Facts of the Case

M/s Pandey Construction Co., engaged in civil construction work, was subjected to scrutiny assessment under Section 143(3) of the Income-tax Act. During assessment proceedings, the Assessing Officer found deficiencies and discrepancies in the books of accounts. Considering the accounts unreliable, the books were rejected under Section 145(3), and income was estimated by applying a net profit rate to the gross receipts. The CIT(A) partly upheld the action of the Assessing Officer. Aggrieved, the assessee filed an appeal before the Income Tax Appellate Tribunal.

Issues Involved

  1. Whether rejection of books of accounts under Section 145(3) was justified.
  2. Whether estimation of profit by applying a net profit rate was reasonable.
  3. Whether the income determined by the Assessing Officer required modification.

Petitioner’s (Assessee’s) Arguments

  • The assessee contended that the books of accounts were properly maintained.
  • The rejection of accounts was unjustified and arbitrary.
  • The profit rate applied by the Assessing Officer was excessive compared to the nature of business.
  • The assessee requested adoption of a lower and reasonable profit rate.

Respondent’s (Revenue’s) Arguments

  • The Revenue argued that significant discrepancies existed in the accounts.
  • Proper supporting records and vouchers were not maintained.
  • The Assessing Officer was justified in invoking Section 145(3).
  • Estimation of income was necessary in the absence of reliable accounts.

Court Order / Findings (ITAT Allahabad)

The Tribunal observed that when the correctness or completeness of accounts is not reliable, rejection of books under Section 145(3) is legally permissible. In such circumstances, the Assessing Officer is empowered to estimate income on a reasonable basis.

However, estimation must be fair, rational, and based on surrounding facts, past history, and industry norms. The Tribunal evaluated the profit rate applied and determined that a reasonable net profit rate should be adopted to meet the ends of justice.

Accordingly, the income of the assessee was recomputed by applying a modified profit rate considered appropriate by the Tribunal.

Important Clarification

The Tribunal reiterated that rejection of books does not grant unfettered discretion to make arbitrary additions. Profit estimation must be reasonable and based on objective criteria such as past results, comparable cases, and business conditions of civil contractors.

Link to download the order –https://itat.gov.in/public/files/upload/1604653504-ITA%20smc%20%20300%20Pandey%20Constructions.pdf

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