Section 145(3) – Books of Accounts cannot be rejected u/s. 145(3) merely because Gross profit from a particular segment was lower and assessee was not in possession of proper documentary evidences in respect of expenses where the genuineness of expenses was not doubted.

Dreamax
Infrastructure Developers vs. ITO ITA No. :
364/JP/2017 A.Y.:
2012-13Dated: 25^th May, 2018

Section 145(3) – Books of Accounts cannot
be rejected u/s. 145(3) merely because Gross profit from a particular segment
was lower and assessee was not in possession of proper documentary evidences in
respect of expenses where the genuineness of expenses was not doubted.

FACTS

The appellant, a partnership firm, engaged
in the business of Infrastructure and industrial project of Construction of
Road, Industrial Township, Security Barracks etc., was awarded two different
projects. One of road work and industrial township (Chittorgarh project) and
another of a highway road project (Pune Project). Appellant had maintained
single set of books for whole of its business covering both the projects. No
work was carried in respect of Pune project and no revenue was generated,
whereas, there was contractual revenue from the Chittorgarh project.  Appellant was asked to submit separate
trading account for each project by the Assessing Officer (AO). Appellant had
not maintained separate books for each project, however books were audited and
the same were produced along with other required details. AO further pointed
out that assessee had not supported the expenditure with proper vouchers. AO
also noted that appellant had shown very less Gross Profit (GP) for the
relevant Assessment year from the work executed. Accordingly, the AO doubted
the correctness of the books of accounts of the assessee and rejected the same
by invoking the provisions of section 145(3) of the Income Tax Act and adopted
8% Net Profit rate on Contract receipts. The rejection of Books was challenged
before the Hon’ble ITAT.

HELD

When AO does
not dispute the fact that appellant maintains Books, which are also audited,
then he is not justified in segregating the activities in different category
and then observing that appellant had reported low GP in some category ,
whereas overall 7.44% GP rate was declared which was not objected by the
revenue. Further, AO had only pointed out that expenses were not supported with
proper evidences and he had not doubted the genuineness of expenditure. When
appellant had produced relevant documentary evidences, insignificant defects in
supporting evidence cannot be a reason for rejection of books of account. It
was further held that if the expenditure claimed by the appellant was not found
to be bogus/ excessive then the low profit cannot be reason for rejection of
Books. As the work was carried under a composite work contract and appellant
was working as one enterprise there was no need for production of separate
books for each activity. Further, Hon’ble ITAT followed the decision of the
Hon’ble jurisdictional High Court in case of Malani Ramjivan Jagannath vs.
ACIT 316 ITR 120, wherein it was held that mere deviation of GP rate cannot
be a ground for rejecting books of accounts and income cannot be determined on
the basis of estimate and guesswork. Accordingly it was held that appellant’s
case did not warrant rejection of Books of Accounts u/s. 145(3).