Case Law Details
Sri Sivaram and Co Vs ACIT (ITAT Chennai)
ITAT Chennai held that rejection of books of accounts justified as transactions recorded in the books of accounts are not properly vouched or supported by proper documents. Further, expenses and related vouchers were also not found in accordance with books of accounts.
Facts- The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in rejecting the entire books of accounts in limited scrutiny case and restricting expenses by estimating the profit rate at 8% and also consequently making addition of interest received from banks and interest on income tax refund.
Conclusion- We noted that the assessee before us could not satisfactorily explain as to how the assessee’s books have been rejected without any basis. The assessee could not controvert the finding of the AO that there are bills and vouchers or receipts which are not debited properly or not vouched properly. Since the transactions recorded in the books of accounts are not properly vouched or supported by proper documents, the AO could not verify the genuineness of transactions and they are conscious that this case was selected for limited scrutiny purpose but to verify the closing cash balance as on 31.03.2016. For verification of cash balance i.e., closing cash balance, the AO has to verify the bills and vouchers and it found not correct, he has rightly rejected the books of accounts. We affirm the action of AO. However, going through the estimation of income from civil construction business, no other expenses are allowed and applied profit rate at 8% i.e., net profit on the total contract receipts. The total contract receipts of the assessee is Rs.8,10,78,364/- and in civil construction profit rate i.e., net profit rate at 8% is little higher. In our view, the fair profit rate should have been at 6% in the present facts and circumstance and hence, we direct the AO to apply the fair profit rate of 6% i.e., net profit rate to the total contract receipts and estimate the income accordingly. In our view, this will meet the ends of justice.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi in Appeal No. CIT(A), Coimbatore-3/10088/2018-19 dated 21.11.2022. The assessment was framed by the ACIT, Circle 2, Erode for the assessment year 2016-17 u/s. 143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide order dated 04.12.2018.
2. The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in rejecting the entire books of accounts in limited scrutiny case and restricting expenses by estimating the profit rate at 8% and also consequently making addition of interest received from banks and interest on income tax refund. For this assessee has raised various grounds which are argumentative and exhaustive and hence, need not be reproduced.
3. Brief facts are that the assessee is a partnership firm engaged in civil construction work and for the relevant assessment year 2016-17, it filed its return of income on 23.11.2016 admitting total income at Rs.38,09,800/-. The Income-tax Department selected the assessee’s case for limited scrutiny under CASS to examine closing cash balance as on 31.03.2016. The assessee before AO during the course of scrutiny assessment proceedings produced cash book for financial year 2015-16 and 2016-17 and monthly summary for April, May and June, 2016. The AO noted that cash available as per cash book for financial year 2015-16 as on 31.03.2016 is Rs.83,21,334/-, which was subsequently withdrawn mainly in April, May and June, 2016 and utilized for business purposes. The AO noted that during the course of examination of cash book for financial year 2015-16, it is noted that certain such materials being vouchers / receipts debited to the profit & loss account were not properly vouched. There is discrepancy in the vouchers and bills. Despite pointing out to the AR of the assessee, the assessee could not offer any explanation. Since the assessee could not explain the transaction recorded in cash book properly by supporting documents, hence genuineness of the same cannot be verified. Therefore, the AO rejected the books of accounts and estimated the profit from contract receipts at the rate of 8% of the total contract receipts. The total contract receipts of the assessee is Rs.8,10,78,364/- and this give raise to profit rate of 8% at Rs.64,86,269/-. For this, assessee has not objected and assured to pay tax on the same. The AO also noted from the bank statements that the assessee has received interest from banks amounting to Rs.11,55,754/- and interest u/s.244A of the Act being income-tax refund interest amounting to Rs.1,92,995/-, which is not declared in the return of income. Hence, he added this amount cumulatively at Rs.13,48,749/-. Aggrieved assessee came in appeal before CIT(A).
4. The CIT(A) upheld the action of the AO in rejecting the books of accounts for the reason that the assessee not challenged the action of the AO and not objected to AO’s finding on defects in the books of accounts. Only challenge to the assessment was on that the assessee’s case was selected for limited scrutiny verification and the AO cannot make addition by rejecting books of accounts on the defects found in the books of accounts. Further, the assessee also challenged the addition of interest on bank deposits and interest on income-tax refund u/s.244A of the Act amounting to Rs.13,48,749/-cumulatively. The CIT(A) confirmed the action of AO on both the counts. Aggrieved, now assessee is in appeal before the Tribunal.
5. Before us, the ld.AR for the assessee first of all challenged that it is a case of limited scrutiny and AO could not have rejected the books of accounts and consequently, he could not have restricted the disallowance of expenses but when specifically pointed out that there are defects in the books of accounts that the assessee has not maintained proper vouchers or vouchers are defective as pointed out in the assessment order and no explanation was offered before AO qua this, he could not answer anything.
6. On the other hand, the ld. Senior DR pointed out the difference in opening balance and closing balance and for verifying the opening and closing balance of cash, the AO has to go into the expenses and related vouchers which was not found in accordance with the books of accounts and hence, for this reason the AO has rightly rejected the books of accounts and CIT(A), has upheld the same. He also pointed out that the assessee has not included the interest received from banks amounting to Rs.11,55,754/- and interest on income-tax refund received u/s.244A of the Act amounting to Rs.1,92,995/- and hence, that has also been rightly brought to tax under the head “income from other sources”.
7. We have heard rival contentions and gone through facts and circumstances of the case. We noted that the assessee before us could not satisfactorily explain as to how the assessee’s books have been rejected without any basis. The assessee could not controvert the finding of the AO that there are bills and vouchers or receipts which are not debited properly or not vouched properly. Since the transactions recorded in the books of accounts are not properly vouched or supported by proper documents, the AO could not verify the genuineness of transactions and they are conscious that this case was selected for limited scrutiny purpose but to verify the closing cash balance as on 31.03.2016. For verification of cash balance i.e., closing cash balance, the AO has to verify the bills and vouchers and it found not correct, he has rightly rejected the books of accounts. We affirm the action of AO. However, going through the estimation of income from civil construction business, no other expenses are allowed and applied profit rate at 8% i.e., net profit on the total contract receipts. The total contract receipts of the assessee is Rs.8,10,78,364/- and in civil construction profit rate i.e., net profit rate at 8% is little higher. In our view, the fair profit rate should have been at 6% in the present facts and circumstance and hence, we direct the AO to apply the fair profit rate of 6% i.e., net profit rate to the total contract receipts and estimate the income accordingly. In our view, this will meet the ends of justice.
8. As regards to interest received by assessee from banks on deposits amounting to Rs.11,55,754/- and interest on income-tax refund of Rs.1,92,995/- received u/s.244A of the Act and not declared in the return of income and even, now admitted before us, not even disclosed in the books of accounts, the AO has rightly assessed the same as “income from other sources”. We confirm the same.
9. In the result, the appeal filed by the assessee is partly-allowed.
Order pronounced in the open court on 16th May, 2023 at Chennai.
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