2016 (6) TMI 1150 - AT - Income Tax

Estimation of N.P - profit in case of business in Indian made foreign liquor - Held that - In view of order of the coordinate bench of the Tribunal in T. Appalaswamy Versus ACIT Circle-5 (1) Visakhapatnam 2014 (3) TMI 1056 - ITAT VISAKHAPATNAM we set aside the order passed by the Ld. Commissioner and we direct the A.O. to restrict the estimation at 5% on total purchases net of all deductions. Opening capital unexplained - Held that - The case of the assessee is that in the past 20 years, he has been carrying out various small businesses and he is able to save some money, he has not filed any returns, because his earnings are below taxable limit. Out of the savings, the assessee introduced the capital. The assessee is not able to substantiate his case neither before the A.O. nor before the CIT(A). Now before us, he has submitted that he has quantified all the details and prayed for one more opportunity to substantiate his case before the A.O. By considering the request made by the assessee and also keeping in view of the facts and circumstances of the case, we are of the opinion that in the interest of justice, one more opportunity should be given to the assessee. In view of the above, we set aside the order passed by the Ld. Commissioner and remit the matter back to the A.O., in respect of opening balance as well as source of initial purchases made by the assessee of ₹ 3,28,351/- and direct the A.O. to decide the issue de-novo in accordance with law after being given an opportunity of being heard to the assessee. Unexplained expenditure - Held that - A.O. has not satisfied with the explanation given by the assessee on the ground that the assessees are not able to substantiate the stand taken by them and additions were made. CIT(A) confirmed the same. After hearing both the sides by considering the request of the Ld. Counsel for the assessee, we are of the opinion that one more opportunity should be given to the assessee in the interest of justice. Accordingly, we set aside the order passed by the CIT(A) and remit the matter back to the A.O., in respect of opening balance as well as source of initial purchases made by the assessee and direct the A.O. to decide the issue de-novo in accordance with law after being given an opportunity of being heard to the assessee.

Issues Involved:
1. Estimation of net profit for the business of Indian Made Foreign Liquor (IMFL).
2. Treatment of opening capital balance as unexplained credit.
3. Treatment of initial purchases as unexplained expenditure.

Detailed Analysis:

1. Estimation of Net Profit for IMFL Business:
The primary issue was the estimation of net profit for the assessee engaged in the business of Indian Made Foreign Liquor (IMFL). The assessee declared a net profit of ?2,02,690/- on sales of ?1,16,83,213/- and purchases of ?91,11,524/-. The Assessing Officer (A.O.) rejected the books of accounts due to the absence of bills, vouchers, and stock registers and estimated the net profit at 20% of the stock put for sale. The Commissioner of Income Tax (Appeals) [CIT(A)] reduced this estimation to 10% on the purchase price. The Tribunal referred to previous decisions, particularly the case of T. Appalaswamy and Tangudu Jogisetty, where the net profit was estimated at 5% of total purchases. It was determined that the A.O.'s reliance on a case involving arrack dealers was not appropriate for IMFL dealers, as the latter operates under different regulatory conditions. Consequently, the Tribunal directed the A.O. to estimate the net profit at 5% of total purchases net of all deductions.

2. Treatment of Opening Capital Balance as Unexplained Credit:
The second issue was the treatment of the opening capital balance of ?10,15,000/- as unexplained credit. The A.O. questioned the source of this amount, and the assessee claimed it was accumulated earnings from various businesses over 20 years, despite not filing returns due to income being below the taxable limit. The A.O. found the explanation insufficient, noting the lack of physical evidence of savings or investments. The CIT(A) upheld the A.O.'s decision. The Tribunal, considering the assessee's request for another opportunity to substantiate the claim, remitted the matter back to the A.O. for a fresh examination, directing the A.O. to decide the issue de-novo after allowing the assessee an opportunity to present evidence.

3. Treatment of Initial Purchases as Unexplained Expenditure:
The third issue concerned the initial purchases amounting to ?3,28,351/-. The assessee contended that the actual initial purchase was ?1,31,480/- and was funded through unsecured loans, which were repaid within the financial year. However, the A.O. treated the entire amount as unexplained expenditure due to the lack of supporting evidence. The CIT(A) confirmed this treatment. Similar to the opening capital issue, the Tribunal remitted this matter back to the A.O., directing a de-novo examination and allowing the assessee to provide necessary evidence.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, directing the A.O. to:
- Estimate the net profit at 5% of total purchases net of all deductions.
- Re-examine the opening capital balance and initial purchases, providing the assessee an opportunity to substantiate their claims.

The judgment emphasizes the importance of proper documentation and evidence in substantiating financial claims and provides a precedent for handling similar cases in the IMFL business.

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