2013 (8) TMI 946 - AT - Income Tax

Estimation of income at the rate of 5% net profit on gross receipt - Held that - No infirmity in the findings of the AO in rejecting the books of account. Therefore, the rejection of books of accounts is upheld. We further noted that the assessee did not maintain proper vouchers etc. and, therefore, no recourse was left with the AO except applying the profit on the basis of best judgment. In immediately preceding year, the turn over of the assessee on which the profit was shown at 3.37%, whereas in the year under consideration the AO applied 5%. In our view, the net profit rate applied by the AO is not exorbitant. Therefore, we confirm the application of NP rate of 5% on the facts of the present case. Addition under Section 41(1) - Held that - We found that the assessee deserves to succeed in this ground. Firstly, once the AO has applied the net profit rate then no further addition can be made as held by the Hon ble Allahabad High Court in the case of CIT Vs. Banwari Lal Banshidhar (1997 (5) TMI 37 - ALLAHABAD High Court ). Even on merit, we noted that how the liability on account of sundry creditor is ceased to exist is not borne out from the facts of the case. Therefore, for this reason also, the application of provision of Section 41(1) were not justified.

Summary

Issues involved:
1. Confirmation of estimated income by AO
2. Addition under Section 41(1) of the Act

Analysis:
Issue 1: Confirmation of estimated income by AO
The appeal was filed against the order of the CIT(A)-23, Mumbai for the assessment year 2007-08. The AO estimated the income of the assessee at Rs. 6,96,448, computed at a net profit rate of 5% on gross receipts of Rs. 2,39,20,840. The CIT(A) required the assessee to provide various documents, including partnership deed, bank statements, and financial statements for previous assessment years. As the assessee failed to furnish relevant documents for the current assessment year, the AO rejected the books of accounts and estimated the profit at 5% of gross receipts. The Tribunal upheld the rejection of books of accounts, noting the lack of proper maintenance of vouchers by the assessee. The Tribunal found the net profit rate of 5% applied by the AO to be reasonable based on the previous year's turnover, thus confirming the AO's decision.

Issue 2: Addition under Section 41(1) of the Act
The AO also made an addition of Rs. 94,84,133 under Section 41(1) based on outstanding sundry creditors, as the assessee failed to produce books of account, audit reports, or creditor lists. The CIT(A) confirmed this action. However, the Tribunal, after considering the arguments, held that once the net profit rate was applied, no further addition could be made. Citing a judgment of the Hon'ble Allahabad High Court, the Tribunal concluded that the provisions of Section 41(1) were not applicable as the liability on account of sundry creditors had not ceased to exist. Therefore, the Tribunal allowed this ground of the assessee by deleting the addition made under Section 41(1).

In conclusion, the appeal of the assessee was allowed in part, with the Tribunal ruling in favor of the assessee on both issues. The judgment was pronounced on August 7, 2013.