VEDKIRAN INFRA PROJECTS PRIVATE LIMITED,HYDERABAD vs. DCIT, CIRCLE-8(1), HYDERABAD, HYDERABAD

Succinctly stated, the assessee company, which is engaged in the business of real estate, i.e., land development and plotting, had e-filed its return of income for AY 2017-18 on 03.11.2017, declaring an income of Rs. 1,10,12,300/-.

During the course of the assessment proceedings, the AO observed that the assessee company that was engaged in the business of real estate, i.e., development and plotting of land, had, during the subject year, debited an amount of Rs.1,21,45,175/- in its Profit & Loss account under the head “Direct expenses”, i.e., towards land development, construction expenses and other direct expenses. The AO observed that the assessee company had failed to furnish any evidence for the direct expenses that were claimed as a deduction in its Profit & Loss account. Apart from that, the AO observed that the expenditure claimed by the assessee company was on the higher side when compared to the similar entities engaged in the same line of business. Accordingly, the AO rejected the “books of account” of the assessee company and estimated its net profit at 12.5% of its turnover of Rs. 18,84,62,620/-, resulting in a consequential addition of Rs. 1,25,45,525/-. Apart from that, the AO made an addition of unexplained cash deposits of Rs. 13 lacs made in the bank account of the assessee company during the demonetisation period. The AO, vide his order passed under Section 143(3) of the Act, dated 30.12.2019, determined the income of the assessee company at Rs. 2,48,57,825/-.

The assessee company, being aggrieved with the CIT(A) order, has carried the matter in appeal before us.

We have heard the Ld. Authorised Representatives of both parties, perused the orders of the authorities below and considered the judicial pronouncements as have been pressed into service by them to drive home their respective contentions.

Shri. C Maheshwar Reddy. Ld. Authorised Representative (for short, “AR”) for the assessee company, at the threshold of hearing of the appeal, submitted that the same involves a delay of 151 days. Elaborating on the reasons leading to the delay, the Ld. AR submitted that the same had crept in because of an inadvertent mistake on the part of a staff member of its counsel who was engaged for filing the appeal. The Ld. AR submitted that though the assessee company had, within the prescribed period, approached its counsel and provided the requisite details and instructions for filing the present appeal, but it was on account of omission on the part of the latter’s office that the said appeal inadvertently could not be filed within the stipulated time period. The Ld. AR submitted that the moment the aforesaid omission to file the appeal had come to light, the same was immediately filed, but by the time it involved a delay of 151 days. The Ld. AR to support his explanation regarding the reasons leading to the delay in filing the present appeal had drawn our attention to the affidavit of Shri. Nalla Sudhakar, Managing Director of the assessee company, dated 07.11.2025 and that of Shri Manukuntla Sridhar, accountant in M/s B. Narsing Rao and Co., LLP, i.e the Chartered Accountant of the assessee company, wherein the aforesaid factual position was deposed by the respective deponents.

Per Contra, the Ld. DR objected to the seeking of the condonation of the delay involved in filing the present appeal by the assessee company/appellant.

We have thoughtfully considered the explanation of the assessee company regarding the reason leading to the delay in filing the present appeal. In our view, as the delay in filing the preset appeal is not attributable to any malafide approach or lackadaisical conduct of the assessee company, but had crept in because of a bonafide omission on the part of the staff of the assessee’s counsel, a fact that can safely be gathered from the affidavit of Shri Manukuntla Sridhar (supra), therefore, we are of firm conviction that the same in all fairness merits to be condoned. We, thus, condone the delay of 151 days involved in the filing of the present appeal by the assessee company.

On merits, the assessee company has assailed the impugned order of the CIT(A) primarily on two grounds, viz. (a) rejection of its audited books of accounts without pointing out any specific defect; and (b) estimation of its profit at 12.5% of its turnover without referring to any comparable case or placing on record any evidentiary basis.

