2014 (2) TMI 270 - HC - Income Tax

Estimation of gross profit rate - Held that - The assessee has shown gross profit rate of 17.82% in assessment year 2005- 06 and 10.26% in assessment year 2004-05 - Keeping in view the aforesaid rates of gross profit shown by the assessee itself in preceding 2 years, it is considered proper to direct the Assessing Officer to apply gross profit rate of 11% as against 17.82% applied by him and 8% applied by the CIT(A) - There is bound to be some estimation and guess work when the Tribunal on the basis of the recent rate of return of the assessee s business in his own case, estimated the GP rate at 11% - Decided against assessee.

Summary

Issues:
1. Rejection of book results and application of gross profit rate.
2. Nature of business carried out by the appellant.
3. Accuracy of book results and estimation of income.

Analysis:

Issue 1: Rejection of book results and application of gross profit rate
The appellant, engaged in the business of cattle feed, filed an appeal challenging the rejection of book results by the Income Tax Appellate Tribunal (the Tribunal) and the application of a gross profit rate of 11% by the Assessing Officer. The Assessing Officer had rejected the book results due to a steep fall in the GP rate and added a sum to the total income of the assessee based on a different GP rate. The CIT(Appeals) accepted the rejection of book results but chose to adopt a GP rate of 8% considering the nature of the business. The Tribunal confirmed the view that the book results were inaccurate and adopted a GP rate of 11% based on the appellant's previous GP rates in the preceding years.

Issue 2: Nature of business carried out by the appellant
The bone of contention between the Revenue authorities and the appellant was the nature of business carried out by the appellant. The CIT(Appeals) observed that the appellant was engaged in both cattle feed and cotton business, leading to a higher GP rate in cattle feed business. However, the Tax Audit Report certified that the appellant's business continued to be the manufacturing of cattle feed and mixture of cattle feed, refuting the claim of engagement in cotton business. The Tribunal concluded that the appellant's business was primarily cattle feed, directing the Assessing Officer to apply a GP rate of 11%.

Issue 3: Accuracy of book results and estimation of income
The Tribunal based its decision on facts, concluding that the book results did not accurately reflect the income. Despite differing opinions from the Assessing Officer and CIT(Appeals), the Tribunal upheld the rejection of book results and estimated the GP rate at 11% considering the recent return of the assessee's business. The Tribunal's decision involved some estimation and guesswork, as evidenced by the varying GP rates in previous years. Ultimately, the High Court found no question of law arising and dismissed the Tax Appeal.

In conclusion, the High Court upheld the Tribunal's decision regarding the rejection of book results and the application of a GP rate of 11%, emphasizing the importance of accurate reflection of income in determining tax liability.