ACIT, CIRCLE-4, NAGPUR, NAGPUR vs. PRASHANT CONSTRUCTION COMPANY, NAGPUR

PER KHETTRA MOHAN ROY, AM:

This appeal by the Revenue is directed against the order of Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi, (for short, “CIT(A)”), dated 17/12/2024 passed under section 250 of the Income Tax Act, 1961 (for short, “Act”) which is emanating from the assessment order

ITA No. 136/NAG/2025 (Prashant Construction Company) dated 10.05.2021 passed u/s. 144 r.w.s. 144B of the Act for Assessment Year 2018-19.

“1. The Ld. CIT(A) had erred on the facts and in the circumstances of the case and in law, in holding that estimation of net profit @10% of total receipts by the AO is arbitrary and deleted addition of Rs. 3,25,34,911/-, when the assessee was non- compliant during the course of assessment proceedings. 2. The Ld. CIT(A) had erred on the facts and in the circumstances of the case and in law, in estimation of net profit@10% of gross receipts by the AO in the absence of any evidence in a work contract business cannot be considered as arbitrary. 3. The Ld. CIT(A) had erred on the facts and in the circumstances of the case and in law, in deleting addition of unsecured loans as per the provisions of section 68 of the Act amounting to Rs.20,00,000/- on the basis of evidence submitted by the assessee during the course of appellate proceedings, in the absence of not submitting any evidence during the course of assessment proceedings, thus rendering the additional evidence relied upon by the Ld. CIT(A) is contrary to the provisions of Rule 46A of Income Tax Rules. 4. The Ld. CIT(A) had erred on the facts and in the circumstances of the case and in law, in deleting addition of Rs.1,40,47,654/ on account of unexplained sundry creditors, by holding that no addition on account of sundry creditors can be made when the books of accounts have been rejected and the income of the assessee has been determined as per best judgement assessment, when the AO, without disallowing the total purchases, had made addition of Rs.1,40,47,654/- u/s 68 of the Act, by holding

ITA No. 136/NAG/2025 (Prashant Construction Company) that the credits in books of accounts on account of sundry creditors remained unexplained.

ITA No. 136/NAG/2025 (Prashant Construction Company) the assessee explained that the discrepancy arose because deductors had deducted TDS on gross receipts inclusive of GST, whereas turnover in the profit and loss account was shown net of GST, and reconciliation thereof has been submitted. Regarding the opening stock, assessee submitted that non-filing of return for the preceding assessment year was not intentional but occurred due to delay in completion of tax audit. It was also submitted that reassessment proceedings for the earlier year were pending and the statutory auditor had accepted the opening stock after due verification. In respect of sundry creditors and unsecured loans, assessee undertook to furnish complete details including confirmations, PAN and supporting evidences within the extended time sought. Thus, according to the assessee, there was substantial compliance and the delay was attributable to genuine hardship and extraordinary circumstances prevailing during the pandemic period, and therefore the assessment ought not to have been completed ex parte under section 144 of the Act. Upon considering the submissions of 4

ITA No. 136/NAG/2025 (Prashant Construction Company) assessee, Ld. AO concluded that assessee furnished reconciliation statement, but not furnished any supporting documentary evidence. Ld. AO further observed that merely filing of return of income is not sufficient to prove the genuineness of the correctness of the particulars furnished in the return of income, assessee has failed to prove the onus lying upon it to prove the genuineness of the transactions reported in return of income. In absence of complete information, Ld. AO completed the assessment u/s. 144 r.w.s. 144B of the Act making addition of Rs. 3,25,34,911/- on account of estimation of net profit @10% of total turnover after abatement of income declared in return; and addition of Rs. 1,40,47,654/- on account of unexplained cash credits/sundry creditors u/s. 68 of the Act and Rs. 20,00,000/- on account of unexplained unsecured loans.

