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2019 (7) TMI 739 - AT - Income TaxAd-hoc disallowance of 25% of construction expenses - AO rejected the books of accounts u/s 145 - CIT(A) who has restricted the disallowance to 10% - HELD THAT:- AO instead of estimating the income on the basis of some reasonable and proper criteria being GP or NP has resorted to make disallowance of expenses which is not a permissible course of action under the provisions of section 145(3) r.w.s. 144. It is settled principles of law that after rejection of books of account, the income of the assessee should be based on average GP declared by the assessee in the preceding years or the prevailing GP in the same trade or business. In the case in hand, since it is the first year of reporting the income by the assessee, therefore, the past history of the GP is not available and hence the only option for making the estimation of income of the assessee is to adopt reasonable and proper GP/NP prevailing in the industry. Since the assessee is in the business of real estate and construction, therefore, the provisions of section 44AD also provides guidance for estimation of income. Since the income of the assessee is required to be estimated on some reasonable and proper basis, therefore, in the facts and circumstances of the case, we set aside this issue to the record of the AO for estimation of income by applying a proper and reasonable basis of GP/NP. Needless to say that the assessee be given proper opportunity of hearing before passing the afresh order. Disallowance of indirect expenses - AO has made disallowance of 20% of the said expenses for want of supporting evidence - HELD THAT:- Assessee has failed to produce the books of account as well as the supporting bills and vouchers regarding claim of indirect expenses. AO consequently made the disallowance of 20% of the indirect expenses which was confirmed by the CIT(A). Though there is a failure on the part of the assessee to substantiate its claim, however, once the claim is found to be reasonable and by nature all the expenses itself reveals that the said expenditure was incurred for the purpose of the business of the assessee then the disallowance of 20% without giving any basis is highly arbitrary. Since the issue of best judgement on the basis of estimation of income of the assessee has been set aside to the record of the AO, accordingly this issue is also set aside to the record of the AO to reconsider and decide afresh after giving a proper opportunity of hearing. We may clarify if the income of the assessee is estimated applying GP Rate then only issue of disallowance of indirect expenses arises. On the other hand, if the income of the assessee is estimated on the basis of NP Rate then no question of disallowance of indirect expenses arises. Addition made u/s 68 - assessee was asked to furnish the confirmation of the loan / cash creditors - AO also issued notices u/s 133(6) calling information from the loan creditors - HELD THAT:- Since the assessee has now explained the reasons of discrepancy in recording the transactions in the books of account which could be verified from the bank statement of the assessee as well as loan creditors, therefore, this issue requires a proper verification and examination at the level of the AO. Accordingly, in the facts and circumstances of the case, we set aside this issue to the record of the AO for conducting a proper verification by taking into consideration the bank statement of the assessee as well as loan creditors for reconciliation of the discrepancy as noted during the assessment proceeding. Needless to say that the assessee be given proper opportunity of hearing before passing afresh order. - Appeal of the assessee is allowed for Statistical purposes.
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