2013 (6) TMI 543 - AT - Income Tax

Addition of Income - estimating net profit at 0.5% on turnover by CIT(A) - case was selected for scrutiny under CASS u/s 143(2) - disallowance of 25% of total purchases by the assessee - Held that - As per CIT(A) s conclusion all the parties from whom the assessee had made purchases were assessed to tax and were disclosed in their trading account. The parties from whom the assessee had made purchases had only wrongly classified in their books of accounts as loan instead of showing the balance due to the assessee as receivable from the assessee as debtors.In such circumstances, the transactions of the purchases and sales made by the assessee need not be doubted. As during the year the assessee had a turnover of Rs.18.23 Crores with gross profit at 0.04% and net profit at 0.02%. During the subsequent assessment year, the turnover declared was nil and had shown negligible administrative expenses of Rs.46,187/- and had outstanding debtors and creditors. Thus from this it could be inferred that both the purchases and sales are bogus and only book entries. Such transactions are generally made to extend bogus entries to other concerns in order to help them to evade tax or it could be a circular transaction to generate a healthy balance sheet to deceive financial institutions or for other purposes. Thus the income of the assessee could not be to the extent of 25% of unverifiable purchases. Further, drawing support from the decisions of Vijay Protins Ltd. 1996 (1) TMI 144 - ITAT AHMEDABAD-C net profit could be estimated at 0.05% on the total turnover of Rs.18.23 Crores. All the findings of the CIT(A) is quite reasonable & either parties did not produce any materials on record to dislodge the findings of the CIT(A, thus no hesitation to confirm the order of the CIT(A).

Summary

Issues Involved:
1. Addition of Rs.9.12 lakhs by estimating net profit at 0.5% on turnover.
2. Restriction of addition of Rs.2,73,09,640/- made by disallowing 25% of total purchases to Rs.9.12 lakhs.
3. Admission of the assessee's submission about circular transactions without a remand report under Rule 46A.

Issue-wise Detailed Analysis:

1. Addition of Rs.9.12 lakhs by estimating net profit at 0.5% on turnover:
The assessee challenged the confirmation by the CIT (A) of the assessing officer's action in sustaining an addition of Rs.9.12 lakhs by estimating the net profit at 0.5% on turnover. The assessee's appeal raised three grounds, but only ground No.1 survived for adjudication. The CIT(A) had estimated the net profit at 0.5% on the turnover of Rs.18.23 crores, considering the transactions were circular and aimed at generating a healthy balance sheet for financial institutions. The Tribunal found the CIT(A)'s findings reasonable and confirmed the order, dismissing the assessee's appeal.

2. Restriction of addition of Rs.2,73,09,640/- made by disallowing 25% of total purchases to Rs.9.12 lakhs:
The revenue appealed against the CIT(A)'s decision to restrict the addition of Rs.2,73,09,640/- made by disallowing 25% of total purchases to Rs.9.12 lakhs. The assessing officer had initially made the addition, treating 25% of the purchases as bogus following the decision in Vijay Protein Ltd. The CIT(A) observed that the purchase parties were assessed to tax and their trading accounts showed the sales. The CIT(A) found no basis for disallowing 25% of the purchases while accepting 75% as genuine. The Tribunal upheld the CIT(A)'s decision, noting that the transactions were circular and aimed at creating a fake healthy balance sheet. The Tribunal dismissed the revenue's appeal.

3. Admission of the assessee's submission about circular transactions without a remand report under Rule 46A:
The revenue also contended that the CIT(A) erred in admitting the assessee's submission about circular transactions without calling for a remand report under Rule 46A. The CIT(A) had considered the assessee's admission that the transactions were circular to fulfill turnover criteria for bank finance. The Tribunal found the CIT(A)'s approach reasonable, noting that the transactions were not genuine purchases or sales but book entries for creating a favorable balance sheet. The Tribunal dismissed the revenue's appeal, supporting the CIT(A)'s estimation of net profit at 0.5% on the turnover.

Conclusion:
The Tribunal dismissed both the assessee's and the revenue's appeals, confirming the CIT(A)'s order. The CIT(A) had reasonably estimated the net profit at 0.5% on the turnover, considering the transactions were circular and aimed at generating a healthy balance sheet. The Tribunal found no material evidence to dislodge the CIT(A)'s findings and upheld the decision. The appeals were dismissed, and the order was pronounced in the open court on 10-05-2013.