2016 (7) TMI 1449 - AT - Income Tax

Estimating the net profit at 5% of the cost of the goods sold - Held that - As relying on case of Sri Venkateswara Wines 2015 (11) TMI 1746 - ITAT HYDERABAD we direct the A.O. to adopt 3% of the cost of goods sold as the income of the assessee.

Summary

Issues:
1. Rejection of books of account and estimation of net profit at 5% of cost of goods sold.
2. Deductibility of depreciation on assets after income estimation.
3. Inclusion of miscellaneous income after income estimation at 5%.
4. Comparison of gross profit margin with government guidelines.

Analysis:
1. The appellant, engaged in liquor wholesale and retail business, challenged the CIT(A)'s decision confirming the AO's rejection of books of account and estimation of net profit at 5% of the cost of goods sold for A.Y. 2011-2012. The AO found the appellant's gross profit margin of 11.01% lower than the government guideline of 24% for liquor retail. The appellant argued that the 24% margin was excessive and cited precedents where ITAT and the High Court estimated income at 3-5% of goods sold. The AO, following a High Court judgment, estimated income at 5% and added miscellaneous income. The ITAT, considering similar cases, directed the AO to adopt 3% of cost of goods sold as income, partly allowing the appeal.

2. The appellant contested the CIT(A)'s direction allowing depreciation deduction post income estimation. The ITAT, relying on a previous decision involving similar circumstances, directed the AO to consider 3% of cost of goods sold as income, indicating the deductibility of depreciation despite income estimation.

3. The inclusion of miscellaneous income after estimating income at 5% was a point of contention. The ITAT, following precedent and considering similar cases, directed the AO to adopt 3% of cost of goods sold as income, implicitly rejecting the inclusion of miscellaneous income after the income estimation.

4. The comparison of the appellant's gross profit margin with the government guideline was a crucial factor in the assessment. The AO's decision to estimate income at 5% based on the guideline led to the appeal and subsequent direction by the ITAT to consider 3% of cost of goods sold as income, indicating a discrepancy between the government guideline and actual profit margin in the liquor business.