DY. COMMISSIONER OF INCOME TAX , CIRCLE-3(1), HYDERABAD vs. RKI BUILDERS PRIVATE LIMITED, HYDERABAD

PER S.S.GODARA, J.M. : This Revenue’s appeal for AY.2014-15 arises from the CIT(A)-3, Hyderabad’s order dated 16-10-2017 passed in case No.0660 / DC-3(1) / Hyd / CIT(A)-3 / 2016-17, involving proceedings u/s.143(3) of the Income Tax Act, 1961 [in short, ‘the Act’]. Heard both the parties. Case file perused.

3.Ld.CIT(A) erred in deleting the addition made by AO since the income in question either directly flowed from the business of the assessee or was closely connected thereto, as much as, no separate addition on that account was warranted after estimating the income”.

“IX) Ground Nos.2 in appeal has not been pressed by the appellant. Hence, the same is dismissed. X] Ground No.3 of original grounds and Additional Ground No.1 are against rejection of books by the assessing officer. In para 2.1 of the written submissions, the appellant had given an account on the factual matrix of the case and judicial principles concerning rejection of accounts by the assessing officer. Relevant documentary evidence was also filed. The submissions of the appellant are extracted hereunder: 2.1. REJECTION OF BOOKS OF ACCOUNT: 2.1.1. The law with regard to invocation of S.145(3) is well settled. As per the guidelines issued in this regard by various judicial authorities, rejection of books of account should not be resorted to in a casual or mechanical fashion………………………………………………. In view of the above factual and legal submissions, the rejection of books of account and consequent assessment on estimate basis is legally unsustainable and hence the Appellant humbly prays the CIT (A) to hold that the books of account maintained were correct and complete and accordingly to direct the AO to accept the income returned. After going through the assessment order, the submissions made by the appellant and the judicial decisions on the subject, it is opined that there is merit in the contentions of the appellant. Rejection of books of account should not be resorted to in a mechanical manner. The onus is on the AO to show that the books of account maintained by the appellant are incorrect or incomplete and true profits cannot be deduced there from. The inference with regard to the incorrect and incomplete nature of accounts should be based on specific deficiencies in the accounts. The AO is to carefully scrutinize the accounts and make necessary enquiries, based on suspicion or any other feature suggesting any falsity, and to bring cogent reasons and specific material on record to substantiate the alleged defects in the accounts. Mere surmises, presumptions, lack of sufficient time for verification of accounts, considerations cannot be the basis for rejection. Further, where the accounts have been audited with unqualified reports there is no scope for rejection of the same unless any specific mistake therein is pointed out with supporting evidence. Where the book results were accepted in the earlier years it is all the more important for the AO to highlight specific instances of mistakes in the books of account and other records before embarking on rejection. Another fundamental requirement is that the assessing officer cannot go ahead with rejection unilaterally in violation of basic principles of natural justice. It is obligatory on the part of the AO to communicate such defects to the appellant and to call for an explanation on the alleged infirmities thereby affording a proper and reasonable opportunity to rebut the allegations of the AO. Careful and objective consideration of such rebuttals, the AO is expected to resort to rejection of accounts. In the case of the appellant none of these principles was followed by the assessing officer. The books of account of the appellant were audited under Companies Act and Income Tax Act and both the reports were clear i.e., The assessments for two immediate preceding years i.e., A.Y.2012-13 and 2013-14 were completed u/s 143(3) and the books of account for such years were accepted. The average rate of net profit from the civil contract receipts (excluding trading activity) for such years was about 6.02%, as against 6.05% for A.Y.2014-15. Thus, there was a slight increase in the rate of net profit of the. Further, in compliance to the notice issued u/s 142(1) dt.09.11.2016, the appellant filed the details documents called for by the AO vide the questionnaire enclosed to such notice. In fact, no specific defect, in respect of the details and evidence filed, was pointed out to the Appellant. Nor was the Appellant called up on to furnish any further clarifications on the doubts, if any, entertained by the AO in that regard. As can be seen from the assessment order itself, the case was taken up for scrutiny towards the end of the time limit for completion of assessment. It is clear from para 4 of the order that the primary ground, on which the books were rejected, was that the time limit for completion of assessment was going to get booked by 31.12.2016. In other words, lack of sufficient time for necessary certificate was the ground for rejection. The appellant contended that though the