Once books of account are rejected under Section 145(3) of the Income Tax Act, 1961, the Assessing Officer cannot invoke Section 68 for specific additions based on entries within those rejected books; income must be determined via rational estimation based on past history or comparable data.

O R D E R

PER KHETTRA MOHAN ROY, AM:

This appeal by the Revenue is directed against the order of Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi, (for short, “CIT(A)”), dated 17/12/2024 passed under section 250 of the Income Tax Act, 1961 (for short, “Act”) which is emanating from the assessment order dated 10.05.2021 passed u/s. 144 r.w.s. 144B of the Act for Assessment Year 2018-19.

The Revenue has raised the following grounds of appeal:

“1. The Ld. CIT(A) had erred on the facts and in the circumstances of the case and in law, in holding that estimation of net profit @10% of total receipts by the AO is arbitrary and deleted addition of Rs. 3,25,34,911/-, when the assessee was non- compliant during the course of assessment proceedings.

2. The Ld. CIT(A) had erred on the facts and in the circumstances of the case and in law, in estimation of net profit@10% of gross receipts by the AO in the absence of any evidence in a work contract business cannot be considered as arbitrary.

3. The Ld. CIT(A) had erred on the facts and in the circumstances of the case and in law, in deleting addition of unsecured loans as per the provisions of section 68 of the Act amounting to Rs.20,00,000/- on the basis of evidence submitted by the assessee during the course of appellate proceedings, in the absence of not submitting any evidence during the course of assessment proceedings, thus rendering the additional evidence relied upon by the Ld. CIT(A) is contrary to the provisions of Rule 46A of Income Tax Rules.

4. The Ld. CIT(A) had erred on the facts and in the circumstances of the case and in law, in deleting addition of Rs.1,40,47,654/ on account of unexplained sundry creditors, by holding that no addition on account of sundry creditors can be made when the books of accounts have been rejected and the income of the assessee has been determined as per best judgement assessment, when the AO, without disallowing the total purchases, had made addition of Rs.1,40,47,654/- u/s 68 of the Act, by holding that the credits in books of accounts on account of sundry creditors remained unexplained.

5. Any other ground that may be raised during the course of appellate proceedings.”

Facts of the case in brief are that assessee is a partnership firm was executing works contract for State Public Works Department relating to road construction, filed its e-return of income for AY 2018-19 declaring income of Rs. 2,16,18,211/- on 31.10.2018. Statutory notices u/s. 143(2) & 142(1) were issued and served upon the assessee. In response to the notice issued u/s. 142(1), assessee submitted its reply and stated that estimation of net profit at 10% of turnover was arbitrary and excessive considering the nature of construction contract business, which involves substantial expenditure towards materials, labour, sub-contract and other direct and indirect expenses and submitted net profit already disclosed @4.08% may be accepted. With regard to the difference between turnover disclosed in Form 26AS for Rs. 54.13 crores and as per return of income for Rs. 52.86 crores, the assessee explained that the discrepancy arose because deductors had deducted TDS on gross receipts inclusive of GST, whereas turnover in the profit and loss account was shown net of GST, and reconciliation thereof has been submitted. Regarding the opening stock, assessee submitted that non-filing of return for the preceding assessment year was not intentional but occurred due to delay in completion of tax audit. It was also submitted that reassessment proceedings for the earlier year were pending and the statutory auditor had accepted the opening stock after due verification. In respect of sundry creditors and unsecured loans, assessee undertook to furnish complete details including confirmations, PAN and supporting evidences within the extended time sought. Thus, according to the assessee, there was substantial compliance and the delay was attributable to genuine hardship a