1997 (2) TMI 558 - AT - Income Tax

Summary

Issues Involved:
1. Reduction of the addition from Rs. 14,16,912 to Rs. 1,00,000.
2. Estimation of net business income at 0.50% on the turnover of Rs. 2 crores.
3. Validity of the loss of books of account claim.
4. Estimation of sales and gross profit.
5. Allowability of expenses.

Detailed Analysis:

1. Reduction of the Addition:
The primary issue raised by the Revenue was the reduction of the addition from Rs. 14,16,912 to Rs. 1,00,000 by the Commissioner of Income-tax (Appeals) (CIT(A)). The CIT(A) based this reduction on an estimated net profit rate of 0.50% on a turnover of Rs. 2 crores. The Revenue contended that this reduction was erroneous and arbitrary.

2. Estimation of Net Business Income:
The CIT(A) estimated the net business income at 0.50% on the turnover of Rs. 2 crores, resulting in an income of Rs. 1,00,000. This estimation was based on the past records of the assessee, which showed a net profit rate of 0.35% for the assessment year 1985-86. The CIT(A) considered it reasonable to apply a higher net profit rate of 0.50% given the circumstances.

3. Validity of the Loss of Books of Account Claim:
The assessee claimed that the books of account were lost in transit, which was reported to the police and advertised in a local newspaper. The Assessing Officer (AO) found this claim to be concocted, citing discrepancies in the timing and manner of reporting the loss. The AO believed that the books were deliberately withheld to reduce tax liabilities. However, the CIT(A) accepted the loss of books as a fact and proceeded with the assessment based on available records.

4. Estimation of Sales and Gross Profit:
The AO estimated the total sales at Rs. 2,90,92,953 based on the sales register for April and May 1985, which showed sales of Rs. 90,92,953. The AO then estimated the sales for the remaining period (4 months and 22 days) at Rs. 2 crores. The AO applied a gross profit rate of 6.5%, resulting in a gross profit of Rs. 18,91,041. The CIT(A) found this estimation excessive and reduced the estimated turnover to Rs. 2 crores, considering the past turnover records and the shorter accounting period (6 months and 22 days).

5. Allowability of Expenses:
The AO disallowed 40% of the expenses, citing unverifiable and unsigned debit notes. The CIT(A), however, did not explicitly address the disallowance of expenses but focused on the net profit estimation. The Judicial Member (JM) agreed with the AO on the sales estimation and gross profit rate but directed that expenses should be allowed without any deduction. The Third Member (TM) concurred with the CIT(A) and Accountant Member (AM), emphasizing that a net profit rate of 0.50% on the estimated sales of Rs. 2 crores was fair and reasonable.

Conclusion:
The appeal by the Revenue was dismissed, with the majority view supporting the CIT(A)'s decision to estimate the net business income at 0.50% on the turnover of Rs. 2 crores, resulting in an income of Rs. 1,00,000. The assessment was based on a fair and reasonable estimation considering the past records and the circumstances of the case. The claim of loss of books was accepted, and the estimation method adopted by the CIT(A) was upheld.