2014 (12) TMI 1162 - AT - Income Tax

Estimation of Turnover - CIT(A) estimated the income of the assessee at the rate of 3% of the sales at ₹ 29,42,380/- against ₹ 1,02,63,160/- assessed by the AO at the rate of 10% of the turnover - Held that - Order of the Ld. CIT(A) is well reasoned. The assessee has explained that the facts and circumstances for the year under consideration were altogether different from that of preceding year. The assessee had diverted its business from being stockist of vehicles into consignee of the vehicles. Since there was not much requirement of investment of funds in consignment business, hence the risk factor involved was negligible. The turnover for the year under consideration had considerably increased in comparison to last year. It is commonly observed that when turnover is increased the profit margin is generally decreased. The assessed income of the assessee for the year under consideration even at the rate of 3% of the turnover at ₹ 29.40 lakhs was much more than the assessed income at the rate of 10% of the turnover of the preceding year at ₹ 13.57 lakhs. The Ld. CIT(A), after taking into consideration the facts and circumstances of the case and also taking into consideration the assessed income of the assessee in the subsequent year, has directed the assessment of income at the rate of 3% of the total turnover. We do not find any infirmity in the well reasoned order of the Ld. CIT(A) and hence the same is upheld. - Decided against revenue.

Summary

Issues:
1. Disallowance estimation discrepancy by CIT(A)
2. Discrepancy in turnover estimation between years
3. Change in business activity affecting profit margin
4. Best judgment assessment and estimation of income

Analysis:

Issue 1: Disallowance Estimation Discrepancy by CIT(A)
The Revenue appealed against the CIT(A)'s order restricting the disallowance at 3% of turnover, challenging the earlier 10% disallowance made by the assessing officer. The Revenue argued that the CIT(A) erred in not considering the best judgment assessment under section 144 of the IT Act and the non-compliance of the assessee in submitting proper accounts. The CIT(A) justified the 3% estimation based on the change in business activity and lack of justification for a 10% disallowance, providing detailed reasoning for the adjustment.

Issue 2: Discrepancy in Turnover Estimation Between Years
The assessing officer determined the income of the assessee at 10% of the turnover based on the comparison with the previous year's assessment. However, the CIT(A) noted the significant increase in turnover due to the change in business activity from stockist to consignee of vehicles. The CIT(A) highlighted the lower profit margin in consignment business and the negligible risk factor due to minimal investment, leading to a revised estimation of income at 3% of the turnover.

Issue 3: Change in Business Activity Affecting Profit Margin
The assessee shifted its business from stockist to consignee of vehicles, resulting in a substantial increase in turnover. The CIT(A) considered the impact of this change on profit margin, emphasizing the lower margin in consignment business due to reduced investment and risk. The CIT(A) analyzed the financial data of successive years to justify the 3% income estimation for the current year, aligning with the actual business operations.

Issue 4: Best Judgment Assessment and Estimation of Income
In a best judgment assessment, the AO must make a fair estimate of income based on available information. The CIT(A) criticized the AO's arbitrary 10% turnover estimation without substantial justification, especially considering the subsequent year's assessment at a much lower rate. The CIT(A) upheld the 3% income estimation for the current year, emphasizing the need for a reasonable and justified assessment even in best judgment scenarios.

In conclusion, the ITAT Mumbai upheld the CIT(A)'s order, dismissing the Revenue's appeal and affirming the 3% income estimation based on the specific circumstances and business activities of the assessee.