Rejection of Books of Accounts: The profit estimation cannot be arbitrary or without any basis.
Let us have a Short Overview of the case:
The Assessing Officer rejected the books of accounts and estimated profit @ 6% of gross receipts, citing that the assessee had “failed to substantiate the loss claimed against Hyderabad Branch” and did not furnish relevant information for various expenses.
However, the Tribunal found “no observation with regard to any incorrectness in the books of accounts” or any specific reasons given for not accepting the financials.
It was observed that the assessee “complied with all details and furnished various bills and vouchers” in response to notice under section 142(1), and these were available on record. There were also “no adverse comments in the books of accounts… either from the Assessing Officer or from the Auditor.”
The Tribunal held that “the Assessing Officer cannot reject the books of accounts merely for the reason of un-substantiating the claim of loss on works contract at Hyderabad Branch”, especially when the accounts were verifiable and regularly audited.
Regarding the 6% profit estimation, the Tribunal emphasized that “the profit estimation cannot be arbitrary or without any basis.” It noted that the AO “could not give any reasons as to why 6% profit is justifiable… or with any comparable cases of similar nature of business.”
The assessee had furnished a chart showing “net profit declared ranging from 4.1% to 5%” in earlier years, and the Tribunal remarked that “the Assessing Officer has accepted the financial results of assessee for earlier assessment year.” Therefore, “the Assessing Officer should have adopted the assessee’s financial results for earlier years” to estimate profit for this year.
Concluding that the estimation at 6% was unjustified, the Tribunal directed the AO to “estimate 5% profit on total contract receipts, including other receipts and interest income”, in line with past assessments.
The copy of the order is as under:
