2016 (12) TMI 1778 - AT - Income Tax

NP determination - estimation of profit - HELD THAT - Net profit for the A.Y. 09-10 and A.Y. 10-11 has been shown by the assessee at 5.28% and 5.75% respectively. Therefore if 2% increase is considered the net profit for the relevant assessment year with go upto 7.14% which is much higher than the average net profit in the above mentioned assessment years. Estimation of profits by the A.O. has not been found based on some cogent and relevant material. CIT(A) was reasonable in increasing the profit by 1% which will take the net profit for the relevant year at 6.14% which will still be much higher than 5.5% the average of two preceding assessment years. In view of the above discussion and the facts and circumstances of the case we hold that CIT(A) was justified in directing the AO to recompute the profits by increasing the same @ 1% as against 2% applied by the Assessing Officer. We therefore confirm the order of the learned CIT(A).

Summary

Issues:
1. Discrepancy in net profit shown by the assessee during survey and in the return of income.
2. Rejection of books of accounts by the Assessing Officer and subsequent increase in net profit estimation.
3. Appeal against the reduction of net profit by 1% instead of the 2% applied by the Assessing Officer.

Analysis:
1. The case involved a situation where the assessee declared a total income of &8377; 7,59,97,540 for the assessment year 2011-12, but discrepancies arose due to survey proceedings conducted under section 133A of the Act. The Assessing Officer questioned the low net profit ratio shown by the assessee and issued a show cause notice regarding the same. The assessee explained the difference in receipts and expenses, leading to the rejection of books of accounts by the Assessing Officer.

2. The assessee appealed to the CIT(A) against the Assessing Officer's decision. The CIT(A) observed that while the rejection of books was justified, the increase in net profit by 2% lacked a proper basis. The CIT(A) directed the Assessing Officer to recompute the profits by increasing them by 1% instead of 2%, considering the historical net profit ratios of the assessee in previous assessment years.

3. The department appealed against the reduction of net profit by 1%, while the assessee appealed against retaining the 1% increase. During the hearing, the Tribunal considered the net profit ratios from previous assessment years presented by both parties. The Tribunal upheld the CIT(A)'s decision, stating that the 1% increase in net profit estimation was reasonable based on the historical performance of the assessee.

In conclusion, the Tribunal dismissed the appeals of both the revenue and the assessee, confirming the CIT(A)'s order to recompute the profits by increasing them by 1% instead of the 2% initially applied by the Assessing Officer. The Tribunal found the CIT(A)'s decision justified based on the historical net profit ratios of the assessee in previous assessment years.