2015 (9) TMI 595 - AT - Income Tax

Rejection of books of account - trading addition - Held that - The assessee s books have been rejected year after year and estimate has varied in each year. The ld. Counsel for the assessee has requested for addition on lump sum basis which in our view is not a scientific method and cannot be adopted in assessee s case. Thus looking at the repeated failure of not maintaining proper books, despite a voluminous business, nature of the business and the transactions, assessee cannot be allowed to escape the situation created by his own default and demand a lump sum addition. Assessee cannot claim advantage of lesser addition by getting the books rejected year after year and avoiding the maintenance of proper books of accounts. In the entirety of the facts and circumstances of the case, we take a lenient view and direct the AO to adopt estimate of 2.5% (against 4% adopted) of net profit rate on transportation receipts, which will meet the ends of justice. The AO is directed to calculate the taxable income accordingly. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Trading addition of Rs. 7,59,500/- on account of freight payments.
2. Rejection of books of account under Section 145(3) of the Income Tax Act.
3. Estimation of net profit rate by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Trading Addition of Rs. 7,59,500/-:
The core issue is the trading addition made by the AO amounting to Rs. 7,59,500/- due to discrepancies in freight payments. The AO observed that the assessee, a transport booking agent, did not own any trucks and arranged transportation by hiring trucks from the open market. The AO found that the assessee had shown a receipt of freight amounting to Rs. 22,24,36,643/- and a payment of Rs. 2,17,98,232/-, declaring a gross profit of Rs. 6,38,411/- and a net profit of Rs. 1,37,965/- with a net profit rate of 0.61%. The AO noted that the assessee's claim that the freight received from parties was passed on to subcontractors after deducting commission was not verifiable due to the lack of receipts or vouchers regarding the commission. The AO also found that various expenses claimed were not vouched, leading to the conclusion that the assessee paid lesser amounts to subcontractors, resulting in savings in freight received and paid. Consequently, the AO applied a net profit rate of 4% on the gross freight receipt, resulting in a trading addition of Rs. 7,59,500/-.

2. Rejection of Books of Account under Section 145(3):
The rejection of the books of account under Section 145(3) was not challenged by the assessee. The AO justified the rejection by pointing out that the books maintained by the assessee were not proper and defective, as no records regarding part payment of freight were maintained, and no receipts were issued for charging fixed commission. The AO communicated these facts to the assessee, who failed to provide a satisfactory explanation. Consequently, the AO considered it fair and reasonable to estimate the income by applying a net profit rate of 4%.

3. Estimation of Net Profit Rate:
The AO estimated the net profit rate at 4% based on a similar case of Shri Ramniwas Yadav, where the Hon'ble ITAT, Jaipur Bench, applied a 4% net profit rate. The CIT(A) upheld the AO's decision, stating that the actual receipts regarding net payment of freight made to truck owners or net receipt of bilty charges/commission by the appellant were not verifiable. The CIT(A) found that the facts of the assessee's case were similar to that of Shri Ramniwas Yadav and sustained the trading addition of Rs. 7,59,500/-. The assessee argued that the rejection of books of account under Section 145(3) does not confer the power to make arbitrary assessments and cited past history and case laws to support a lower net profit rate. The assessee also pointed out that in the subsequent assessment year, the AO made a lump sum addition resulting in a net profit rate of 1.75%, which was further reduced by the CIT(A) to Rs. 50,000/-.

Final Judgment:
The Tribunal considered the rival contentions and noted that the assessee's books had been rejected year after year, with varying estimates. The Tribunal found that a lump sum addition was not a scientific method and could not be adopted in the assessee's case. Considering the repeated failure to maintain proper books, the nature of the business, and the transactions, the Tribunal took a lenient view and directed the AO to adopt an estimate of 2.5% net profit rate on transportation receipts, instead of 4%. This adjustment was deemed to meet the ends of justice. Consequently, the appeal of the assessee was partly allowed.

Conclusion:
The appeal was partly allowed, with the AO directed to calculate the taxable income based on a 2.5% net profit rate on transportation receipts. The Tribunal's decision balanced the need for a fair estimate with the assessee's failure to maintain proper records, ensuring a just outcome.