ITA No. 136/NAG/2025 (Prashant Construction Company) material available on record, observed that the Assessing Officer rejected the books of account under section 145(3) being not satisfied about the completeness and correctness of books of account and estimated net profit at 10% of turnover without bringing any comparable cases or cogent material on record. It was held that mere rejection of books of account does not automatically justify arbitrary enhancement of income and that estimation of profit must be based on reasonable and rational parameters, particularly the past history of the assessee. Ld. CIT(A) noted that the assessee was engaged in execution of Government construction contracts in Naxalite affected areas where operational costs were comparatively higher and profit margins fluctuated depending upon stage of completion and escalation clauses in contracts coupled with defect liability. It was further observed that the assessee had explained the delay in compliances on account of disputes amongst partners, resignation of accountant and serious health issues of a key partner. According to the Ld. CIT(A), the Assessing 6

ITA No. 136/NAG/2025 (Prashant Construction Company) Officer failed to establish any specific defect in the method of accounting or justify deviation from the profit rates accepted in earlier years, particularly in view of the fact that the nature of business is one and the same. Relying upon settled legal principles and the decision of the Hon’ble Madras High Court in the case of Commissioner of Income Tax vs. Shri Srinivasan Devendran, on 10.01.2023 Ld. CIT(A) held that estimation of net profit at 10% was excessive and arbitrary since there is no correlation with part history. Accordingly, the addition of Rs. 3,25,34,911/- made on account of differential estimated net profit was deleted. Ld. CIT(A) further held that once income was estimated after rejection of books of account, separate addition under section 68 on account of sundry creditors was not warranted in absence of any independent incriminating material or enquiry by the Assessing Officer. Since the Assessing Officer had merely made an ad hoc addition of 10% of sundry creditors without proper verification, the addition of Rs. 1,40,47,654/- was deleted.

ITA No. 136/NAG/2025 (Prashant Construction Company) With regard to unsecured loans of Rs. 20,00,000/-, the Ld. CIT(A) observed that the loans were received from identifiable persons and interest thereon was paid after deduction of tax at source, which was duly reflected in TDS returns containing PAN details of the lenders. The Ld. CIT(A) held that mere non-mentioning of PAN in the audit report could not justify addition under section 68, particularly when no independent enquiry was conducted by the Assessing Officer. Accordingly, the addition of Rs. 20,00,000/- was also deleted and the appeal of the assessee was allowed.

ITA No. 136/NAG/2025 (Prashant Construction Company) difficulties, partner disputes and medical emergencies with documentary evidence. Since the assessee did not furnish requisite details relating to expenses, creditors and unsecured loans, the Assessing Officer was justified in estimating net profit at 10% and making additions under section 68. The Ld. DR further submitted that the Ld. CIT(A) erred in deleting the additions without proper verification and wrongly relied upon past history of the assessee. It was argued that the assessee failed to discharge the onus cast upon it under section 68 in respect of sundry creditors and unsecured loans. Accordingly, the order of the Ld. CIT(A) deserves to be set aside and that of the Assessing Officer be restored in entirety.

ITA No. 136/NAG/2025 (Prashant Construction Company) disputes amongst partners and serious illness of a key partner. It was argued that the Assessing Officer neither pointed out any specific defects in the books nor brought any comparable cases on record before estimating profit at 10%, which was arbitrary and excessive. The assessee being engaged in Government contract works in Naxalite affected areas incurred higher operational costs and the declared profit rate was consistent with earlier accepted years. Ld. Counsel further submitted that once income was estimated after rejection of books, separate addition under section 68 in respect of sundry creditors was unwarranted in absence of independent enquiry. Similarly, unsecured loans were received from identifiable parties and interest thereon was subjected to TDS and disclosed in statutory returns. Therefore, the Ld. CIT(A) rightly deleted all the additions after proper appreciation of facts and settled legal principles, therefore, the same should be upheld.

ITA No. 136/NAG/2025 (Prashant Construction Company) 7.1 Ground Nos. 1 & 2: It is an undisputed fact that assessee failed to furnish complete details and supporting evidences called for by the Assessing Officer during the course of assessment proceedings. The assessee also could not substantiate the correctness and completeness of the books of account maintained for the year under consideration. Therefore, in the facts and circumstances of the case, rejection of books of account under section 145(3) and completion of assessment under section 144 of the Act cannot be faulted with. However, at the same time, it is equally settled proposition of law that after rejection of books of account, estimation of income should be made on some reasonable and rational basis and not arbitrarily or erratically, the Assessing Officer estimated the net profit at 10% of the gross turnover without bringing any comparable cases on record or demonstrating as to how such rate can be justified. There is no whisper in the assessment order regarding prevailing profit margins in similar line of business or deviation from assessee’s past history. Therefore, estimation of profit at 10% appears to 11

