Bulk entries passed in books of accounts cannot be said to be entirely bogus expenses – ITAT

Bulk entries passed in books of accounts cannot be said to be entirely bogus expenses – ITAT

In a recent judgment, the ITAT Chennai has held that practice of making bulk entries in books of accounts is indeed an accounting anomaly, but cannot be straightaway construed as booking of bogus expenses. It was held that estimated profit margin at 10% from NHAI projects would be reasonable.

ABCAUS Case Law Citation:
4279 (2024) (10) abcaus.in ITAT

Important Case Laws relied upon:
KNR Constructions Ltd Vs DCIT
ITO vs. K.C. Reddy Associates
Sri Srinivasa Constructions
Krishnamohan Constructions vs. ACIT

In the instant case, the Revenue had challenged the order passed by the CIT(A) in deleting the addition/s 37 of the Income Tax Act, 1961 (the Act)  for bulk bogus expenses and estimating income of the assessee @ 12 per cent.

The respondent assessee was a contractor who was engaged in engaged in the business of constructing road projects for National Highway Authority of India (NHAI).

A search u/s 132 of the Act was conducted upon the assessee pursuant to which, his books of accounts, documents and other materials were seized and sworn statements of the assessee and other key persons were recorded.

Subsequent thereto, in response to notices u/s 153A of the Act, the assessee filed returns of income declaring total income at amounts higher than the total income admitted in the return of income originally filed u/s 139 of the Act for AYs 2016-17 to 2021-22.

However, after analyzing the transactions recorded in the tally accounts, the AO found that the figures were in agreement with the figures reported by the assessee in his return of income filed u/s 139(1) of the Act for said AYs. Upon analysis of the above seized tally software data, the AO was of the view that, the tally data revealed that, the assessee had understated his taxable income by creating bogus liability under the various heads and by recording bogus bulk expenses under various heads, in the books of accounts. It was further noted that, the corresponding credit against these debits of bulk entries was either in the cash ledger, i.e. payment was shown to have been made in cash or it was shown as a liability to be paid under the head ‘Bills & expenses payable- Sundries’ Account in the Balance Sheet.

The AO further noted that, the employees of the assessee in their statements recorded u/s 132(4) of the Act had admitted that the assessee was generating self-made cash vouchers for claiming bogus cash expenses. According to AO, the above bulk entries debited in the books of accounts were bogus expenses and thus disallowed the same.

The CIT(A) held that the disallowance of entire bulk entries was unjustified and excessive. The CIT(A) estimated the assessee’s income from the construction contract business at 12.5%. after taking into account the additional income already offered by the assessee in the returns of income.

Aggrieved by this order of the Ld. CIT(A), the Revenue challenged it and assessee also filed cross objections.

The Tribunal noted that the assessee had explained that, due to shortage of proper accounting staff and lack of proper knowledge, the accounting staff would not pass the entries on a day-to-day basis but update the books of accounts in the Tally software and pass the finalization entries only at the fag-end of the statutory time for filing the return of income.

The Tribunal concurred with the findings of the CIT(A) that the practice of making bulk entries was indeed an accounting anomaly, but the existence of such an anomaly cannot be straightaway construed as booking of bogus expenses.

The Tribunal minutely analysed both debit and credit bulk entries (cash and journal) related to various heads, i.e. provisions, sub-contract expenses, expenses payable, site expenses etc. and agreed with the CIT(A) that, the books of accounts for relevant AYs did not reflect the true and correct state of affairs.

The Tribunal observed that the CIT(A) had objectively analyzed the entries passed in the re-casted P&L A/c, manner of accounting under the percentage completion method, engineer’s certificate, comments of the AO in his remand report, relevant provisions of law and thereafter rightly upheld the assessee’s adoption of percentage completion method for recognition of revenues for the project.

The Tribunal noted that it was not the case that the assessee did not incur alleged bogus expenses at all so as to disallow the bulk entries of cash payment in its entirety. If the AO’s reasoning was upheld, then the disallowance would result in abnormally and unrealistically high net profit margins, which again underlines the lack of rationale in the disallowance of bulk entries made by the AO.

The Tribunal observed that it was also not in dispute that the assessee had actually executed and delivered the road projects and therefore understandably he would have indeed incurred the expenses disallowed. Also, search did not result in unearthing of any excess cash, jewellery, bullion or any other valuable article or undisclosed investment. Also, no evidence of any unexplained cash expenditure, parallel books of accounts etc. was found.

AT the same time the Tribunal opined that it cannot be ruled out that certain element of these cash entries were meant to inflate the expenses under this head to reduce the profitability of the projects.

The Tribunal noted that as against the profit estimated by CIT(A) @ 12%, the assessee sought to justify the net profit rate of 10% disclosed by it in the returns filed u/s 153A of the Act, which according to him, was considered acceptable by NHAI in the road construction projects awarded by it.

The assessee drawn the attention of the bench to the fact that an external engineering agency

was appointed from the engineers empaneled with NHAI, who had furnished a GST impact sheet in which the agency had pegged the profitability from the NHAI projects at 10%.

Similarly, the assessee also placed on the record contemporaneous details available in public domain regarding the lowest and highest bid for its Project of NHAI wherein the successful bid was 28% lower than the Project cost fixed by NHAI as per Request for Proposal. The Tribunal found force in the assessee’s plea that, when the bid price itself was 28% lower than the price fixed by NHAI, the estimate of profit margin at 10% would be reasonable.

The Tribunal noted that similar road construction companies engaged in the same line of business had reported profitability in the range of 3% to 9% across these years. In another case, which was most functionally comparable, had also reported profitability in the range of 4% to 6%. The Tribunal further noted that jurisdictional Madras High Court had found net profit rate of 3.83% from road projects of NHAI to be a justifiable margin.

However, the Tribunal observed that the years involved in these cases were 1980s & 1990s. Therefore, the economics of road construction, tax structure, infrastructure and overall economic scenario was vastly different and hence the estimation exercise undertaken in these decisions cannot be considered as a comparable barometer for the years in question.

Considering the totality, the Tribunal held that the profit of the assessee is to be estimated at 10% of the contractual receipts from NHAI. The Tribunal added that once the books of accounts have been rejected and the profits are being estimated, then no further separate disallowance u/s 40A(3) or 40(a)(ia) is warranted.

Accordingly, the appeals of the Revenue were dismissed and the appeals of the assessee were partly allowed. 

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