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2018 (2) TMI 1775 - AT - Income TaxEstimation of net income - N.P. determination - Held that - A.O. as well as Ld. CIT(A) have relied upon the decisions of the ITAT rendered in 2011 / 2012 whereas the Assessing Officer, under similar circumstances, made scrutiny assessments wherein the stringent change in policy as well as impact of the High Court directions were taken into consideration for the purpose of estimating the net income @ 3% and in fact in the later decisions of the Tribunal, the net income was estimated @ 3% of the cost of goods sold. Under these circumstances we direct the A.O. to adopt 3% of the cost of the goods sold as the income of the assessee.
Issues:
- Estimation of income at 5% on stock put to sale - Rejection of book results and estimation of net profit at 5% - Discrepancy in net profit declared and estimated by the Assessing Officer - Change in excise policy affecting profit margins - Rejection of contention regarding Maximum Retail Price (MRP) fixed by the State - Comparison of decisions by the ITAT on net profit rates Estimation of income at 5% on stock put to sale: The appeals before the Appellate Tribunal ITAT Hyderabad pertained to different assessees but were based on identical orders by Ld. CIT(A)-5, Hyderabad, all related to the assessment year 2013-14. The common grounds raised by the assessees included challenges to the estimation of income at 5% on stock put to sale. The assessees argued that the estimation was erroneous both factually and legally. They contended that the Ld. CIT(A) erred in confirming the income estimation without considering the new Excise Act and recent decisions by the ITAT. The assessees highlighted that the sale price was fixed by the government and violating it would lead to severe consequences, including license forfeiture. Rejection of book results and estimation of net profit at 5%: The Assessing Officer (AO) rejected the book results of the assessees, citing discrepancies in the declared net profits. The AO estimated the net profit at 5% on goods put to sale, based on previous ITAT decisions and the perceived low net profit margins declared by the assessees. The assessees argued that the net profit margins were impacted by the stringent liquor policy enforced by the State Government, leading to lower profitability than usual in the liquor business. They contended that the net profit should not exceed 3%, citing past ITAT decisions supporting this view. Change in excise policy affecting profit margins: The assessees highlighted the change in excise policy, emphasizing that selling goods above the Maximum Retail Price (MRP) would result in license cancellation and loss of license fees. They argued that the Gross Profit (GP) should be considered based on the MRP fixed by the State, rather than a blanket estimation of 5% on goods put to sale. The assessees presented the liquor policy to support their claim, but the Ld. CIT(A) upheld the AO's decision to estimate income at 5%. Comparison of decisions by the ITAT on net profit rates: The assessees presented various ITAT decisions where net profit rates of 3% were accepted, arguing that the AO and Ld. CIT(A) should have considered these precedents. The assessees pointed out that in similar circumstances, the net income was estimated at 3% of the cost of goods sold by the Tribunal. The Appellate Tribunal, after considering the submissions and records, directed the AO to adopt 3% of the cost of goods sold as the income of the assessees, in line with the consistent view taken by the Tribunal in recent decisions. In conclusion, the appeals filed by the assessees were allowed by the Appellate Tribunal, overturning the estimation of income at 5% and directing the adoption of 3% of the cost of goods sold as the income for the assessees for the relevant assessment year.
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