SARANADHAR UMASHANKAR GUPTA,PALANPUR vs. THE ACIT, CIRCLE, PALANPUR

(Assessment Year: 2017-18) Sarandhar Umashankar Gupta, Vs. Assistant Commissioner of 25, Guru Bungalow Society, Income Tax, Circle, 1st Floor, Shri Hari Complex, Opp: Gayatri Temple, Abu Road Highway, Palanpur, Opp. Gayatri Temple, Abu Road Gujarat-385001 Highway, Palanpur-385001 [PAN No.AEVPG3999R] (Appellant) .. (Respondent) Appellant by : None Respondent by: Shri Rignesh Das, Sr. DR Date of Hearing 05.12.2024 Date of Pronouncement 26.12.2024 O R D E R

PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:

1. Both the lower authorities erred in law and on facts confirm addition of Rs. 40,44,977 by rejecting books of accounts u/s. 145A of the Act, estimating the gross profit at the rate 20.97 percent purely on assumption and presumption without appreciating the nature of business of the appellant and past gross profit and net profit therefore addition of GP/NP may be deleted in the interest of justice.

3. The brief facts of the case are that the assessee is engaged in the business of road maintenance and Govt. contractor. During the assessment proceedings of the assessee, from a detailed examination of the books and records, the Assessing Officer observed several Sarandhar Umashankar Gupta vs. ACIT Asst.Year –2017-18 - 2– discrepancies. The assessee was asked to provide supporting documents for their income and expenses. Upon reviewing the provided details, the Assessing Officer made the following key observations: The first major issue was the statement of contract expenses, where the assessee reported total contract expenses of Rs. 6,45,21,600/-. Out of this amount, Rs.1,96,01,970/- had been paid in cash to 206 different individuals. The second significant finding was that with regards to other major expenses such as raw material expenses (amounting to Rs. 6,37,40,829/-) and labour expenses (Rs. 3,08,44,613/-), a major portion of these expenses was also paid in cash, and the entries lacked any narrative description, with only the notation "cash on hand" listed as the explanation for the expenses. The Assessing Officer was of the view that absence of details made it difficult to verify the legitimacy of the expenses. The Assessing Officer was of the view that the assessee had intentionally structured their accounts in such a way that it became nearly impossible to verify the expenses properly, especially considering the huge amount of cash payments and lack of adequate documentation. Further, the assessee reported contract income of Rs. 82,48,175/- in cash, with each of amounts being just below Rs. 20,000/-. The assessee submitted details for government contracts, which amounted to Rs. 19,09,84,032/-. The Assessing Officer noted that when both of these figures were added together, the total came to Rs. 19,92,32,207/-. However, in the Profit and Loss (P&L) account, the total contract income was shown as Rs. 19,62,06,649/-, which led to a discrepancy of Rs. 30,25,558/-. In view of these findings, the Assessing Officer issued a show cause notice to the assessee, asking why their books of accounts should not be Sarandhar Umashankar Gupta vs. ACIT Asst.Year –2017-18 - 3– rejected under Section 145A of the Income Tax Act, and why their gross profit should not be estimated at 20.97% (as in the previous year, Assessment Year 2016-17). In reply, the assessee submitted the assessee hired local villagers for supervision of machinery such as tractors, trolleys, and JCBs used in road construction and maintenance. The assessee submitted that these workers, who were paid in cash, were not permanent employees but were hired as and when needed. It was submitted that cash payments were made based on the workers' demands and expectations, and payments for raw materials were made via bank transactions, and not in cash. The Assessing Officer rejected the submission of the assessee on the ground that the explanation provided did not sufficiently address the discrepancies in the documentation. The assessee had submitted two lists of individuals who received payments. One list included 17 persons to whom payments totaling Rs. 4,49,19,680/- were made, where TDS had been deducted while the other list contained 206 persons who received a total of Rs. 1,96,01,970/- in cash. A ledger was provided showing that all contract expenses totaling Rs. 6,45,21,600/- were paid in cash, with payments often being below Rs. 20,000/-. Despite providing this information, the assessee did not clarify the nature of the work done by the contractors or explain why payments were not made by cheque, particularly in cases where TDS had been deducted and the payments ranged between Rs. 1,50,000 and Rs. 50,00,000/-. Similar issues were noted for labour and raw material expenses. Given the lack of adequate documentation and explanation for the expenses, and the failure to provide necessary details for verifying the expenses, the assessing Sarandhar Umashankar Gupta vs. ACIT Asst.Year –2017-18 - 4– officer held that the books of accounts could not be relied upon. Consequently, the books of accounts were rejected under Section 145A of the Income Tax Act. For the current year, the Assessing Officer applied the gross profit rate from the previous year i.e. assessment year 2016-17 (20.97%) to the total turnover as reported by the assessee. Based on the P&L account, the total contract receipt shown was Rs. 19,62,06,649/-, and applying the 20.97% gross profit rate resulted in a gross profit of Rs. 4,11,44,534/-. However, the gross profit reported by the assessee for the year under review was Rs. 3,70,99,557/-, representing a gross profit rate of 18.91%. The difference of Rs. 40,44,977/- (Rs. 4,11,44,534/- minus Rs. 3,70,99,557/-) was added to the total income of the assessee.