2017 (4) TMI 1572 - AT - Income Tax

Rejection of books of account - estimation of profit at 8% of contract receipts - HELD THAT - Without going into the merits of the reasons assigned by the AO for rejecting the books of account of the assessee, we find that for all the years stated above the Department consistently accepted the profit ratio in the business of the assessee is between 1.60 and 3.31 and at no point of time any objection is taken by the AO on the ground that in the kind of business of the assessee average rate of profit would be anything around 8%. We do not find any rational in the AO estimating the profit at 8% and the consistency of the net profit as was established by the accepted books of account in the business of the assessee was something between 1.60% and 3.31% as such taking a pragmatic view, we find that 3% of the profit ratio of the contract receipt would meet the ends of justice - Decided in favour of assessee in part.

Summary

Issues:
- Challenge to rejection of books of account
- Challenge to estimation of profit at 8% of contract receipts

Analysis:
1. Challenge to rejection of books of account:
The appeal challenges the order of the Commissioner of Income Tax (Appeals)-Ghaziabad, which upheld the assessment by the Assessing Officer (AO) estimating the income of the assessee at ?41,09,614/- by considering the profit at 8% of the total turnover. The assessee contended that in previous years, the profit ratio accepted ranged between 1.60% and 3.31%, and it was not justified for the Revenue to suddenly estimate the profit at 8%. The Department consistently accepted the profit ratio within the range of 1.60% to 3.31% for earlier years without any objection. The Tribunal found no rational basis for estimating the profit at 8% and directed the AO to estimate the profit at 3% of the total turnover, considering the historical profit ratios accepted in previous assessments.

2. Challenge to estimation of profit at 8% of contract receipts:
The assessee argued that the profit ratio of 2.46, accepted in the preceding assessment year 2009-10, should be applied instead of the 8% estimation by the AO. The Revenue contended that a profit ratio of 2.46 was too low and suggested a minimum profit ratio of around 4%. The Tribunal noted the historical profit ratios accepted for the assessee in previous assessments and found that a profit ratio of 3% of the total turnover would be just and reasonable. Therefore, the Tribunal allowed the appeal in part, directing the AO to estimate the profit at 3% of the total turnover, considering the consistency in profit ratios accepted for the assessee in earlier assessments.

In conclusion, the Tribunal set aside the estimation of profit at 8% and directed the AO to estimate the profit at 3% of the total turnover, considering the historical profit ratios accepted for the assessee in previous assessments.