AO tried to justify the rejection by listing out certain reasons in the order, the reasons so stated were without legally sustainable basis. Detailed submissions on each of the issues were filed. On a careful consideration of the factual matrix, the contention of the appellant carry merit and the AOs rejection of books were not based on tangible and clear evidences or material. Thus, the very rejection of accounts was arbitrary and against principles of natural justice. Therefore, the AO is directed to accept the book results and accordingly to accept the income returned. Thus, the ground 3 of original grounds and additional ground 1 of the appeal are allowed. XI). Ground Nos.4, 5 and 6 of original Grounds and additional ground no.2 are against the adoption of uniform rate of 15% while estimating the income. Though the grounds against rejection of accounts are allowed, the grounds raised on merits of the assessment are also considered for proper adjudication of the issue involved. The appellant filed detailed submissions in this regard vide para 2.2 of written submissions. The same are reproduced hereunder: 2.2. ESTIMATE OF BUSINESS INCOME @ 15% OF GROSS TURNOVER: Without prejudice to the prayer made in para 2.1 above, the Appellant further submits that the right to reject accounts does not confer the right to make an arbitrary assessment……………………………………... In view of the above factual and legal submissions, the estimate of business income at a uniform rate of 15% is legally unsustainable and hence the Appellant humbly prays the CIT (A) to delete the addition made on that account and accordingly direct the AO to accept the income returned. Having gone through such submissions and relevant material the appellant's contention that the right to make an arbitrary assessment holds merit. The AO is bound to give the clear finding for the rate adopted while estimating the income of an appellant. However, in the instant case, the income from business was at estimated @ 15% without giving any justification therefor. The AO did not note the fact that the gross revenue of the Appellant included trading turnover apart from civil contract receipts. Therefore, in all fairness. the AO should have excluded the trading turnover while estimating the income from business and accordingly should have considered only contract receipts for such purpose. Further, even in respect of estimate of income from civil contracts the rate adopted should normally be based on comparative cases and the same should be stated in the order. Thus, there is force in the argument of the appellant that where the profit is sought to be determined by adopting a net profit rate, the AO is bound to take the rate of profit disclosed in the appellant's own case for earlier years and rate of profit normally accepted in respect of others in the same industry. The net profit from the civil contracts declared by the Appellant in its accounts for A.Y.2014-15 was about 6.05% as against average rate of about 6.02% for the two immediately preceding years and accordingly it was almost on par with the appellant's performance in the preceding years. In so far as similar or identical cases are concerned, the jurisdictional Bench of Hon'ble ITAT has been upholding the estimate of net profit @8% for main/direct contracts and 5% on sub contracts. Accordingly, adoption of 15% by the AO was without any basis and, as such, was not justified. The details of Main and sub-contracts of the appellant were filed. Considering the same, the total income to be estimated in the case of the appellant, at the rates upheld by the ITAT, would work out to Rs.3,89,11,587/- whereas the total income returned by the appellant as per its accounts was much higher at Rs.4,91,63,239/-. Hence, Ground Nos.4, 5 and 6 in appeal are allowed and the AO is directed to accept the book results.

4.1. We do not find force in either parties’ submission in entirety. This is for the reason that it was bounden duty of the assessee not only to cast its onus of proving the corresponding contracts as well as sub-contracts executed in the relevant previous year but also the cogent supportive evidence of the expenditure items wholly and exclusively incurred for deriving the business income/turnover. The fact also remains that the Assessing Officer had nowhere commented upon the assessee’s voluminous evidence even if it is accepted that it has placed on record before us some additional details as well. We make it clear that hon'ble jurisdictional high court’s recent decision in ITTA No. 40 & 41/2020 PCIT Vs. Mech Engineers and Vice versa holds that contractual and sub-contractual receipts have to be assessed @9% and 6%; respectively.

4.2. Faced with this situation, we restore the Revenue’s instant grievance back to the Assessing Officer with a clearcut direction that it shall be incumbent upon the assessee to prove all kinds of receipts forming part of turnover as well as the corresponding expenditures’ claims failing which the same would stand assessed in light of the hon'ble jurisdictional high court’s foregoing decision. Ordered accordingly.

Order pronounced in the open court on 27th January, 2022