ITA No. 136/NAG/2025 (Prashant Construction Company) be excessive and arbitrary, erratic and whimsical which is unconscionable. The assessee is engaged in execution of Government construction contracts in Naxalite affected areas of Gadchiroli District where operational and overhead costs are comparatively higher which has dampening effect on margins. The assessee has also explained that profit margins fluctuate depending upon the stage of completion of contracts and escalation receipts. Considering the entire gamut of facts and circumstances, nature of business carried on by the assessee, past history and keeping in view the principles of reasonable estimation relying upon comparables, we direct that estimation of net profit at 6% of the gross turnover would meet the end of justice in view of the fact that net profit ratio for A.Y. 2017-18 and 2018-19 was 5.95% and 4.08%. Accordingly, we direct the Assessing Officer to recompute the income of the assessee by adopting net profit rate at 6% of the gross turnover as per return of income for Rs. 52,86,07,324/- after allowing due

ITA No. 136/NAG/2025 (Prashant Construction Company) credit for income already declared by the assessee. Revenue partly succeeds in Ground Nos. 1 & 2.

7.2 Ground Nos. 3 & 4:- As regards the separate addition made under section 68 on account of sundry creditors, it is a settled proposition of law that once the business income is determined on estimated basis after rejection of books of account, a separate addition in respect of trading liabilities arising from business transactions ordinarily cannot be sustained in absence of any independent incriminating material brought on record by the Assessing Officer to establish that there do not have any nexus with business. The additional income so determined is always available for telescoping with the amount of trading liabilities and no separate addition is warranted. With regard to the addition of unsecured loans amounting to Rs. 20,00,000/-, the assessee failed to furnish complete confirmations, financial statements, bank statements and other evidences establishing identity, creditworthiness and genuineness of the transactions either before the

ITA No. 136/NAG/2025 (Prashant Construction Company) Assessing Officer or before us. Even on legal side, we find substantial merit in the submission made by Ld. AR that once the AO has rejected books of assessee u/s 145, the addition u/s 68 cannot be made. Their Lordship in CIT Vs. Dulla Ram (2014) 42 taxmann.com 349 (Punjab & Haryana HC) have approved this proposition in following terms:

“10. An Assessing Officer may, while considering a return of income, inspect the account books and, if satisfied, that account books do not reflect the true income of an assessee, reject the same. Account books once rejected, are ruled out of consideration and cannot be pressed into service whether by the assessee or the revenue. Thus, when account books are rejected, it would follow, as a necessary corrolary, that entries in the account books whether suspicious or not cannot be relied by the revenue or the assessee. To hold otherwise, would, in essence, render account books valid for certain purposes and invalid for others, a course impermissible in law. The Assessing Officer rejected the account books in their entirety and thereafter proceeded to assess income by applying a flat rate of profit of 10%. After applying a flat rate of profit of 10%, the Assessing Officer added Rs.1,98,298/- to the income of the assessee on the basis of certain 'entries' deemed to be suspicious. The Commissioner of Income Tax (Appeals) as well as the Tribunal have rightly held that as books of accounts were rejected in their entirety, the Assessing Officer could not rely upon any entry in the books of accounts for making an addition of Rs.1,98,298/-. A bare reading of Section 68 of the Act would reveal that it would not apply to a situation where account books have been rejected.” The same view is also propounded in (i) CIT vs. K.M.N Naidu (1996) 221 ITR 451 (Mad. – HC); and (ii) CIT vs. 14

ITA No. 136/NAG/2025 (Prashant Construction Company) Modern Rubber Industries (2013) 37 taxmann.com (All. – HC)

Order pronounced on 19.05.2026 under Rule 34 of Income Tax (Appellate Tribunal) rules 1963

Sd/- sd/- PAWAN SINGH KHETTRA MOHAN ROY JUDICIAL MEMBER ACCOUNTANT MEMBER

Nagpur: Dated: 19/05/2026 vr/-

ITA No. 136/NAG/2025 (Prashant Construction Company) Copy to: 1. The Assessee 2. The Revenue 3. The Pr.CIT concerned. 4. The DR, ITAT, Nagpur 5. Guard file. By order Vukkem Digitally signed by Vukkem Rambabu Rambabu Date: 2026.05.19 17:04:44 +05'30' Senior Private Secretary ITAT, Nagpur