2010 (9) TMI 1138 - AT - Income Tax

Estimation of profit - allowed to sell the wine 30% over and above the purchase price - discrepancies in the books of account - HELD THAT - Admittedly the assessee disclosed the sale at ₹ 5,73,36,805. However, the AO estimated the same at ₹ 6,03,02,927. The difference between the sales declared by the assessee and estimated by the AO was added as income of the assessee. The difference of ₹ 29,66,182 comes to 5% of the purchase cost. For the A.Y. 2001-02, the total purchases was ₹ 2,50,72,224. The total sales was ₹ 2,69,81,342. The assessee declared the profit at 3.48%. The AO estimated the profit at 5%. However, the Tribunal after deletion of ₹ 3,45,000 sustained the profit at 3.68%. For the A.Y. under consideration the total purchases is ₹ 5,44,21,009 after reducing the incentives given by the manufacturer. The sales declared by the assessee was ₹ 5,73,36,805. Admittedly the assessee has not maintained proper sales bills for sale of wines. Therefore, we cannot blame the AO for rejecting the books of account. The only option available to the AO is to estimate the profit on the basis of material available on record. For the purpose of estimation of profit the AO has to necessarily take into consideration the factors such as competition in the business, availability of stock, demand in the market, availability of labourers, comparative profit of the similarly placed traders in that locality, comparative profit rate of the assessee in respect of other years, turnover, etc. In this case, the AO has not considered any of those factors except to say that the 5% estimated by him for the A.Y. 2001-02 was confirmed by the CIT(A). Profit ratio cannot be a constant figure. The profit ratio would fluctuate depending upon the various factors for every year. the profit ratio will decrease when the turnover increases.By taking into consideration of the competition in the business incentives given by the manufacturers and the profit ratio shown by the assessee from the A.Y. 1997-98 and the profit estimated by this Tribunal in assessee's own case for A.Y. 2001-02, in our opinion, estimation of profit at 3% of the purchases made by the assessee would meet the ends of justice. Accordingly, we direct the AO to estimate the profit at 3% on the purchases of ₹ 5,44,21,009. deletion of the difference in the licence fee - HELD THAT - Admittedly, the books of account were rejected and the profit was estimated. Once the books of account were rejected the very same books cannot be a basis for making any addition as held by the jurisdictional High Court in the case of Indwell Constructions vs. CIT 1998 (3) TMI 121 - ANDHRA PRADESH HIGH COURT . When the profit was estimated after rejecting the books of account, all the expenditure including licence fee are deemed to be allowed. Therefore, once profit was estimated there cannot be any further addition. In our opinion, the CIT(A) has rightly deleted the addition. Exclusion of business income - HELD THAT - In case the returned income consists of income from other sources other than business income then such income has to be brought to tax in addition to the estimated profit of 3% as discussed earlier. In view of the above we do not find any infirmity in the order of the CIT(A). Accordingly the same is confirmed.

Summary

Issues:
Estimation of profit at 5% for assessment year 2004-05.

Analysis:
1. The first issue in this judgment revolves around the estimation of profit at 5% for the assessment year 2004-05. The Assessing Officer estimated the gross sale at 5% more than the purchases, resulting in an addition of income to the assessee. The representative for the assessee argued that the manufacturer's incentives reduced the purchase cost, affecting the profit ratio. Referring to a previous tribunal order, it was highlighted that excessive license fees paid by the assessee were considered in profit estimation, leading to a reduced addition. The Tribunal determined that the profit ratio should be between 2.05% to 3.68% based on various factors and directed the Assessing Officer to estimate profit at 3% on the purchases made by the assessee.

2. The second issue addressed in the judgment relates to the Revenue's appeal regarding the deletion of a difference in license fees and the exclusion of certain business income. The Revenue contended that once the books of account were rejected, no further additions could be made. The Tribunal agreed with the CIT(A)'s decision to delete the addition of the license fee difference and exclude the existing business income when estimating the profit. The Tribunal confirmed the CIT(A)'s decision in this regard.

3. In conclusion, the Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, emphasizing the importance of considering various factors in profit estimation and the exclusion of existing business income when determining the final taxable amount. The judgment provided a detailed analysis of profit estimation, the impact of manufacturer incentives, and the correct approach to be taken when rejecting books of account for assessment purposes.