Facts of the Case

The assessee, an individual contractor executing road construction works for MPRRDA, filed returns supported by audited accounts. During scrutiny, he failed to produce books of account, claiming they had been forcibly taken away during disputes at the project site. No documentary proof such as an FIR was produced.

The Assessing Officer rejected the books under section 145(3) and estimated profit at 7.25% of gross contract receipts for AY 2009-10 and similarly for AY 2010-11. The CIT(A) upheld the estimation. The matter ultimately reached the Tribunal.

Issues Involved

  1. Whether profit estimation after rejection of books should be based on past history.
  2. Whether demurrage deducted by the contractee should be excluded from gross receipts before estimating profit.
  3. Whether additions under section 69A and disallowances under section 40(a)(ia) can be made after estimating income.
  4. Whether head-wise deductions can be separately allowed once books are rejected.

Petitioner’s Arguments

The assessee contended that additional expenditures such as royalty, demurrage for delayed completion, statutory levies, depreciation, and finance costs significantly reduced profitability compared to earlier years.

It was argued that demurrage amounts deducted from bills were never received and therefore should not form part of gross receipts for profit estimation. The assessee also challenged separate additions made under section 69A and disallowance of interest under section 40(a)(ia).

Respondent’s Arguments

The Revenue argued that in the absence of books and supporting evidence, the Assessing Officer was justified in estimating profit at a reasonable rate on gross receipts. It was further contended that deductions cannot be allowed merely on the basis of certificates without substantiating primary expenses such as material and labour costs.

Court Order / Findings (ITAT Allahabad)

The Tribunal held that non-production of books justified rejection under section 145(3). In such circumstances, profit must be estimated on a reasonable basis, with past history of the assessee being the best guide.

Considering earlier years’ profit rates (around 6.3% to 6.6%), the Tribunal held that estimation at 7.25% was excessive.

Important Clarification

The Tribunal emphasized that estimation of profit at a reasonable rate inherently accounts for allowable expenses under sections 30 to 43D. Therefore, separate additions or disallowances based on the same rejected records are impermissible.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771066024_MSNAGENDRARAISONEBHADRAVS.ACITMIRZAPUR.pdf

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