Assessee was engaged in business of contract work of military engineering services - Assessing Officer having found that assessee disclosed lower gross profit rate 7.20 per cent in relevant year, in comparison to 10.25 per cent in immediately preceding year despite three fold increase in gross receipt and assessee had not maintained salary register, payment register etc., rejected books of account of assessee and estimated income of assessee by applying net profit rate of 12.5 per cent - Whether since explanations of assessee that gross receipts had substantially increased by three times for which assessee had to reduce margin, and that contract works were executed in military and air force areas where working hours were lesser in comparison to normal civil work and that cost of various expenses and material had also been increased, was not rebutted by revenue, gross profit rate applied by Assessing Officer could not be sustained - Held, yes - Whether on facts, it would be fair and reasonable if net profit rate of 7.50 per cent was applied subject to interest to third parties, depreciation, interest to partners and salary to partners - Held, yes-Shri Ram Traders [2013] 37 taxmann.com 427 (Jodhpur - Trib.)

Books of Accounts can not be rejected for mere absence of a few vouchers

1. Vishal Infrastructure Ltd. vs Assistant Commissioner Of ... on 29 March, 2006 2007 104 ITD 537 Hyd
2. Kerala High Court in the case of CM. Francis & Co. (P.) Ltd. v. CIT
3. Allahabad High Court in another case of Imran Ahmed v. CIT 1982 Tax LR (NOC) 111 (All.) 

If some deficiencies are found in books of accounts some guess work has to be applied by A.O National Plastic Incus (2009) ITR 309 191

Fall in sale without showing any material to prove sale outside books, does not warrant rejection of books. Ravi Agricultural Industries121 TTJ 903 (Agra) (TM)

Additions made for understatement of sale to co-ops which was merely 5% of total sale by comparing sale price to sale to other individuals without bringing any material on record was unjustified. Rabindranath (kol) 180 taxmann 104

Held By ITAT Chandigarh in Smart Value Product & Services Ltd ITA 685/2014 dtd 28-10-2015 that addition made by AO for negative stock by preparing monthly trading account is not sustainable. Similar decision has been given by ITAT Chandigarh in M/s Saqi Brothers V ITO ITA No. 279/Chd/1990 which has been confirmed by Hon’ble Punjab & Haryana High Court vide judgment ITR No. 70 of 1998 dated 31.10.2006

Punjab and Haryana High Court laying down principles of assessment in the case of Contractors in the case of TELELINKS &MATTEWAL CO-OP L/C SOCIETY (P&H) 20-11-14

In ITA 269/2014 AO rejecting a/c books-[Telelinking v/S CIT Bathinda] applied 12% rate in case of contractor applying Prabhat Kumar 323 17R 675 (P&H) and ITAT Chd in ESS Buildings [ITA 707/1997] CIT(A) reduced to 6% ITAT restored to 12%

The assessee claiming deduction u/s 80IB. The observation of AO that GP ratio for subsequent years was lower can not be ground for rejection of the books. Swastik Food Products [2015] 61 taxmann.com 83 (Himachal Pradesh) JUNE 25, 2014

AO assumed that all the patients who had undergone lab test had been operated upon. Held that AO has not brought any material on record to show whether actually any patient had undergone surgery without recording the same in the records Of the assessee. The addition has been made by the AO merely on assumption of certain facts without any basis.Books of accounts can not be rejected. Dr. Maheshinder Singh [2015] 61 taxmann.com 353 (Chandigarh - Trib.) JANUARY 30, 2015

Salary and Interest to partner to be allowed as deduction while estimating the profits of the firm where books of accounts are rejected- Inter Continental Constructions[2015] 61 taxmann.com 15 (High Court of Andhra Pradesh and Telangana

Where assessee, a civil contractor, made payments to transporters and sub-contractors in course of its business, in view of fact that assessee gave complete addresses and PANs of payees and, moreover, said payments had been made after deducting tax at source, impugned order rejecting assessee's books of account was to be set aside

V.V. Constructions[2015] 59 taxmann.com 368 (Pune - Trib.) JUNE  12, 2015 

For relevant assessment year, assessee-firm declared gross profit rate (GPR) of 25.38 per cent as against 29.5 per cent declared in immediate preceding year - Assessing Officer was not satisfied with assessee’s explanation regarding decline in GPR and, therefore, he rejected its books of account and applied GPR at 27 per cent which resulted in certain addition - On appeal, Commissioner (Appeals) deleted addition holding that Assessing Officer made addition without pointing out any specific defect in books of account - Tribunal upheld finding of Commissioner (Appeals) - Whether there was any perversity in order of Tribunal - Held, no

Om Overseas [2008] 173 TAXMAN 185 (PUNJ. & HAR.) HIGH COURT OF PUNJAB AND HARYANA MARCH 4, 2008

On assessee’s inability to supply addresses of purchasers who purchased goods on cash, ITO rejected assessee’s books of account showing result in respect of cash sale transactions, and made addition – AAC deleted additions but Tribunal restored ITO’s orders – Whether there was no necessity whatsoever for assessee to maintain addresses of cash customers – Held, yes – Whether, therefore, rejection of book results of assessee was unjustified – Held, yes – Whether, consequently, additions made to assessee’s income were liable to be deleted – Held, yes

