre expenses of Rs.40,96,735/-. In this respect, assessee was required to furnish evidence for expenses claimed. Ld. Assessing Officer also noted a difference of Rs.31,80,932/- in the ledger account for lorry hire expenses for which also explanation was called for. Assessee was also asked to furnish books of account and cash book for verification along with original vouchers to verify the claim of expenses debited in Profit and Loss account. Ld. Assessing Officer examined the books of accounts and other relevant documents furnished by the assessee after impounding the same. He identified several discrepancies, details of which are already noted in the impugned assessment order and found defects in the documents, which led him to issue a show-cause notice on the assessee to explain why the books of accounts should not be rejected u/s. 145(3) of the Act.
3.1. Ld. Assessing Officer, on verification of vouchers as submitted by the assessee noted that some of them were unsigned or not countersigned by the cashier, more particularly in the case of payments made above Rs.5000/-. He compared the cash book entry with supporting vouchers and found that cash book entry is not matching with the supporting vouchers furnished by the assessee. He also observed that the vouchers are self-made vouchers, many of which do not bear proper signatures. Also in respect of cash expenses to a single person on a single day were for amounts equal to or more than Rs.35,000/- which were split by the assessee so as to escape the provisions of section 40A(3). This compelled him to conclude that assessee failed to prove the genuineness of expenses claimed by it as recorded in the books of accounts and thus were finally rejected as assessee did not satisfy the conditions prescribed in section 145(3). The primary reasons for rejection of books of accounts were: i) Authenticity of certain self-made vouchers could not be established and some of the vouchers are not reflected in the books of accounts ii) Book of accounts have been manipulated to escape the provisions of section 40A(3).
3.2. Before the ld. Assessing Officer, assessee made his detailed explanations including the nature of the business and its modus operandi. It was submitted that on account of the nature of business in which the assessee is engaged in, it is not possible for it to maintain all the vouchers in perfect manner and some shortcomings do arrive in preparation. According to it, sales and purchase are guided by lorry receipts, which are basic document and other documents like sale bill, lorry payment vouchers are prepared accordingly. It was contended that assessee was a transport contractor and its major work is completed by hiring the vehicles from outside and therefore very low margin is earned by it in this business as major portion of the receipt is transferred to the vehicle owners. Upon rejection of the books of accounts, ld. Assessing Officer resorted to estimation of the profits of the business for which he noted that net profit margin ranges around 8% in the business in which the assessee is engaged in. He thus completed the assessment by estimating the net profit at the rate of 8% on the reported sales turnover of the assessee after giving deductions for remuneration and interest to partners, interest on borrowings and depreciation. Total income assessed was at Rs.1,29,30,470/- for which assessee went in appeal before the ld. CIT(A), who confirmed the stand taken by the ld. Assessing Officer
Ld. CIT(A) also recorded the submissions made by the assessee which were reiterated. In respect of rejection of books of accounts, he noted that section 145(3) cast triple onus on the assessee to maintain books of accounts in such a way to meet the following criteria: a) Satisfaction about the correctness of the account b) Satisfaction about the completeness of the accounts c) Regularity in following the method of accounting provided in section 145(1) or accounting standard as notified under section 145(2).
4.1. He thus noted that in the present case, completeness and correctness of accounts is compromised which is proven by the submission made by the assessee itself as reproduced in the impugned assessment order. He noted that assessee had itself accepted the shortcomings in the maintenance of books of accounts in the course of assessment proceedings. Aggrieved, assessee is in appeal before the Tribunal.
We have heard both the parties and perused the material on record including written submission made by the ld. Counsel of the assessee including the paper book containing 88 pages and a legal compendium containing 4 citations. We note that assessee has not complied with the conditions prescribed u/s. 145(3) in respect of books of accounts maintained by it for its business. Admittedly, it itself has expressed its difficulties in maintaining proper books of accounts owing to its nature of business and its modus operandi which has been captured by the ld. Assessing Officer in the impugned assessment order itself. Ld. Assessing Officer in the course of assessment has tested and verified the books of accounts along with supporting documents and identified discrepancies and defects, which were put forth before the assessee for explanation. Ld. CIT(A) has also gone through the submissions made by the assessee and found no infirmity in the observations and findings of ld. Assessing Officer in respect of books of accounts upholding the rejection. Having perused the orders of the authorities below as well as material on record, we do not find any reason to interfere with the findings arrived at for the rejection of books of accounts of the assessee. Accordingly, ground no.2 raised by the assessee is dismissed.
In respect of estimation of profits of the business, ld. Assessing Officer has adopted the rate of 8% to arrive at net profit margin for making the addition in the hands of the assessee. In this respect contention of the assessee is that such as estimation is without any basis and on a much higher rate not prevalent in the industry to which the assessee belongs to. To support its contention, assessee furnished profitability position of past preceding years which is tabulated below:
Asst. Sales as per Net Profit % Copy of the years P&L Account before audited P & remuneration L account & interest to enclosed at partners, page, no's, interest & of the depreciation paperbook 2011-12 27,13,69,165/- 1.42,55,674/- 5.25% 63 2012-13 32,74,62,188/- 1,45,58,667/- 4.45% 64 2013-14 35,20,49,953/- 1,58,53,000/- 4.5% 65 2014-15 30,77,86,143/- 1,39,00,987/- 4.52% 66 6.1.Assessee thus contented that its net profit margin ranges from 4.5% to 5.25% and therefore estimation made at the rate of 8% by the ld. Assessing Officer is exorbitant. More particularly, when it is before allowing remuneration and interest to partners, interest cost and depreciation. Assessee referred to certain judicial precedents wherein in similar circumstances and in the same line of business when the profit estimation was done by applying the net profit margin rate of 3% after rejection of books of accounts. For this assessee placed reliance on the following decisions:
M/s. Sri Raghavendra Lorry Book results rejected and profit Services vs DCIT LT.A. estimated @ 3% of turnover No.41/Viz/2020 Visakhapatnam Bench, ITAT dt. 22.08.2022 M/s. Sidhi Cargo Carries vs. Book results rejected and profit ACIT, estimated @3% of turnover "SMC" Bench, Cuttack ITAT dt. 02.02.2017 M/s. Sri Gundapaneni Nageswara Book results rejected and profit Rao & others-vs-ITO @3% of turnover 1799/Hyd/2013, "A" Bench, Hyderabad, ITAT dt. 29.04.2014 M/s. Maa Mangala Transport-vs- Books not produced profit ITO 1.T.A. No.313/CTK/2012 estimated @ 4% of turnover
Cuttack Bench, Cuttack ITAT dt. 24.08.2012
In this respect, from the perusal of the order of ld. Assessing Officer, we note that no comparable data was placed on record to take an estimation at the rate of 8% for computing net profit margin, despite assessee submitting that it ranges between 3% to 4% before allowing deductions on account of remuneration and interest to partners, finance charges and depreciation. Considering the overall factual matrix supported by the data furnished by the assessee for the past three years as well as findings arrived by the Coordinate Benches in the judicial precedents listed above, we find it appropriate, in order to meet the ends of justice, to consider net profit margin at the rate of 5% instead of 8% considered by ld. Assessing Officer. Accordingly, ld. Assessing Officer is directed to re-compute the net profit of the assessee by applying rate of 5% and thereafter allow the claim of deduction for remuneration and interest to partners, interest on borrowing and depreciation which remains undisturbed. Accordingly, ground no.1 raised by the assessee is partly allowed.
In the result, appeal of the assessee is partly allowed.