Case Law Details
Envista Engineering & Construction Private Limited Vs ACIT (ITAT Chennai)
Summary: The ITAT Chennai held that rejection of books under Section 145(3) was justified where the assessee failed to maintain reliable and verifiable records. The Assessing Officer noted that major expenses were supported only by self-made cash vouchers, with no third-party confirmations, project-wise details, or reconciliations, and the assessee also failed to respond adequately to notices. Accordingly, the books were rejected and profit was estimated at 8% of turnover. While upholding rejection of books, the Tribunal found the 8% estimation excessive, as it relied on large listed companies not comparable to the assessee, a subcontractor operating in difficult terrains with lower margins. It also held that Section 44AD benchmarks cannot be applied mechanically. Considering business realities and deficiencies in accounts, the Tribunal reduced the profit estimation to 5% of turnover. Thus, the appeal was partly allowed, balancing the need for estimation with fairness and comparability principles.
Core Issue-The primary issue was whether rejection of books of account under section 145(3) was justified due to unverifiable expenses and whether estimation of profit at 8% of turnover by the Assessing Officer was reasonable, or required modification considering the nature of assessee’s business.
Facts of the Case:-The assessee, engaged in contract works, declared income of ₹1.52 crore on a turnover of ₹27.45 crore, resulting in a profit rate of 2.28%. The case was selected for limited scrutiny on account of large expenses. The Assessing Officer observed that major expenses, particularly labour payments, were supported only by self-made cash vouchers without third-party confirmation, and no project-wise records or reconciliations were furnished. Consequently, the books were rejected under section 145(3), and profit was estimated at 8% of turnover.
Assessing Officer’s Findings:-The AO held that the books lacked reliability due to absence of verifiable supporting evidence, non-production of critical records, and failure to respond properly to notices. The declared profit rate was considered abnormally low compared to industry benchmarks, and therefore income was estimated at 8% by applying comparable company margins and analogy of section 44AD.
CIT(A) Findings:-The CIT(A) upheld the AO’s action, observing that audit of books does not ensure correctness where primary evidence is deficient. It was held that rejection of books was valid due to defective vouchers and lack of corroboration, and estimation of income was justified using industry comparisons. The assessee’s failure to furnish credible evidence or comparables weakened its case.
ITAT Findings:-The Tribunal upheld the rejection of books under section 145(3), noting that the assessee failed to produce verifiable labour records, confirmations, and project-wise details, and relied heavily on self-made vouchers. However, on the issue of profit estimation, the ITAT held that the AO’s adoption of 8% was excessive. It observed that the assessee was a sub-contractor working in difficult terrains, and comparison with large listed companies was not appropriate. Further, section 44AD could not be mechanically applied where turnover exceeded prescribed limits. Considering the nature of business, deficiencies in records, and overall facts, the Tribunal held that a reasonable estimation would be 5% of turnover instead of 8%.
Final Decision:-The ITAT partly allowed the appeal by upholding rejection of books but reducing estimated profit from 8% to 5% of turnover, thereby granting partial relief to the assessee.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
The captioned appeal filed by the Assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals), NFAC, Delhi, [CIT(A)] dated 30.10.2025 for Assessment Year 2015-16.
