2016 (2) TMI 1274 - AT - Income Tax

Addition u/s 68 - unexplained Cash deposits found in the bank account of the assessee - Estimation of profit from spare parts business - As per CIT-A Deposits made by the assessee in the bank account represents business transactions pertaining to spare parts business and accordingly estimated profit there from at the rate of 12%, since the assessee had admitted in the statement that he has been making profit at 10 to 12% from trading in spare part - HELD THAT - Since the assessee is carrying on business in the mixer grinders and spare parts and since there has been successive deposits and withdrawals, we are of the view that the ld. CIT(A) was justified in considering the bank deposits as relating to business transactions. However, we are unable to understand as to why he considered them as relating to spare parts business and not related to mixer grinder business. Be that as it may, we notice that the Ld CIT(A) has estimated the rate of profit on the basis of statement given by the assessee and hence we do not find any reason to interfere with his order on this issue. Estimation of profit from sale of mixer-grinders - This addition has also been made on the basis of statement given by the assessee, wherein he had stated that he is selling approximately 1500 pieces of mixer-grinders in a year - AO has placed full reliance on the statement given by the assessee, which he has given on approximate basis - AO has not allowed any deduction towards expenses - assessee has also stated that his income from spare parts business ranges from ₹ 5000 to 6000/- per month approximately, meaning thereby he is earning a sum of ₹ 60,000/- to 72,000/- per year from the business of spare parts. CIT(A) has, however, estimated the income from spare parts at ₹ 1,27,560/-, which is contrary to the statement given by the assessee. CIT(A) has not explained as to why he has considered the bank deposits as representing the transactions relating to spare parts business alone - possibility of depositing the sale proceeds relating to mixer grinders cannot be ruled out. We are of the view the income of the assessee has to be estimated by considering all the facts in a holistic manner. Accordingly, we proceed to estimate the profit of assessee as under (a) We adopt the net profit on sale of one piece of mixer-grinder at ₹ 225/- after allowing administrative expenses @ 30%, i.e., ₹ 75/- per mixer-grinder. Accordingly, the profit earned from sale of mixer grinder shall be (1500 x ₹ 225/- 3,37,500). (b) The income from sale of spare parts business is estimated at ₹ 65,000/- based on the statement given by the assessee. (c) Aggregate of both the income shall work out to ₹ 4,02,500/-. (d) Since we have estimated the income from the business activities, we are of the view that the income of ₹ 1,27,560/- estimated by the ld. CIT(A) out of bank deposits is required to be telescoped against the above said income estimated by us. We modify the order of Ld CIT(A) and direct the AO to restrict the addition relating to bank deposits and sale of mixer grinders to ₹ 4,02,500/-.

Summary

Issues:
1. Estimation of profit from spare parts business
2. Estimation of profit from sale of mixer-grinders

Estimation of profit from spare parts business:
The appellant challenged the order passed by the ld. CIT(A) regarding the estimation of profit from spare parts business and sale of mixer-grinders for the assessment year 2008-09. The AO assessed the entire cash deposit of Rs. 10,89,000 as the appellant's income under section 68 of the Act. The ld. CIT(A) estimated the profit from spare parts business at 12% of the deposits made in the bank account, considering them as business transactions. However, the CIT(A) did not explain why he considered the deposits only related to spare parts business and not mixer grinders. The ITAT found the CIT(A) justified in considering the bank deposits as business transactions but disagreed with the selective treatment of spare parts business. The ITAT estimated the profit from sale of mixer-grinders at Rs. 3,37,500 and spare parts business at Rs. 65,000, totaling Rs. 4,02,500, and directed the AO to restrict the addition to this amount.

Estimation of profit from sale of mixer-grinders:
The AO estimated the profit from sale of mixer-grinders at Rs. 4,50,000 based on the appellant's statement that he sells approximately 1500 pieces per year with a profit of Rs. 300 per piece. The ld. CIT(A) confirmed this estimation. However, the assessing officer did not inquire about the appellant's expenses. The ITAT noted discrepancies in the CIT(A)'s estimation of spare parts income at Rs. 1,27,560, contrary to the appellant's statement. The ITAT recalculated the profit from sale of mixer-grinders at Rs. 3,37,500 and spare parts business at Rs. 65,000, totaling Rs. 4,02,500. The ITAT directed the AO to limit the addition to this amount, thereby partly allowing the appellant's appeal.

In conclusion, the ITAT modified the ld. CIT(A)'s order and directed the AO to restrict the addition relating to bank deposits and sale of mixer-grinders to Rs. 4,02,500. The appeal filed by the assessee was partly allowed on 3rd Feb, 2016.