ITAT Holds Rejection of Books Under Section 145(3) Invalid:

The case concerned disallowance of outstanding labour and wage charges amounting to Rs. 51.72 crore under the Income Tax Act, 1961. The assessee, Kunal Pandey, was engaged in executing Government contracts and had declared a total income of Rs. 9.24 crore for Assessment Year 2020-21. During the assessment proceedings, the AO noticed that the assessee had debited labour and contract expenses of Rs. 41.62 crore and shown substantial outstanding labour and wage liabilities under the head 'Other Current Liabilities'.

Consequently, the AO treated Rs. 51,72,29,144 as unexplained labour and wage charges after reducing the estimated wages attributable to February and March 2020 from the total outstanding amount. The AO also rejected the assessee's books of accounts under Section 145(3) of the Income Tax Act, 1961, and made the addition while framing the assessment under Section 143(3) read with Section 144B of the Act. The CIT(A) Upheld the Addition. 

After considering the rival submissions and examining the material on record, the Tribunal observed that the assessee had furnished the relevant details of labour charges, wage expenses and outstanding liabilities during the assessment proceedings. The AO, however, had not identified any specific defect in the books of accounts before rejecting them under Section 145(3) of the Act.

The Tribunal held that rejection of books of accounts cannot be sustained merely because certain particulars of the labourers were not furnished, particularly when the assessee had produced labour registers, attendance details, daily wage records and supporting documentary evidence. With regard to the addition of Rs. 51.72 crore, the Tribunal noted that the assessee had raised bills amounting to Rs. 60.33 crore in March 2020 alone, excluding applicable CGST and IGST. The Tribunal further noted that the outstanding labour charges were substantially discharged in the subsequent financial year after the assessee received payments against the contractual work. The outstanding labour liability in the subsequent year had reduced to merely Rs. 2,58,051, which supported the assessee's explanation regarding the genuineness of the outstanding payments.

Accordingly, the Tribunal held that neither the rejection of books of accounts nor the addition could be sustained. It set aside the order passed by the CIT(A) and directed the AO to delete the entire addition of Rs. 51,72,29,144. Consequently, the appeal filed by the assessee was allowed.