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Facts
The assessee, Guhana Educational Society, filed its return of income for AY 2017-18 declaring Nil income, claiming exemption under Section 10(23C)(iiiab). The Assessing Officer (AO) rejected the assessee's books of account due to various deficiencies in supporting documents and estimated income at 8% of gross receipts. The First Appellate Authority confirmed the AO's action.
Held
The Tribunal held that while the rejection of books of account by the AO was not wholly unjustified due to certain deficiencies in self-made vouchers and lack of third-party evidence for substantial expenses, the estimation of income at 8% of gross receipts was on the higher side. The Tribunal found merit in some of the assessee's explanations and considered it appropriate to restrict the estimation of income to 5% of gross receipts.
Key Issues
Whether the rejection of books of account and estimation of income at 8% of gross receipts by the AO was justified, and if not, what should be the correct estimation.
Sections Cited
10(23C)(iiiab), 143(2), 142(1), 12A, 143(3), 37(1)
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Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MADHUSUDAN SAWDIA
ORDER Per Madhusudan Sawdia, A.M.: This appeal is filed by Guhana Educational Society (“the assessee”), feeling aggrieved by the order passed by the Learned ADDL/JCIT(A)-3, Mumbai (“Ld. First Appellate Authority”) dated 13.03.2025 for the A.Y.2017-18. 2. Assessee has raised the following grounds of appeal:
1. The order of the learned CIT (A) is erroneous both on facts and in law;
1.
The learned CIT (A) erred in confirming the action of the Assessing Officer in rejecting the books of account and in resorting to estimation of income at 8% of the receipts of Rs.2,58,90,677/-;
ITA 784/Hyd/2025 Guhana Educational Society
3. The learned CIT (A) erred in determining the total income at Rs.20,71,254/- by estimating the same at 8% of the gross receipts without considering the fact that the books of account have been properly recorded and the income is correctly arrived at; 4. Any other ground/grounds that may be urged at the time of hearing.”
The brief facts of the case are that the assessee is a society registered under the Andhra Pradesh Societies Act, which filed its return of income for the Assessment Year 2017–18 on 28.10.2017, declaring Nil income after claiming exemption under section 10(23C)(iiiab) of the Income Tax Act, 1961 (“the Act”). The case of the assessee was selected for limited scrutiny through CASS, and accordingly, notices under sections 143(2) and 142(1) of the Act were issued by the Learned Assessing Officer (“Ld. AO”) to the assessee. During the course of assessment proceedings, the Ld. AO observed that the assessee did not possess registration under section 12A of the Act nor approval under section 10(23C) of the Act. Accordingly, the assessee was assessed in the status of an Association of Persons. The Ld. AO further noticed that the assessee had claimed various administrative and other expenses on the basis of self-made vouchers without producing proper supporting bills or third-party evidences. On account of these deficiencies, the Ld. AO rejected the books of account of the assessee and estimated the income at 8% of the gross receipts of Rs.2,58,90,677/-, resulting in an assessed income of Rs.20,71,254/-. The assessment was completed by the Ld. AO under section 143(3) of the Act vide order dated 12.12.2019.
Aggrieved with the order of the Ld. AO, the assessee preferred an appeal before the Ld. First Appellate Authority, who, not being convinced with the submissions of the assessee, confirmed the action of the Ld. AO and dismissed the appeal of the assessee.
Aggrieved with the order of Ld. First Appellate Authority, the assessee is in appeal before the Tribunal. At the outset, the Learned Authorized
ITA 784/Hyd/2025 Guhana Educational Society Representative (“Ld. AR”) submitted that the solitary issue involved in the present appeal is the rejection of books of account and estimation of income at 8% of gross receipts. It was contended that the assessee maintained proper books of account along with vouchers for each and every expenditure, and the accounts were duly audited by a qualified Chartered Accountant. Despite this, the Ld. AO rejected the books of account without valid justification. The Ld. AR specifically invited our attention to para no. 3.1 of the assessment order and submitted that the discrepancies noted therein are factually incorrect. The Ld. Ld. AO has noted that the purchase of Xerox machine was booked for Rs.99,855/- whereas the same machine was shown in the assets at Rs.1,74,196/-. With regard to the purchase of Xerox machine amounting to Rs.99,855/-, it was explained that the balance sheet reflected a figure of Rs.1,74,196/- because the assessee owned three Xerox machines at three different locations. During the relevant year, addition of only Rs.99,855/- was made in one location, while the balance represented the cumulative closing balance of all machines. In this regard, reliance was placed on the ledger accounts of Xerox machines placed at page nos. 87 and 88 of the paper book. As regards the expenditure of Rs.12,140/- paid to the RTA, Telangana, for traffic violation, it was submitted that the same was incurred inadvertently during conveyance and should not be treated as a penalty disentitled for deduction. With respect to the observation of the Ld. Ld. AO relating to inclusion of JK White Cement under celebration expenses, the Ld. AR invited our attention to the vouchers placed at page no. 21 of the paper book and clarified that the expenditure was not for cement but for 5 kg lime purchased on 11.08.2016 for marking and decoration in connection with Independence Day celebrations. Regarding travelling expenses, it was submitted that the expenses were incurred for routine travel of staff and for travel of visiting IIT lecturers invited by the assessee institution for academic purposes. It was explained that taxi drivers and local transport providers often do not issue formal bills, and therefore self-made vouchers were prepared. It was emphasised that self-made vouchers were used only where third-party bills were not available. In the Page 3 of 8
ITA 784/Hyd/2025 Guhana Educational Society alternative, the Ld. AR submitted that even assuming some deficiencies existed, the Ld. AO ought to have disallowed specific expenses instead of rejecting the audited books of account and estimating income. It was therefore pleaded that the estimation be deleted or suitably reduced.
