2012 (8) TMI 14 - AT - Income Tax

Additions on account of estimation of gross profit rate @28% on the unaccounted turnover Held that - AO could not adduce any cogent reason for applying the higher GP rate of 28% - assessee has declared GP rate of 13.06% to 21.76% in various assessment years 1998-1999 to 2003-2004 which shows an average rate of GP at 18.36% - No reason to justify the higher GP rate of 28% was given by the AO - AO directed to work out the addition on account of GP on undisclosed turnover - Revenue s appeals is partly allowed. Additions on account of unaccounted investment being 1/6th of initial unaccounted capital - assessee has contended that this investment is to be made in the first month and there is a turnover of remaining period - assessee has also contended before the AO that its business cycle period of one time turnover is 25 to 35 days Held that - It would be reasonable to estimate unaccounted initial investment at 1/12th of unaccounted invested capital as against 1/6th thereof estimated by the AO - Revenue s appeals are partly allowed.

Summary

Issues:
1. Estimation of gross profit rate on unaccounted turnover for assessment years 1998-1991.
2. Addition on account of unaccounted investment being 1/6th of initial unaccounted capital.

Estimation of Gross Profit Rate on Unaccounted Turnover:
The appeals by Revenue were directed against the orders of the Commissioner of Income-Tax (Appeals)-IV for the assessment years 1998-1999, 1999-2000, and 2000-2001. The Revenue contended that the CIT(A) erred in deleting additions made on account of estimation of gross profit rate @28% on the unaccounted turnover. The AO had rejected the accounts of the assessee due to defects in the account books and reduced the figure of unaccounted sales to a reasonable amount in the second round of assessment. The Tribunal found that the accounts were rightly rejected by the AO, and the estimation of undisclosed turnover during the relevant periods was justified. However, the Tribunal held that there was no justification for applying a higher GP rate of 28% as the AO failed to provide a reason for it. The Tribunal directed the AO to calculate the addition on account of GP on undisclosed turnover by applying rates of 18.36%, 19.52%, and 21.76% for the respective assessment years.

Addition on Account of Unaccounted Investment:
The second issue involved additions made on account of unaccounted investment being 1/6th of the initial unaccounted capital. The AO estimated the initial unaccounted capital invested by the assessee at 1/6th of the unaccounted turnover. The Tribunal found this estimate to be on the higher side and considered the business cycle period and turnover frequency presented by the assessee. It was held that a more reasonable estimation would be at 1/12th of the unaccounted invested capital instead of 1/6th as estimated by the AO. Consequently, the Tribunal partly allowed the Revenue's appeal on this ground.

In conclusion, the Tribunal partly allowed all three Revenue's appeals concerning the estimation of gross profit rate on unaccounted turnover and the addition on account of unaccounted investment. The Tribunal adjusted the GP rates applied by the AO and revised the estimation of unaccounted initial capital, providing detailed reasoning for each decision.