2024 (10) TMI 309 - AT - Income Tax

Rejected books cannot be used for partial deductions or TDS additions under section 40(a)(ia)

M/s Nagendra Rai Ashok Nagar Versus ACIT, Range-III, Mirzapur

The ITAT Allahabad ruled on a contract business case where books of accounts were rejected. The assessee claimed deductions for demurrage, royalty, and ... Determination of net profits from contract business - Rejection of books of accounts - basic argument and claim of the assessee is that the deduction on account of deductions from bills on account of non-fulfillment of work in time is to be further allowed from the estimated business profit of the assessee and the claim of royalty of course is already debited in profit and loss account, filed by the assessee - HELD THAT:- In the instant case, the assessee without producing any documentary evidences relating to claims of direct expenses made in trading account specially on account of materials and labour, wants to claim deductions on estimate based on past records and further wants to claim, head-wise deductions, on account of upkar, royalty, demurrage, compound tax, etc. as per statement certified by the contractee, which is legally and technically unacceptable arguments, because when book results are rejected, it is rejected as a whole and there cannot be any part rejection and part acceptably of book results, and there cannot be any head wise bifurcation of any claims under direct or indirect expenses, separately, because once books are rejected, it is rejected for the assessee and for the revenue, both, and in the instant case the statement of the Ld AR before the AO, on 05/08/2011 proves beyond doubt, that books of account never ever existed at all. AO under the factual circumstances stated above, and in absence of any regular books of accounts, was fully justified in estimating the business profits at a flat percentage of gross contract receipts. Now in cases of absence of any books of accounts, when the question of estimation of profits arises, it is a fair rate of percentage that is to be applied on actual receipts of the assessee, and in such cases there are plethora of judgments which prescribes that percentage declared by the assessee in earlier years in the assessees own case are the best guide, even though the principles of res judicata does not apply in income tax proceedings. In the instant case, based on earlier years records, in the case of the assessee himself, and after considering the profit percentage declared in Asst years 2007-08 and 2008-09, at 6.6% and 6.32%, respectively took a view to estimate the contract business profits @ 6.30%, on Gross Receipts, after considering all claims referred to in sections 29 of the Act, in accordance with provisions contained in sections 30 to 43D of the Act 61, and we also are of the same opinion and there are no reasons to take a different view in the matter. Regarding the qualms of the assessee that the demurrage, for non completion of the work in time for the year under appeal, has neither been received till date nor receivable in future, we are under the opinion that since we are estimating the contract income at a flat percentage, this amount should be reduced from the gross contract figure because under the circumstances this amount has been taken away by the contractee never to be paid ( which is different from royalty, which goes to the credit of the State Government), and as such in the interest of justice, and for all practical purpose, and also considering the fact that there are no new expenditures as claimed except royalty, only (because other expenditures relating to upkar, bank interest and other finance charges, depreciation were also existing in earlier years as per submitted accounts) and to take a very judicious view in the matter the contract profits is hereby estimated at a flat rate of 6 % ( six percentage ) on the reduced contract figure and we order accordingly. The assessee gets consequential relief and this ground is partly allowed. Addition u/s 40(a)(ia) - not deduction of TDS - HELD THAT:- When books of accounts are rejected, it is rejected both for the assessee and the revenue, and the revenue cannot proceed to make any additions or disallowances, based on the same rejected books. See Bahubali Neminath Muttin [2017 (1) TMI 1375 - KARNATAKA HIGH COURT] and Dulla Ram [2013 (12) TMI 253 - PUNJAB & HARYANA HIGH COURT] Thus, once the books are not existing and profits are determined on a flat rate of total receipts, no further addition for trade creditors or for disallowance u/s 40(a)(ia) can be made separately, because estimation of income has been done taking into consideration the provisions contained in sections 30 to 43D of the Act 61. Addition u/s 40(a)(ia) are deleted - Decided in favour of assessee. Issues Involved:1. Disbelief of dispossession of books of accounts due to lack of FIR.2. Estimation of contractual income and net profit rate.3. Consideration of additional evidence and exercise of appellate power.4. Application of judicial precedence and principle of Ratio Decidendi.5. Addition under section 69A and disallowance under section 40(a)(ia).6. Interest charged under sections 234B and 234C.Issue-wise Detailed Analysis:1. Disbelief of Dispossession of Books of Accounts:The assessee claimed that books of accounts were dispossessed due to a fight, but failed to lodge an FIR to substantiate this claim. Both the CIT (Appeals) and AO disbelieved this assertion due to lack of documentary evidence. The Tribunal upheld this disbelief, emphasizing the absence of supporting documentation like a police diary or FIR copy, which weakened the assessee's position.2. Estimation of Contractual Income and Net Profit Rate:For the assessment years 2009-10 and 2010-11, the AO estimated the net profit at 7.25% of gross receipts due to the absence of books of accounts. The Tribunal, however, reduced this estimation to 6.30% based on past records, considering the profit percentages declared in earlier years. The Tribunal acknowledged additional expenditures like royalty and demurrage, which were not present in previous years, and further adjusted the net profit estimation to 6% on a reduced contract figure after excluding demurrage charges.3. Consideration of Additional Evidence and Exercise of Appellate Power:The assessee argued that deductions from bills were filed as annexures to the TDS certificate and should not be considered additional evidence. The CIT (Appeals) failed to exercise appellate power under section 250(4) to ascertain the true tax liability. The Tribunal considered the evidence provided, including audited accounts and appellate orders from subsequent years, which allowed deductions for demurrage under section 37(1).4. Application of Judicial Precedence and Principle of Ratio Decidendi:The CIT (Appeals) was criticized for not following judicial precedence and the principle of Ratio Decidendi. The Tribunal, however, adhered to established judicial principles, citing cases like Ajay Goyal vs ITO, which emphasized using past history as a guide for estimating trading results when books are rejected.5. Addition under Section 69A and Disallowance under Section 40(a)(ia):The Tribunal held that once books of accounts are rejected, they cannot be relied upon for making additions or disallowances under other sections. Citing judicial precedents, it ruled that additions under section 69A and disallowances under section 40(a)(ia) were not sustainable, as estimation of income had already considered provisions from sections 30 to 43D.6. Interest Charged under Sections 234B and 234C:The assessee contested the interest charged under sections 234B and 234C. However, the Tribunal did not provide specific relief on this issue within the judgment, focusing instead on the estimation of income and related deductions.Conclusion:The appeals were partly allowed, with the Tribunal providing relief by adjusting the estimation of net profit to 6% on reduced contract figures and deleting additions under sections 69A and 40(a)(ia). The judgment emphasized adherence to judicial precedents and proper estimation of income based on past records and additional expenditures.