Per contra, the Learned Departmental Representative (“Ld. DR”) strongly relied upon the orders of the lower authorities and submitted that there was no infirmity in the rejection of books of account. It was contended that the Ld. AO had rightly identified serious discrepancies in self-made vouchers, justifying estimation of income. With regard to the penalty of Rs.12,140/- paid to the RTA, Telangana, for traffic violation, the Ld. DR submitted that the same is clearly hit by Explanation 1 to section 37(1) of the Act and is not allowable. No serious objection was raised by Ld. DR regarding the explanation submitted by the Ld. AR on Xerox machines. Further, as regards celebration expenses, the Ld. DR invited our attention to a voucher placed at page no. 34 of the paper book showing purchase of 50 kg white cement on 28.01.2017 under celebration expenses through a self-made voucher, thereby supporting the finding of the Ld. AO. On the issue of travelling expenses, the Ld. DR pointed out that although the assessee claimed travel expenses of IIT lecturers, no professional fees payable to such lecturers were found debited in the books. It was further submitted that even for substantial expenses such as Rs.12,000/- on 14.03.2017 for purchase of chicken and Rs.19,765/- on 16.03.2017 for food items (page no. 38 of the paper book), the assessee relied only on self-made vouchers without any third-party evidence. The Ld. DR further highlighted inconsistencies in vouchers where the same person acted as both preparer and recipient of payment (page nos. 42 and 43 of the paper book), and instances where signatures of the same payee differed across vouchers dated 11.08.2016 (page no. 26 of the paper book) and 08.11.2016 (page no. 29 of the paper book). On the basis of these discrepancies, it was submitted that rejection of books and estimation of income was fully justified and required no interference.
ITA 784/Hyd/2025 Guhana Educational Society
We have carefully considered the rival submissions and perused the material available on record. At the outset, we note that the assessee’s books of account were audited. However, it is equally well settled that mere audit of accounts does not preclude the Assessing Officer from examining the correctness and completeness of the accounts where defects are noticed. As regards the issue relating to purchase of Xerox machine, we have gone through the ledger accounts placed at page nos. 87 and 88 of the paper book, which is to the following effect:
ITA 784/Hyd/2025 Guhana Educational Society
On perusal of the above, we find merit in the explanation of the assessee that addition during the year on account of Xerox machine was only Rs. 99,855/- , and the figure of Rs.1,74,196/- represented cumulative closing balances of machines located at different places. To this extent, the objection of the Ld. AO does not survive. However, with respect to the payment of Rs.12,140/- towards traffic penalty, we are unable to accept the contention of the assessee. Such payment arises from violation of law and is clearly hit by Explanation 1 to section 37(1) of the Act. The submission of the Ld. DR on this issue is legally sound and is accordingly upheld. Coming to celebration expenses, we have gone through the relevant vouchers, including those placed at page no. 34 of the paper book, which is to the following effect:
ITA 784/Hyd/2025 Guhana Educational Society
On perusal of the above, we find that the observation of the Ld. AO regarding inclusion of white cement under celebration expenses is factually borne out from the record. Therefore, the explanation of the assessee on this aspect cannot be accepted in entirety. As regards travelling and other miscellaneous expenses, we find force in the submission of the Ld. AR to the extent that third-party bills may not always be available for expenses such as auto charges, local conveyance, labour payments, etc., and in such cases self- made vouchers may be inevitable. However, the same logic cannot be extended to substantial expenses relating to food items and organised travel, where some form of external evidence ought to have been maintained. In the case of many substantial expenses also, the assessee has failed to obtain external evidence and only relied on self-made vouchers. Further, the presence of inconsistencies in signatures and preparation of vouchers further weakens the reliability of such claims.
In view of the above factual matrix, we are of the considered opinion that rejection of books of account cannot be said to be wholly unjustified. At the same time, estimation of income at 8% of gross receipts appears to be on the higher side considering the nature of activities carried on by the assessee and the fact that certain explanations of the assessee have been found acceptable. Considering the totality of facts and circumstances, and in the interest of justice, we deem it appropriate to restrict the estimation of income to 5% of the gross receipts instead of 8% as adopted by the Ld. AO.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Open Court on 11th February, 2026.