2004 (9) TMI 15 - HC - Income Tax

What should be the gross profit rate finding of fact VDIS - Tribunal rejected Revenue s contention that the income of the assessee be determined by application of a net profit rate of 20 %, has been rejected. - AO had rejected the books of the assessee and determined the income from bakery business by applying a net profit rate of 20 per cent, to the declared sales of Rs. 2,28,60,250. The basis for applying a net profit rate of 20 per cent, was that the assessee had made a declaration u/s 68(2) of the Voluntary Disclosure of Income Scheme, 1997, in which a sum of Rs. 5 lakhs had been offered for assessment on undeclared sale of Rs. 19,10,000 - amount of Rs. 5 lakhs surrendered under the Scheme was not only in respect of profits earned on the sales of Rs. 19,10,000. In the declaration filed under the Scheme, it had been clearly stated that the declared amount covered the gross margin after including fixed expenses. It is, therefore, clear that the declared amount was not entirely on account of income from undisclosed sales although it covered the said income also. Thus, it could not be a guide for determining the rate applicable to the sales as declared in the books of account. Hence, Tribunal was justified in upholding the application of gross profit rate of 22 %. The findings recorded by the Tribunal are pure findings of facts. What should be the gross profit rate in a given case does not give rise to any legal issue. Revenue s appeal is dismissed in limine.

Issues:
1. Application of net profit rate for determining income.
2. Rejection of books of account and estimation of income based on past history.
3. Justification of applying gross profit rate instead of net profit rate.
4. Interpretation of declaration under Voluntary Disclosure of Income Scheme.

1. Application of Net Profit Rate:
The Revenue filed an appeal against the Tribunal's order rejecting the application of a net profit rate of 20% to the declared sales of the assessee for the assessment year 1996-97. The Assessing Officer had initially determined the income by applying this net profit rate due to a declaration made under the Voluntary Disclosure of Income Scheme. However, the Tribunal disapproved this approach, emphasizing the need for a fair and reasonable estimate of income based on past history rather than a fixed net profit rate.

2. Rejection of Books of Account and Estimation of Income:
While the Tribunal upheld the rejection of the books of account, it highlighted the importance of determining income based on past history. Referring to the gross profit rate applied in earlier years, the Tribunal justified the reduction of the addition by applying a gross profit rate of 22% as per the past history of the case. The Tribunal emphasized the Assessing Officer's duty to make a fair estimate of income supported by evidence and material on record, rather than relying solely on a net profit rate without evidence of inflated expenses.

3. Justification of Applying Gross Profit Rate:
The Tribunal upheld the application of a gross profit rate of 22% instead of a net profit rate, as there was no basis for the latter. The declared amount under the Voluntary Disclosure of Income Scheme covered gross margin after fixed expenses, indicating it was not solely from undisclosed sales. The Tribunal's decision to apply the gross profit rate was considered justified, as it was based on factual findings and past history, without raising any substantial legal issues.

4. Interpretation of Declaration under Voluntary Disclosure of Income Scheme:
The declaration made under the Voluntary Disclosure of Income Scheme clarified that the surrendered amount was not only from profits earned on undisclosed sales but also covered fixed expenses. This interpretation supported the Tribunal's decision to apply a gross profit rate instead of a net profit rate, as the declared amount did not solely pertain to undisclosed sales. The Tribunal's findings were deemed factual, leading to the dismissal of the appeal by the court.

In conclusion, the judgment focused on the importance of fair estimation of income based on past history and evidence, rather than applying fixed profit rates without proper justification. The interpretation of declarations under specific schemes played a crucial role in determining the appropriate profit rates for assessing income, leading to the dismissal of the Revenue's appeal.

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