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TMI Blog2025 (5) TMI 1069X X X X Extracts X X X X X X X X Extracts X X X X ..... addition of Rs. 96,94,500/- u/s 40(a)(ia), for admitted failure to deduct tax on labour charges. 4. CIT(A) erred in deleting the addition of Rs. 2,40,000/- for admitted violation of Provisions of Sec 40A(3)." 3. The relevant facts giving rise to this appeal are that the appellant assessee, Government Civil Contractor, filed its Income Tax Return (hereinafter 'ITR') on 13.02.2021 declaring income of Rs. 47,35,490/-. The record shows that the assessee has worked only for Municipal Corporation of Gurgaon (Har.). The case was picked up for complete scrutiny. During the course of assessment proceedings, the Assessing Officer (hereinafter, the 'AO') noticed that the assessee has inflated his purchases by Rs. 2,12,26,191/-; therefore, he disallowed the same. Further, the AO noticed that the assessee had made payment without deducting tax at source (TDS)on contractual payments of Rs. 3,23,15,000/- made to labour subcontractors in contravention to section 40(a)(ia) of the Income Tax Act, 1961 (hereinafter, the 'Act'). The AO therefore, disallowed 30% of Rs. 3,23,15,000/- amounting to Rs. 96,04,500/- and added back to the returned income. Further, the AO also noticed that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th of his accountant late Sidharth Bansal is an afterthought and it is devoid of any merits. Accordingly, the request of the assessee to reject his books as per section 145(3) of the IT Act and to estimate his income is found not acceptable. Further, the assessee placed reliance on the judgments as mentioned in para 3.5 (iii) above. The same are perused carefully and found not to be acceptable as the facts of the instant case are entirely different from those cases which have been relied by the assessee. Further, the assessee requested vide his letter dated 23.09.2022 to the Unit Head of the Assessment Unit to give direction/guidance u/s 144A of the Income Tax Act, 1961, to invoke provisions of section 145(3) of the Income Tax Ad. 1961 which was forwarded to the Range Head on the very same day. The Range Head of this unit on 27.00.2022 has given the following directions u/s 144A of the Act. 1. Being the data of High Risk Billers received from the CBIC and the CASS Rationale highlighted to verify the genuineness of purchases, on the above CASS criteria. The FAO is directed to arrive the correctness of purchase and consider GST input credit after due consideration of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and hence actual purchase is Rs. 15,81,97,454/-. Considering the above submissions of the assessee for total purchases, excess purchase of the assessee for the AY under question has been worked out as the below table: Total purchase claimed in the profit and loss account including labour payment of Rs. 3,23,15,000/- (as stated by the assessee) (In Rs.) 19,05,12,454/- Total GST purchase claimed in his submission dated 21.00 2022 9,99,41,294/- Total non-GST purchase claimed in his submission dated 21.09.2022 3,70,29,969/- Labour charges 3,23,15,000/- Total claim of purchase including labour payments 16,92,86,263/- Total claim of excess purchase of the assessee 2,12,26,191/- From, the above it is very clear that the assessee has claimed excess purchase to the tune of Rs. 2,12,26,191/- (Rs. 19,05,12,454/- - 16,92,86,263/-) in order to reduce his tax liability. The assessee was requested to furnish details of total purchases of Rs. 19,05,12,454/- shown in the return of income but the assessee has submitted explanation and evidences to the extent of Rs. 16,92,86,263/- only which includes the labour charges of Rs. 3,23,15,000/-, GBT purchase of Rs. 9,99,41,294/- and non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the Video Conference, the assessee was asked about the mode of rental payment in response, Anjali Aggarwal, who represented the case of the assessee, accepted that it was paid in cash, which is in violation of section 40A(3) of the Act. With respect to the rental payment, the assessee stated that rental payments were made on regular basis and no payments were made in excess of Rs. 10,000/-, however, the assessee failed to provide any documentary evidence in support of his statement, hence, in absence of any evidences the above explanation of the assessee is found not acceptable. Accordingly Rs. 2,40,000/- is hereby disallowed u/s 40A(3) of the Income Tax Act, 1961 and added back to the returned income of the assessee for the AY-2020-21." [Emphasis was supplied by us.] 3.2 Aggrieved, the assessee filed appeal before the CIT(A); who rejected the books of accounts under section 145(3) of the Act and applied a Net Profit Rate (NP) @ 3.00% as against 2.35% declared by the assessee, which resulted relief of Rs. 2,97,96,653/- to the assessee. The Ld. CIT(A) further held that since the income had been worked out by applying NP rate; therefore, disallowance made under section 40(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercome the specific disallowances/additions. She also pointed out that the assessee GP rate had doubled in past three years from 4.26% to 8.87% (para 6.13 of the impugned order); therefore, its average would not serve the purpose. She therefore, questioned the applicability of average GP/NP rate by the Ld. CIT(A) by submitting that the Ld. CIT(A) had not given any justification for that. Further, she reiterates that the Ld. CIT(A) had not given categorical finding wherein he had rejected the books of accounts of the assessee. 