2015 (11) TMI 1756 - AT - Income Tax

Estimation of income of the assessee @ 5% on the cost of goods sold - Non maintenance of books of accounts - Held that - We find that the assessee has not maintained any books of account and therefore, the estimation of income is justified. It is only the rate at which the income is to be estimated is before us. A.O. has estimated the income at 5% of the cost of goods sold, while the assessee is seeking the estimation at 3% of the cost of goods sold. In the case before us, the assessee is agreeable to the estimation of income at 3% of the cost of goods sold. As the facts before us are similar to the facts before the Tribunal in the case of Venkateswara Wines, Nizamabad (2015 (9) TMI 1616 - ITAT HYDERABAD) and the uniform rate of profit cannot be adopted in the case of every assessee in similar business, we allow ground No.2 of the assessee. Remuneration paid to the partners to be allowed to be deducted from the estimated income - Held that - We find that the same is not allowable as the income of the assessee itself has been estimated on the cost of the goods sold and not on the turnover or receipts of the assessee.

Summary

Issues:
Estimation of income based on cost of goods sold @ 5% - Challenge by assessee - Comparison with Tribunal's decision on estimation @ 2.5% - Consideration of remuneration paid to partners as deduction from estimated income.

Analysis:
The judgment involves the appeal of the assessee for the Assessment Year 2011-12, challenging the estimation of income at 5% of the cost of goods sold by the Assessing Officer (AO), which was confirmed by the Ld. CIT(A). The AO resorted to estimation due to the absence of sale invoices provided by the assessee, who explained the difficulty in maintaining sale bills for a wine shop business. The AO relied on ITAT's decision and the High Court's ruling to estimate profits at 5% of goods put to sale, resulting in a tax liability of Rs. 15,07,663. The assessee contended for a lower estimation of 3% of the cost of goods sold, supported by a Tribunal decision approving a 2.5% estimation in a similar case.

The Tribunal analyzed the absence of maintained books of account by the assessee, justifying the income estimation but deliberated on the appropriate rate. Referring to the Venkateswara Wines case, the Tribunal emphasized the need for individualized profit estimation based on case-specific facts rather than a uniform rate for similar businesses. Consequently, the Tribunal allowed the assessee's appeal, agreeing to estimate income at 3% of the cost of goods sold, aligning with the principle of case-specific profit estimation.

Regarding the deduction claim for partners' remuneration of Rs. 8 lakhs, the Tribunal rejected it since the income was estimated based on the cost of goods sold, not on the turnover or receipts of the assessee. Therefore, the deduction claim was deemed inapplicable in this context. Consequently, the Tribunal partially allowed the assessee's appeal, modifying the income estimation rate while rejecting the deduction claim for partners' remuneration.

In conclusion, the Tribunal's judgment addressed the issue of income estimation based on the cost of goods sold, emphasizing the need for case-specific profit estimation rates rather than uniform percentages for similar businesses. The decision highlighted the importance of individual circumstances in determining profit estimates and clarified the inapplicability of certain deductions in the context of income estimation methods.