2011 (5) TMI 944 - AT - Income Tax

Summary

Issues Involved:
1. Confirmation of addition of Rs. 9,77,250 by applying a net profit rate of 3.73% on total sales.
2. Justification of the net profit rate applied without specific defects in the books of accounts.
3. Consistency in applying net profit rates across different assessment years.

Summary:

Issue 1: Confirmation of Addition of Rs. 9,77,250 by Applying Net Profit Rate of 3.73%
The assessee, a partnership firm engaged in the liquor business, challenged the addition of Rs. 9,77,250 by the AO, who applied a net profit rate of 3.73% on total sales. The AO invoked provisions u/s 145(3) of the Income-tax Act, 1961, due to the assessee's failure to produce books of accounts and estimated sales at 2.5 times the bid money, applying a 3% net profit rate initially. The matter was remanded by the ITAT for fresh assessment, where the AO applied a 4% net profit rate, later reduced by the CIT(A) to 2.5%. The CIT(A) confirmed the addition, noting the AO's failure to follow ITAT's directions fully but accepted the sales figures provided by the assessee.

Issue 2: Justification of Net Profit Rate Applied Without Specific Defects in Books of Accounts
The assessee argued that the application of a 3.73% net profit rate was unjustified as no specific defects were found in the books of accounts. The CIT(A) observed that the rejection of books of accounts was not under dispute and upheld the AO's estimation method, which was based on average sale rates and quantities provided by the assessee. The CIT(A) confirmed the net profit rate of 3.73%, considering it reasonable under the circumstances.

Issue 3: Consistency in Applying Net Profit Rates Across Different Assessment Years
The assessee contended that for the assessment year 1994-95, the CIT(A) upheld a 2% net profit rate, and the department did not appeal against it. The ITAT emphasized the principle of consistency, citing the Supreme Court's ruling in Radhasoami Satsang vs. CIT and other relevant cases. The ITAT noted that the department accepted a 2% net profit rate in the succeeding year and found no justification for deviating from this rate for the year under consideration. Consequently, the ITAT deleted the addition of Rs. 9,77,250 made by the AO and confirmed by the CIT(A).

Conclusion:
The appeal was allowed, and the addition of Rs. 9,77,250 was deleted, emphasizing the principle of consistency in applying net profit rates across different assessment years. The order was pronounced in the open Court on 23.5.2011.