5.2 The Ld. Sr. DR contended that the AO had made specific additions/ disallowances on accounts of bogus purchases, disallowances under section 40(a)(ia) and 40A(3) of the Act. The Ld. Sr. DR, quoting the provisions of Section 145(3) of the Act, submitted that the Ld. CIT(A) had erred in upholding the NP rate of 3.00% without rejecting books of accounts and in view of the fact that there was extreme fluctuation in profit rates over the years in assessee's own case. She also contended that the Ld. CIT(A) had not reversed the finding of the AO as far as non-rejection of books of accounts and bogus purchases were concerned. She therefore, prayed for setting asid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputation and disclosure standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144. 6.2 As per section 145(3) of the Act, following circumstances under which the AO 'may' make best judgement assessment as provided under section 144 of the Act are as under: (i) when the AO is not 'satisfied' about correctness or completeness of 'accounts' of the assessee; or (ii) where the method of accounting provided in section 145(1) of the Act has not been regularly followed; or (iii) where income has not been computed in accordance with the standards notified under sec 145(2) of the Act. 6.3 In section 145(1) of the Act, while making it mandatory to compute the income under head 'business & profession' or 'Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income determined as best judgement under section 144 of the Act. In case specific disallowance/addition for violations of any of sections from 28 to 44DB of the Act are not made after invocation of 145(3) of the Act and determining of income as best judgement under section 144 of the Act, then such incorrect claim may also get insulated from various consequences; such as penalties and prosecutions, thereby making these sections not only inapplicable but also diluting/diminishing the penal consequences of those sections of the Act. 6.5 As per the language of section 145(3) of the Act, satisfaction of the AO envisaged is specifically qua the correctness of the accounts, or the method of accounting regularly followed as per accounting standards only. It is not qua the non-applicability of other provisions of the Act related to allowance of expenditure claimed in accounts or assessment of income. The satisfaction of correctness and completeness of accounts or otherwise, is qua the accounts only. The meaning of expression 'accounts' as used in section 145 of the Act is very wide and encompasses as a whole gamut of things and not being restricted to the itemized entries alone. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by restricting the claim not allowable under regular provisions of the Act, the resulting assessment would be the most appropriate instead of the best judgement under section 144 of the Act. This is the whole concept and idea behind any best judgement assessment also. Best judgement under section 144 of the Act is part of assessment procedure and it is to be applied only when the AO is satisfied that otherwise correct income is not computable. In fact, the language of section 143(2) and 143(3) of the Act which give power to the AO to embark upon the due process of assessment obligates the AO to ensure that there is no understatement of income or claim of excessive loss and thereby make assessment of 'Total Income or Loss' of that year. 6.7 Neither section 143(3) nor 144 of the Act mandates that the AO has to make assessment after invocation of section 145(3) of the Act, if some bogus expenses had been claimed or any of the claims found excessive or income found understated because invoking powers under section 145(3) of the Act in each and every case is mandatory. During assessment, the AO consider not only entries of the books of accounts but also upon any other relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrectness or incompleteness of the books of accounts of the assessee, or failure of the assessee to maintain his books of accounts as per the method of accounting provided in section 145(1) of the Act or the assessee has not computed his income in accordance with the standards notified under section 145(2) of the Act. It is for the AO to be satisfied about the correct income; (i) either by making specific disallowances/additions only if possible or (ii) by estimating income after rejecting the books of accounts. In the present case, the AO chose the first option and made specific disallowances/additions over the second option of the average Gross Profit rate addition after rejection of books of accounts under section 145(3) of the Act. 6.9 In view of the above, we are of the considered opinion that the Ld. CIT(A) is not justified in applying NP rate after rejecting the books of accounts under section 145(3) of the Act particularly when the AO, on same sets of facts, has categorically held that the assessee, as tactical move, has requested for application of average Gross Profit rate after rejection of books of accounts under section 145(3) of the Act to avoid specific disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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