The Chennai Bench of Income Tax Appellate Tribunal (ITAT) ordered income estimation at 12.5% of gross receipts instead of disallowing entire entries as bogus due to potential expense inflation.
Irulandi Thevar Vetrivel, the assessee is a contractor engaged in multiple activities, including constructing roads, bridges, tunnels, runways, etc., On March 3, 2021, a search under Section 132 of the Income Tax Act was conducted on the assessee.
The search led to the seizure of books of accounts and data from the Tally software, which revealed details of financial transactions from financial years 2015-16 to 2019-20. The seized materials led to concerns regarding discrepancies in income reporting.
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After the search, the Assessing Officer (AO) issued notices under Section 153A for Assessment years 2016-17 to 2019-20. The assessee filed revised returns declaring higher incomes than those originally declared under Section 139 of the Income Tax Act, 1961.
The AO reviewed the bulk entries in the books of accounts under various heads like coolie & wages, site operating expenses, and power/electricity and concluded that these bulk entries were bogus and designed to understate taxable income.
The AO disallowed these expenses, which totaled Rs. 28.78 crores (AY 2016-17) to Rs. 52.69 crore (AY 2021-22) stating that the expenses lacked proper documentation.
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On appeal, the Commissioner of Income Tax (Appeals) acknowledged that the nature of the assessee’s business, operating across remote project sites, made it difficult to maintain perfect accounting records. The use of bulk entries and self-made vouchers was understandable given these practical difficulties.
CIT(A) rejected the AO’s disallowance of the entire bulk expenses stating that complete rejection was excessive. CIT(A) reasoned that although some expenses might have been inflated, it was unlikely that all of them were fraudulent.
The CIT(A) held that the books of accounts were not entirely reliable due to the differences and accounting anomalies. Therefore, the CIT(A) rejected the books but instead estimated the net profit at 12.5% of turnover, which was higher than the income declared by the assessee but lower than the profits resulting from the AO’s complete disallowance.
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Aggrieved by the decision, the revenue appealed before the Chennai, Bench of ITAT. Upon reviewing the CIT(A) reasonings and orders, the ITAT found no merits in the revenue’s arguments.
The Tribunal emphasized that the assessee’s books had irregularities, and completely dismissing all bulk entries as suggested by the AO would result in an unrealistically high-profit margin. The tribunal supported the approach of estimating profits reasonably rather than disallowing all expenses.
Therefore, the tribunal upheld the CIT(A)’s decision to estimate the income based on a 12.5% net profit margin. The tribunal directed the AO to reassess the assessee’s income based on the revised profit margin. The appeal of the revenue was dismissed.
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