2009 (8) TMI 757 - AT - Income Tax

Rejection of books of accounts - Assessment u/s 143(3) r/w 153A - estimation of income - percentage of net wealth / net worth - retraction of statement - Held that income is generally arrived at based on income method or net asset method . - It cannot be said the adoption of net asset method is an impossible view. This is a permissible view. Net worth method is a recognized method of accounting in the absence of proper maintenance of books of accounts on the basis of which profits of the year can be determined. Undisputedly in the instant case, no books of accounts are maintained by the assessees. Under these circumstances, only two options are left with the assessees, either to compute the profit by applying the net profit rate to the gross receipts, or by taking the net worth basis. The reasons for rejecting the net worth basis do not appear to be reasonable because they are not based on some documentary evidence. - If the assessee has earned some profit or income it must have been spent in acquisition of wealth. So far as withdrawal towards the personal expenses are concerned, we find from the statement of the assessee that he has been regularly showing the withdrawal in every year the dispute was raised with regard to the quantum of withdrawal. In the absence of any evidence, it is also a question of estimate. Decided in favor of assessee - matter remanded back to AO with a direction to accept the profit of the year shown by the assessees on the basis of the net wealth method.

Issues Involved:
1. Validity of assessment under Section 143(3) read with Section 153A of the IT Act, 1961.
2. Method of income estimation: Net profit rate vs. Net wealth method.
3. Justification of the CIT(A)'s estimation of profit at 5% vs. AO's estimation at 8%.
4. Admission of additional evidence by CIT(A) without AO's opportunity for examination.
5. Credit for tax paid by partnership firms in individual assessments.

Issue-Wise Detailed Analysis:

1. Validity of Assessment under Section 143(3) read with Section 153A:
The assessee challenged the validity of the assessment on the grounds that the return of income filed in response to notice under Section 153A was not processed under Section 143(1)(a) before the issuance of notice under Section 143(2). The Tribunal did not specifically address this procedural issue in the final judgment, focusing instead on the method of income estimation.

2. Method of Income Estimation:
The central issue was whether the profit should be estimated by applying a net profit rate to contract receipts or using the net wealth method. The assessees argued for the net wealth method, citing CBDT Circular No. F. No. 2/48/68-IT (Inv.), dt. 26th Feb., 1969, which recognizes the net worth basis in the absence of proper books of accounts. The AO rejected this method, preferring an 8% net profit rate based on Section 44AD of the IT Act. The Tribunal, referencing previous cases (Smt. Rajni vs. ITO and K.C.K.A. Gupta vs. Asstt. CIT), upheld the net wealth method as a recognized accounting method when books are not adequately maintained.

3. Justification of CIT(A)'s Estimation of Profit at 5%:
The CIT(A) reduced the AO's profit estimation from 8% to 5%, considering the peculiar facts of the case. The Revenue appealed against this reduction, arguing that 8% was reasonable and supported by precedents. The Tribunal found that the AO's rejection of the net wealth method was not based on specific defects but rather on presumptions. The Tribunal directed the AO to accept the profit shown by the assessees on the net wealth method, thus setting aside the CIT(A)'s estimation.

4. Admission of Additional Evidence by CIT(A):
The Revenue contended that the CIT(A) admitted additional evidence without giving the AO an opportunity to examine it, contravening Rule 46A of the IT Rules, 1962, and the doctrine of natural justice. The Tribunal did not address this procedural contention in detail, focusing on the substantive issue of the method of income estimation.

5. Credit for Tax Paid by Partnership Firms:
The assessees requested that the tax paid by the partnership firms be credited in their individual assessments since the Revenue did not consider the firms genuine. The Tribunal directed that credits for the said tax paid in the hands of the firms be given in the individual hands of the assessees.

Conclusion:
The Tribunal allowed the appeals of the assessees, directing the AO to accept the profit estimation based on the net wealth method and to provide credit for the tax paid by the partnership firms in the individual assessments. The appeals by the Revenue were dismissed.

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