The discretionary powers under Section 145(3) of the Income Tax Act must be used with an established justification for rejecting the accounts to ensure proper accounting principles are applied.

ORDER

PER AVDHESH KUMAR MISHRA, AM

This appeal, filed by the Revenue, for the Assessment Year (hereinafter, the ‘AY’) 2020-21, is directed against the order dated 07.11.2023 passed by the Commissioner of Income Tax (Appeals), NFAC, New Delhi [hereinafter, the ‘CIT(A)’].

2. Following grounds have been raised by the Revenue: -

“1.The Ld. CIT(A) erred on facts in deleting the addition on account of unsubstantiated purchases of Rs.2,12,26,191/- and treating it as subsumed in estimated addition of Rs.13,38,765/-.

2. CIT(A) erred in invoking provisions of section 145(3) to reject Books of accounts even when the prevalent facts did not require rejection simply because purchases to the extent of Rs.2,12,26,191/- were found to be inflated.

3. CIT(A) erred in deleting the 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 sub- contractors 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 had made payments, in excess of Rs.10,000/- in cash at a time, in violation of the provisions of Section 40 A(3) of the Act. Hence, he also disallowed Rs.2,40,000/- on this score.

3.1 The relevant part of the assessment order is extracted hereunder: -

“3.7. Point-wise rebuttal of reply of the assessee including analysis of any case low relied upon

i. The books of account of the assessee for the AY under question was audited by a certified Chartered Accountant, Moreover, the assesses has furnished the details of GST and non-GST purchases made by him during the relevant previous year. After considering the GST and Non- GST purchases, when excess purchase was pointed out to the assessee and was requested to explain the same, the assessee came up with a new idea for estimation of his income as per section 146(3) of the Act. Only at the eleventh hours of the assessment proceedings, the assessee has requested to reject his books of accounts and to estimate his income.

The assessee has never requested this unit prior to the issue of show cause notice dated 16.09.2022 to reject his books of account as per section 145(3) of the Act and estimate his income accordingly When the assessee was pointed out about the claim of excess purchase over and above the GST and non-GST purchases, the assessee came up with a new idea and requested to estimate his income. If the books of accounts are not in the possession of the assessee, he would have not furnished any details in respect of purchases made and for other issues. However, in the instant case the assesse has submitted the details of GST purchase like copy of GST return, copy of invoices, E-way bills, ledger copies (for three parties), comparison of gross receipt, net profit & gross profit for the past 3 ye