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Facts
The assessee, a partnership firm engaged in government contracts, filed its return for AY 2017-18. The Assessing Officer (AO) rejected the books of accounts due to multiple defects and estimated the business income at 15% of gross receipts. The First Appellate Authority (FAA) upheld the rejection but restricted the estimation to 8%.
Held
The Tribunal upheld the rejection of books of accounts, citing multiple defects and non-compliance with TDS provisions. However, considering the nature of government contracts and competitive bidding, the Tribunal reduced the estimated income to 6% of gross receipts from the 8% estimated by the FAA.
Key Issues
Whether the rejection of books of accounts by the AO and estimation of income at 8% by the FAA is justified, and if the estimation can be reduced.
Sections Cited
250, 143(3), 131, 145(3), 44AB, 44AD, XVIIB
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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI INTURI RAMA RAO
आदेश/ O R D E R
PER GEORGE GEORGE K, VICE PRESIDENT:
This appeal filed at the instance of the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 26.09.2025 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2017- 18.
2 -: 2. The issues argued by the Ld.AR is whether the First Appellate Authority (FAA) is justified in confirming the assessment order in rejecting the books of accounts and estimating the income at 8% of gross contract receipts (AO estimated the income of the assessee at 15% of the gross contract receipts)
Brief facts of the case are as follows: Assessee is a partnership firm. It is engaged in government contract (primarily construction of roads, culverts, etc). For the assessment year 2017-18, return of income was filed on 07.11.2017 declaring total income of Rs.9,98,980/- against the gross contract receipts of Rs.18,48,81,846/-. The return was selected for scrutiny and order u/s.143(3) of the Act was completed on 31.12.2019 rejecting the books of accounts of the assessee due to multiple defects. The AO estimated the business income at 15% of the gross receipts after allowing interest and allowance claimed by the partnership firm.
Aggrieved by the order of the assessment completed by rejecting the books of accounts and estimating the income at 15% of gross receipts, assessee filed appeal before the FAA. The FAA upheld the rejection of books of accounts. However, FAA held that estimation of 15% by the AO is arbitrary and directed to restrict the 3 -: estimation of income at 8% of the gross receipts. Accordingly, the appeal filed by the assessee was partly-allowed.
Aggrieved by the order of the FAA, assessee has filed the present appeal before the Tribunal. The Ld.AR submitted that the assessee’s books of accounts are audited and there is no adverse observation by the auditor who had certified the audit report. Therefore, it was submitted that rejection of books of accounts by the AO is erroneous. Further, it was contended that estimation by the FAA at 8% of gross receipts is highly excessive and arbitrary and requested the same may be reduced to 3%. In this context, the Ld.AR had filed a comparative chart disclosing GP for the assessment years 2015-16 to 2018-19 (disclosing GP of 4.70% to 1.95%). Further, the Ld.AR relied on the order of the Chennai Bench of the Tribunal in the case of Shri Lakshmanan vs. ITO in (order dated 28.04.2021) and submitted that assessee in the said case was also a government contractor and Tribunal in said case estimated the GP at 3% of the gross receipts.
The Ld.DR on the other hand has filed brief written submission justifying the rejection of books of accounts and estimation made by the FAA at 8% of gross receipts. In support of the contention that estimation made by the FAA at 8% of the gross
We have heard rival submissions and perused the material on record. First, we will adjudicate whether the AO has rightly rejected the books of accounts. During the course of assessment proceedings, assessee was asked to explain decreasing in GP when there was an increase in turnover. It was also observed by the AO that there was abnormal increase in expenditure. During the course of assessment proceedings, summons u/s.131 of the Act was issued to ten parties. However, only seven creditors filed their reply. Out of seven replies received by the AO, discrepancy was noticed in replies of three creditors as there was difference in amounts confirmed. One of the parties, Sri Lakshmi Tyres stated that there was no transaction with the assessee during the relevant period. The assessee had also failed to submit the entire list of sundry creditors. Further, the AO also noticed that there was huge outstanding shown in the name of daily wage earners and the expenses were not correlated with the receipts. Further, it was noted by the AO that the labour expenses were inflated via self- made vouchers and not paid weekly as claimed. There was non- compliance with the chapter XVIIB since there was TDS defaults on 5 -: contract bills. Though in the audit report there was no adverse noting by Auditor but during the course of assessment proceedings clearly multiple defects were identified by the AO which was not controverted during the course of assessment proceedings, the appellate proceedings nor before us. Therefore, on facts of the instant case we uphold the rejection of books of accounts u/s.145(3) of the Act.
As regards the estimation of income at 8% of the gross receipts, the Ld.AR had relied on the comparable figures for the assessment years 2015-16, 2016-17 and 2018-19. For the relevant assessment year namely 2017-18, the gross percentage is only 1.70% on a turnover of Rs.18,48,81,846/-. The Ld.AR had requested for adopting the average gross percentage for the assessment years 2015-16 to 2018-19 for the relevant assessment year. We find that for AYs 2015-16, 2016-17 & 2018-19, assessments were not selected for scrutiny and therefore, gross percentage declared by the assessee was never tested. Therefore, the plea of the assessee to adopt average gross percentage for the relevant assessment year is rejected. Further, assessee nor department has furnished comparable cases for adopting of GP for the relevant assessment year. Therefore, adoption of 8% u/s.44AB of the Act of gross receipts is an important guideline / yardstick for 6 -: determination of income when there is no comparable cases. However, for presumption of taxation u/s. 44AD of the Act, the turnover ought to be less than Rs.2 crores. In the instant case, the turnover for the relevant assessment year is far exceeding the threshold limit prescribed u/s.44AD of the Act. Hence, taking into consideration that assessee firm undertakes government contracts and the bids are placed in highly competitive market, we deem it appropriate to adopt income of 6% of gross receipts instead of 8% estimated by the FAA.
In the result, the appeal filed by the assessee is partly-allowed.
Order pronounced in the open court on 3rd February, 2026 at Chennai.