2014 (1) TMI 398 - HC - Income Tax

Estimation of net profit rate - Held that - The Tribunal has found that for AY 2005-06 where assessment was completed under Section 143(3) of the Act, the AO had adopted a net profit rate of 3.1% (the assessee had declared a net profit rate of 2.1%) whereas for the assessment year under appeal the assessee had declared a net profit rate of 4.5%, the CIT (A) has adopted a rate of 7% - The Tribunal has declined to interfere on the ground that even in the case of a best judgment assessment it is well settled that the Assessing Officer cannot act capriciously and the assessment has to be made on the basis of previous history, local knowledge and the circumstances pertaining to the assessee. Unexplained credit - Held that - During the stage of the remand proceeding, the assessee had filed by way of affidavits confirmations from the creditors. Subsequently, three remaining creditors had also filed confirmations - The Tribunal has compared the same with the list of sundry creditors in the balance-sheet for the earlier year ending on 31 March 2007 - It has been found that the creditors have provided building material for civil construction work and road roller and JCB machine for the use of the business activities of the assessee - If some outstanding amount was left due at the end of the financial year, which was confirmed by the creditors, this could not be regarded as an unexplained liability - Decided against Revenue.

Summary

Issues:
1. Whether the ITAT erred in deleting the additions made U/s 68 based on affidavits only.
2. Whether the ITAT was justified in assessing the income of the assessee by applying a 7% net profit rate instead of 8% as provided U/s 44-AB.

Analysis:
1. The case involved an appeal by the Revenue under Section 260A of the Income Tax Act, 1961, for the assessment year 2008-09. The primary contention was regarding the deletion of additions made under Section 68 based solely on affidavits. The Assessing Officer added unconfirmed creditors and disallowed expenses, leading to a significant addition to the income of the assessee. The CIT (A) upheld the best judgment assessment but found the additions unreasonable, considering verified creditor balances and past assessment history. The Tribunal affirmed the CIT (A)'s decision, emphasizing the importance of reasonable judgment and historical assessment data in determining income.

2. The second issue revolved around the application of a 7% net profit rate by the CIT (A) instead of the prescribed 8% under Section 44-AB. The Tribunal upheld this decision, considering the previous year's assessment where a lower net profit rate was accepted. The Tribunal highlighted the need for assessments to be based on historical data, local knowledge, and circumstances specific to the assessee. The Tribunal also emphasized the importance of reasonable estimates in best judgment assessments, citing legal precedent to support the approach taken in this case.

In conclusion, the High Court dismissed the appeal, finding no substantial question of law arising from the Tribunal's decisions. The Court agreed with the Tribunal's reasoning on both issues, emphasizing the importance of reasonable assessments based on historical data and fair estimates of income. The Court highlighted the significance of verified creditor confirmations and past assessment rates in upholding the Tribunal's decision.