2016 (8) TMI 1273 - AT - Income Tax

Estimation of profit in respect of IMFL business carried by the assessee - Held that - Direct the A.O. to re-compute the income of the assessee at 5% of purchase price. Accordingly this ground of appeal raised by the assessee is allowed.

Summary

Issues involved:
Estimation of profit in IMFL business for assessment year 2011-12, Treatment of initial investment made by the assessee.

Estimation of Profit in IMFL Business:
The appeal pertains to the estimation of profit in the IMFL business of the assessee for the assessment year 2011-12. The assessee, an individual engaged in the purchase and sale of Indian made Foreign Liquor (IMFL), had initially declared nil income in the return filed. The assessing officer, during the assessment u/s 143(3) of the Income Tax Act, 1961, estimated the net profit at 20% of the stock put to sale due to the absence of proper stock registers and sales documentation. On appeal, the CIT(A) reduced the estimated profit percentage to 10% of the purchase price. The Tribunal considered a similar case where a profit margin of 5% was deemed reasonable in the IMFL business and directed the assessing officer to re-compute the profit accordingly. The Tribunal found that the A.O. had relied on a judgment concerning a different type of business, and the assessee's reliance on a coordinate bench decision supporting a 5% profit estimation was deemed appropriate. Consequently, the Tribunal directed the A.O. to estimate the net profit at 5% of total purchases net of all deductions, aligning with the previous decision of the coordinate bench.

Treatment of Initial Investment:
Regarding the treatment of the initial investment made by the assessee, the A.O. had questioned the source of investment, which the assessee claimed was from opening capital and advances received. The A.O. treated the initial investment as unexplained income due to lack of substantiation. On appeal, the assessee presented a memorandum of association with five members to explain the source of funds, which the CIT(A) rejected without proper consideration. The Tribunal noted that the memorandum of association was not submitted before the A.O., and the CIT(A) should have called for a remand report to assess it. As a result, the Tribunal set aside the CIT(A)'s order and remitted the matter back to the A.O. to consider the memorandum of association and provide the assessee with an opportunity to substantiate the case. The appeal was partly allowed for statistical purposes.

In conclusion, the Tribunal's judgment addressed the issues of profit estimation in the IMFL business and the treatment of the initial investment made by the assessee, providing detailed analysis and directions for both matters based on legal precedents and factual considerations.