INCOME ESTIMATION AND ALLOWABILITY OF EXPENDITURE

[Kishor Deshpande]

In case of one of my client income for the A Y 2006-07 has been estimated @ 8% although his turnover exceeded Rs. 40 Lacs.  Moreover for the A Y 2005-06 labour expenditure was disallowed u/s. 40(a)(ia).  Since tax deducted on the said labour expenditure was paid during the F Y 2005-06, so can i setoff such disallowed laobur expenditure for the A Y 2005-06 against the income estimated for the A Y 2006-07.

[MOHAN S]

Dear Kishor,

You have not stated how the Assessing Officer has estimated the profit at 8% of turnover when the books are subject to audit u/s 44AB. If the A.O has rejected the book results he must have given clear reasons for the same. Recently High Courts have ( I dont remember the citation readily) held thet without rejecting the books estimate cannot be made. If books are rejected the A.O must record with proper evidence the reasons for such rejection.

Regarding your query on allowing deduction of earlier year expenditure u/s 40 (a) (ia) I feel it must be allowed by the A.O as it has nothing to do with the Estimation of income of A.Y 2006-07 Even in the normal case without estimation this shall be allowed and I find no reason for the A.O to deny this claim.

AI Summary

Assessing Officer Must Justify Rejecting Audited Books Under Section 44AB; Disallowed Expenses Should Be Deducted for A.Y. 2006-07 A user inquired about setting off disallowed labor expenditure from the Assessment Year (A.Y.) 2005-06 against estimated income for A.Y. 2006-07, where income was estimated at 8% despite turnover exceeding Rs. 40 Lacs. The respondent noted that the Assessing Officer (A.O.) must provide clear reasons for rejecting audited books under section 44AB before estimating profits. Additionally, they advised that the disallowed expenditure should be allowed as a deduction since it is unrelated to income estimation for A.Y. 2006-07, and there is no reason for the A.O. to deny this claim.