2. Brief facts of the case are that the assessee is a private limited company engaged in contract works. For AY 2015-16, it filed its return of income on 31.10.2015 declaring total income of Rs.1,52,29,210/- on a turnover of Rs.27,45,27,862/- (profit rate @2.28%).The case was selected for limited scrutiny under CASS for verification of “large other expenses claimed.” The original assessment was completed by estimating profit @ 8% of turnover, which was upheld by the CIT(A). Subsequently, the Tribunal set aside the matter to the file of the Assessing Officer for de novo assessment.Pursuant to directions, the Assessing Officer issued notices u/s. 142(1). The assessee filed partial details and explained that due to infrastructure project delays and cost escalations, profitability was low. The assessee also suggested a profit range of 5-6%.However, the Assessing Officer observed that:
- Major expenses (especially labour payments) were supported by self-made cash vouchers
- No third-party confirmations or verifiable evidence were furnished
- No project-wise details, measurement books, or reconciliations were produced
Accordingly, the Assessing Officer rejected the books of account u/s. 145(3) of the Act and estimated profit @ 8% of turnover, determining total income at Rs.2,22,51,910/-.The AO held that the books of account were not reliable due to heavy reliance on self-made vouchers, lack of verifiable supporting evidence and absence of project-wise and third-party corroboration. The assessee also failed to comply with the show cause notice u/s 144. The declared profit rate of 2.28% was abnormally low. Industry comparison with companies such as IRB Infrastructure Developers, J. Kumar Infraprojects, and Larsen & Toubro showed profit margins exceeding 8%. Section 145(3) was invoked and income was estimated @ 8% of turnover. Thus, income was determined at:
- Business income: Rs.2,19,62,228/-
- Other income: Rs.2,89,685/-
- Total: Rs.2,22,51,910/-
3. On appeal before the CIT(A), the CIT(A) upheld the action of the AO and held that the AO validly rejected books u/s 145(3) due to defective vouchers, lack of supporting evidence and non-production of critical records, audit of books does not guarantee correctness if primary evidence is deficient, adequate opportunity was provided but non-response to show cause weakens assessee’s case, estimation of income is justified once books are rejected, the AO adopted a reasonable and scientific method by:
- Referring to industry benchmarks
- Considering comparable companies
The assessee failed to provide credible comparables or documentary support. Accordingly, both grounds relating to rejection of books and estimation of income were dismissed.
Now assessee is in appeal before this Tribunal.
4. The ld.AR for the assessee contended that the AO mechanically repeated earlier assessment without fresh application of mind. No new defects were identified in de novo proceedings. Rejection of books u/s 145(3) was without valid basis. Books were audited and maintained as per law. Low profit is due to nature of business (labour-intensive), work in remote/hilly areas and project delays and cost escalations. Comparison with large listed companies is invalid due to size difference. Comparable smaller companies show profit of 2–3%, consistent with assessee’s 2.28%. Estimation @ 8% is arbitrary and excessive hence he prayed for the deletion or reasonable estimation (5–6%).
5. Per contra, the ld. DR for the revenues upported the orders of the lower authorities and submitted that specific defects were recorded that self-made vouchers without verification, no confirmations or reconciliations and absence of project-wise details. She further contended that the assessee failed to discharge the burden of proof. Non-compliance with show cause notice further weakens the case. Rejection of books is supported by judicial precedents. Estimation @ 8% is justified based on industry benchmarks, section 44AD analogy and abnormally low declared profit. The assessee failed to provide credible comparables. The estimation is reasonable and not arbitrary.
6. We have heard both parties and perused the material on record. Regarding rejection of Books [Section 145(3)], It is observed that the assessee failed to produce verifiable labour records, third-party confirmations and project-wise details and reconciliations. Major expenses are supported only by self-made vouchers, which lack credibility. The assessee also failed to respond to the show cause notice. In such circumstances, we are of the considered view that the AO was justified in invoking section 145(3) and rejecting the books of account. Accordingly, the action of the AO and CIT(A) in rejecting the books is upheld.
Regarding estimation of Profit, we are of the view that while estimation is warranted, the rate of estimation must be reasonable and fair. In the present case the AO adopted 8% primarily based on large listed companies and section 44AD benchmark. However, the assessee is a sub-contractor, not a principal contractor and works are executed in remote and difficult terrains. Comparables used by AO are not strictly comparable in scale and operations. Section 44AD cannot be mechanically applied where turnover exceeds limits. At the same time the assessee’s declared profit of 2.28% is not fully reliable due to rejected books. Considering the totality of facts, including nature of business, deficiencies in accounts and industry variability and Judicial precedents favoringreasonable estimation, we are of the view that 8% is on the higher side.In the interest of justice, profit is reasonably estimated at 5% of turnover.
7. In the result, rejection of books u/s 145(3) is upheld. Estimation @ 8% is reduced to 5%. Appeal of the assessee is partly allowed.
8. In the result, appeal filed by the assessee is allowed for statistical purpose.
Order pronounced on the 30th day of April 2026, in Chennai.
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