Facts of the Case

A survey under section 133A was conducted at the premises of the assessee company. During the survey, a statement of a director/partner indicated estimated turnover and income figures. Subsequently, the assessee filed its return declaring income of ₹18,86,660 on turnover of ₹9,01,78,242.

The Assessing Officer found the books unreliable due to several factors, including non-availability of books during survey, absence of stock register, discrepancies in purchases from a sister concern, contradictions in explanations regarding records, and mismatch with commercial tax data. Accordingly, the books were rejected under section 145(3), and income was estimated at 7% of turnover.

The CIT(A) upheld rejection of books but reduced the profit rate to 5.25% based on a comparable case.

 Issues Involved

  1. Whether rejection of books of account under section 145(3) was justified.
  2. Whether profit estimation at 7% (or 5.25% on appeal) was reasonable.
  3. Whether the assessee’s status as a sub-contractor should influence profit estimation.

 Petitioner’s Arguments

The assessee contended that no incriminating material indicating suppression of income was found during the survey. Books of account and details were later produced, and past assessments had accepted net profit rates between 2% and 3%.

It was argued that the company operated as a sub-contractor, where profit margins are inherently lower because the principal contractor retains a share of the contract value. Therefore, higher estimated rates were unrealistic and unsupported by comparable cases.

 Respondent’s Arguments

The Revenue submitted that the books were unreliable due to non-production during survey, absence of stock register, discrepancies in transactions, and contradictions in explanations. Consequently, rejection of books and estimation of profit were justified.

It was further argued that the CIT(A) had already granted relief by reducing the rate from 7% to 5.25%, and no further interference was warranted.

 Court Order / Findings (ITAT Allahabad)

The Tribunal upheld the rejection of books, noting that the stock register was never produced and discrepancies remained unresolved. However, it found the profit rate applied by lower authorities excessive.

The Tribunal emphasized that the assessee was a sub-contractor, not a principal contractor, and therefore operated on lower margins. It also observed that statements recorded during survey could only serve as rough estimates and not as conclusive evidence for determining income.

Balancing discrepancies in records with the assessee’s business profile and past results, the Tribunal held that a net profit rate of 3.5% of contract receipts would be reasonable to cover possible leakages while remaining aligned with realistic margins.

 Important Clarification

The decision underscores that even after valid rejection of books, income estimation must be fair, reasonable, and tailored to the nature of the business. Arbitrary reliance on survey statements or unrelated comparables cannot justify excessive profit rates.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771061753_MSJYOTIERECTORSPVTLTD.ALLAHABAD.pdf

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