R.B. Jessaram Fatehchand (Sugar Dept.)[1970] 75 ITR 33 (BOM. HIGH COURT OF BOMBAY JULY 30, 1969

AO couldn't make estimated additions without showing comparable case to justify higher rate of net profit

Section 145 of the Income-tax Act, 1961 - Method of accounting - Estimation of income (GP Rate) - Assessment year 2009-10 - Assessee - a partnership firm, was engaged in business of civil contractor and had furnished his income-tax return along with audit report and other information - Assessee declared a net profit of 5.38 per cent, subjected to interest and remuneration to partners - A perusal of order revealed that net profit rate in immediate preceding year was 5.02 per cent - Assessing Officer invoked provisions of section 145 and disallowed expenses amounted to Rs. 1.17 crores and determined net profit at 13.7 per cent - Commissioner (Appeals) sustained an ad hoc addition of Rs 10 lakhs - Tribunal reduced addition to Rs 5 lakhs - It was observed by Tribunal that though contract receipts had sharply increased from Rs 10.60 crores to Rs. 12.32 crores, net profit had increased from 5.02 to 5.38 per cent with addition of Rs 5 lakhs - Whether as Assessing Officer had failed to bring on record any comparable case so as to justify any estimation/addition, order of Tribunal was to be upheld - Held, yes [Paras 10 and 11] [In favour of assessee]
[2015] 59 taxmann.com 293 (Rajasthan)/[2015] 371 ITR 325 (Rajasthan)

Unreasoned Order of ITAT reducing addition for bogus purchases to 10% relying upon Coordinate Bench decision upheld by Gujrat High Court

Premkumar B. Rathi [2015] 59 taxmann.com 203 (Gujarat)

The Mumbai High Court in CIT vs. Hariram Bhambhani has held that the entire unaccounted sales cannot be assessed as undisclosed income particularly if the purchases have been accounted for. Only the net profit on such unaccounted sales can be taken as income - [2015-ITRV-HC-MUM-115]

Issues relating to Job worker of dyeing of fabric resolved in : A.P. PROCESSORS vs.ASSISTANT COMMISSIONER OF INCOME TAX Jul 17, 2015 (2015) 44 CCH 0384 DelTrib

1. Job Worker not maintaining the record of receipt and dispatch of the goods because of the fact that the ownership of the fabric received for processing is not of the assessee, nor the shortage due to shrinkage, etc. of the fabrics belong to the assessee. Rejection of books of accounts quashed

2. Following shrinkage in dyeing  accepted

Cambric – shrinkage – 5% and further – 2% to – 5%. If it is further required residual shrinkage as zero.

Crapes – 10% and further – 2% if it required line dry (dry in air).

Other than the above shrinkage, there is another loss of fabric by 2% on account of grey and dyed fabs.

3. Fire Insurance claim received by Job Worker can not be treated as income of the Job worker not mainstaining stock records, where he produced all the relevant documents relating to insurance claim before the AO during the assessment proceedings along with FIR lodged before the Police; and report of Verifier (Valuation and Loss Assessor).

4. Hon’ble Supreme Court decision in Empire Industries Ltd. Vs. Union of India (3 Judges Bench) reported as 162 ITR 846 held that textile dyeing and printing amounts to manufacturing. Hence Additional depreciation of 20% u/s 32(1)(iia) is available to Job Worker engaged in dyeing of fabric

Credit sales not reflected in books of account—Total unrecorded sales cannot be regarded as the profit of the assessee—Net profit rate has to be adopted—Once a net profit rate is adopted, it cannot be said that there is perversity of approach—Whether the rate is low or high would depend upon the facts of each case Held

 BALCHAND AJIT KUMAR (2003) 71 CCH 0380 MPHC. 

President Industries Gujrat High Court Concurred with

Tribunal held that entire sales could not be added as income of assessee but addition could be made only to the extent of estimated profits embedded in sales for which net profit rate was adopted—There is no finding or material about suppression of investment in acquiring the goods which are subject of undisclosed sales—No referable question of law arises

PRESIDENT INDUSTRIES (2002) 124 TAXMAN 0654 (1999) 67 CCH 0259 GujHC

Difference between income as per TDS certificate and that shown in books—As per TDS certificate, gross amount of assessee’s receipts is Rs. 4.51 crores whereas as per the accounts, it is Rs. 4.29 crores—Assessee was not able to reconcile the difference to the extent of Rs. 14,94,285 and hence AO made addition thereof under the head ‘Undisclosed transportation receipts’— Not justified—In case of difference between the gross receipts as shown in the assessee’s books and as per TDS certificate addition is to be made only in respect of profits embedded therein—Impugned order is set aside and the AO is directed to adopt the GP rate declared by the assessee for the assessment year under consideration and compute addition accordingly

R.R. CARYYING CORPORATION CUTTACK BENCH (2009) 126 TTJ 0240

Balasore Synthetic (P) Ltd. vs. Dy. CIT (ITA No. 141/Ctk/2008) followed