Shri. C. Maheshwar Reddy, CA – Ld. Authorised Representative (for short, “Ld. AR”) of the assessee company, submitted that the assessee company had produced before the AO its books of accounts that were duly audited under Section 44AB of the Act. The Ld. AR submitted that the AO had neither pointed out any specific defects or inconsistencies, nor identified any false entries in the books of accounts of the assessee company. Elaborating further on his contention, the Ld. AR submitted that a general observation regarding the absence of some vouchers cannot justify the rejection of the entire book results of the assessee company. The Ld. AR submitted that the declared profit rate of 5.84% disclosed by the assessee company was both consistent with that prevailing in the trade line and also that disclosed in the past years. The Ld. AR submitted that the AO had adopted the NP rate of 12.5% mechanically, without referring to any comparable case or placing on record any reason that would justify the same.

Per Contra, the Ld. Departmental Representative (for short, “DR”) supported the orders of the lower authorities. The Ld. DR submitted that as the assessee company had failed to furnish adequate evidence to substantiate the authenticity of its claim of having incurred the development expenditure, therefore, the AO was justified in rejecting its books of account and estimating its income.

We have thoughtfully considered the contentions advanced by the Ld. Authorised Representatives of both parties in the backdrop of the orders of the authorities below.

At the threshold, we may herein observe that Section 145 of the Act permits rejection of the book results only where the AO records a proper satisfaction that the accounts are incorrect, incomplete, or unreliable. In our view, such satisfaction must be based on specific defects in the books of accounts and not on generalised observations. However, we find that in the present case before us, the AO had merely stated that no evidence was furnished to support the development expenses of Rs. 1,21,45,525./-, without identifying any specific discrepancy, inconsistency, false or incorrect entry in the books of accounts.

On the other hand, we find that the assessee company had produced audited financial statements and maintained regular books of account that have been subjected to tax audit. We find that the AO has not recorded any finding that the entries recorded in the books of accounts of the assessee company were false, fabricated, inflated or unverifiable. The courts have consistently held that mere absence of some vouchers for labour or petty expenses, in a business inherently involving such expenditure, cannot ipso facto justify rejection of the entire books of accounts.

Be that as it may, we are of the considered view that even where the book results of an assessee are rejected, the resulting estimate must be fair, reasonable, and supported by material. In the present case before us, we find that though the AO had estimated the income of the assessee company by adopting a flat rate of 12.5% of its turnover, allegedly based on jurisdictional ITAT practice, but, neither any such order of the Tribunal nor any comparable case of any other assessee in the same trade line involving factual similarities had been referred by him. Also, we find that the CIT(A) had not undertaken any such independent examination and merely affirmed the rate of 12.5% adopted by the AO.

We are of firm conviction that in the absence of comparables, supporting data, or specific defects in the books of accounts of the assessee company, the estimation of the income of the assessee company based on the adoption of a flat rate of 12.5% on its gross turnover is nothing but arbitrary. In fact, we further find that the assessee’s declared profit rate of 5.84% based on its audited financials had also not been shown to be incorrect.

We, thus, find substance in the Ld. AR’s contention that as the AO had not based on any specific defects but generalised observations, rejected the books of accounts of the assessee company, thus, the same on the said count itself cannot be sustained in the eyes of law. Apart from that, we are of the view that the very estimation of the income of the assessee company based on an ad hoc rate, i.e., 12.5%% of its gross turnover in itself is fallacious and falls short of adoption of a judicious approach by the AO. We say so, for the reason that though the AO had observed in the assessment order that the estimation of the income of the assessee company after rejection of its book results, i.e., @12.5% of its gross turnover is based on the view taken by the jurisdictional Tribunal in the case of similarly placed entities who were engaged in the same business of plotting of land, but there is no reference by him of any such case, what to say about affording of any opportunity to the assessee company to rebut the adoption of the said profit rate in the course of the assessment proceedings. Apart from that, there is no whisper in the assessment order of the NP rate of any such assessee in the same trade line that would have justified the adoption of the same for estimating the profit of the assessee company for the subject year. We, thus, find no justification, both in the rejection of the book results and the estimation of the net profit of the assessee company de hors any basis, and thus not being able to persuade ourselves to concur with the view taken by the authorities below, are constrained to vacate the impugned addition made/sustained by them.

Resultantly, the CIT(A) order is set aside and the impugned addition of Rs. 1,21,45,525/- made by the AO is vacated.

In the result, the appeal of the assessee company is allowed in terms of our aforesaid observations.