2011 (9) TMI 1186 - AT - Income Tax

Summary

Issues Involved:
1. Addition on account of suppressed profit.
2. Rejection of books of accounts.
3. Estimation of profit from suppressed turnover.

Detailed Analysis:

1. Addition on Account of Suppressed Profit:
The primary issue is the addition made by the Assessing Officer (AO) on account of suppressed profit. The AO based this addition on a show cause notice from the Central Excise Department, which indicated that the assessee was suppressing the maximum retail price (MRP) of ceramic tiles. The AO estimated suppressed sales at Rs. 21,52,03,905 and applied a 25% profit rate, resulting in an addition of Rs. 5,38,00,976.

The Commissioner of Income Tax (Appeals) [CIT(A)] held that while the AO was justified in rejecting the books of accounts due to suppression of sales, the AO failed to consider comparable cases and did not provide evidence to support the 25% profit rate. The CIT(A) noted that the facts in the cases of Vijay Proteins Ltd. and Sanjay Oil Cake Industries, relied upon by the AO, were not applicable as they involved inflation of purchases rather than suppression of sales.

The CIT(A) concluded that a more reasonable profit rate should be applied, considering comparable cases and the fact that the assessee had declared some portion of the suppressed profit in their regular books. The CIT(A) ultimately applied a net profit rate of 13.20% on the suppressed sales, resulting in a confirmed addition of Rs. 2,84,06,915.

2. Rejection of Books of Accounts:
The AO and CIT(A) both rejected the books of accounts on the grounds of suppression of turnover. The Tribunal agreed with this decision, stating that the suppression of turnover was sufficient reason for rejection of the books of accounts.

3. Estimation of Profit from Suppressed Turnover:
The Tribunal examined whether the profit estimation from the suppressed turnover was fair and reasonable. The AO's application of a 25% profit rate was rejected by the CIT(A) due to lack of evidence and comparable cases. The CIT(A) instead considered the net profit rates of comparable cases and the fact that the assessee had declared higher gross profits from declared sales.

The Tribunal agreed with the CIT(A) that the AO's 25% profit rate was unsupported. However, the Tribunal found that the CIT(A)'s estimation of 13.20% was still on the higher side. The Tribunal decided that a fair and reasonable profit rate should be based on the average net profit rates of comparable cases, which were 13.20%, 10.68%, 7.38%, and 3.65%, resulting in an average of 8.72%. To cover miscellaneous benefits, the Tribunal added 0.28%, arriving at a final profit rate of 9%.

Applying this 9% profit rate to the suppressed sales, the Tribunal recalculated the additions:
- For Vrundavan Ceramics Pvt. Ltd., the addition was reduced to Rs. 1,93,68,351.
- For Gokul Ceramics Pvt. Ltd., the addition was reduced to Rs. 72,06,934.

The Tribunal confirmed these revised additions and deleted the excess amounts:
- Rs. 90,38,554 for Vrundavan Ceramics Pvt. Ltd.
- Rs. 13,45,295 for Gokul Ceramics Pvt. Ltd.

Conclusion:
The Tribunal partly allowed the appeals of the assessee by reducing the additions based on a fair and reasonable profit rate of 9% on suppressed sales. The appeals by the revenue were dismissed. The Tribunal's decision emphasized the importance of considering comparable cases and ensuring that profit estimations are supported by evidence and reasonable assumptions.