ITAT Validates AO’s Estimation of Gross Profit at 20.97% for Road Contractor Amidst Unverifiable Cash Transactions [Read Order]

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) upheld the rejection of books of accounts of a road contractor, and confirmed the addition of ₹40 lakh on account of unverifiable and inadequately documented cash transactions.  The appeal arose from an order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), pertaining to Assessment Year (AY) 2017–18.

The assessee, Sarandhar Umashankar Gupta, a government contractor engaged in road maintenance work, had challenged the CIT(A)’s decision to uphold the rejection of his books under Section 145A of the Income Tax Act and the resultant addition based on estimated gross profit.

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During assessment proceedings, the AO noticed several discrepancies in the assessee’s financials. The assessee had shown total contract expenses of ₹6.45 crore, of which over ₹1.96 crore was paid in cash to 206 individuals. Notably, these entries lacked narration and were simply labeled “cash on hand.” A similar pattern was observed in major expense heads such as raw materials and labour, where substantial payments were made in cash with minimal documentation.

The AO also found a mismatch in reported income. While the assessee claimed to have earned ₹82.48 lakh in cash from contracts and ₹19.09 crore from government contracts, the total contract income recorded in the Profit and Loss account was only ₹19.62 crore, resulting in a discrepancy of over ₹30 lakh.

Given the unsubstantiated nature of both income and expenditure figures, and the cash-heavy nature of transactions, the AO rejected the books under Section 145A and proceeded to estimate gross profit at 20.97%, the same rate applied in the preceding year. This led to an addition of ₹40.44 lakh to the total income.

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In response, the assessee contended that local villagers were engaged informally for tasks like supervising JCBs and trolleys, and were paid in cash based on mutual understanding. It was argued that these were not permanent employees and that bank payments had been made for raw materials. However, the CIT(A) rejected these justifications, observing that the absence of concrete details, such as the nature of services rendered or justification for avoiding cheques in large transactions, made the explanation untenable.

The matter reached the ITAT, where the assessee, despite being given multiple opportunities, failed to appear or argue the case. After examining the records, the Tribunal observed that the CIT(A) had rightly concluded that the assessee failed to establish the genuineness of expenses, and the rejection of books was justified due to their inability to reflect a true and fair view of business affairs. The ruling was delivered by a Division Bench comprising Annapurna Gupta (Accountant Member) and Siddhartha Nautiyal (Judicial Member).

Dismissing the appeal, the ITAT concluded: “We find no infirmity in the order of the Ld. CIT(A) so as to call for any interference.” The ITAT further asserted the importance of maintaining transparent and well-documented financial records, especially for businesses dealing extensively in cash transactions.

To Read the full text of the Order CLICK HERE

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