2018 (4) TMI 1903 - AT - Income Tax

Assessment ex parte u/s 144 - estimation profit @ 5% of the turnover - CIT(A) reduced the rate of profit from 5% to 1% after considering the past history of assessee - HELD THAT - The audited financial statement of the current year as well as profit declared by assessee in earlier years cannot be ignored while estimating the profit under best judgment assessment. The assessee for all the years had duly filed return of income which was not selected under scrutiny u/s 143(3) of the Act. Regarding the selection for scrutiny proceedings it is the policy of the Revenue and the assessee has no role to play in selecting the same under scrutiny. Therefore in our considered view it is imperative to take the guidance from the history of assessee. Rate of profit estimated by Ld. CIT(A) is correct and in accordance with the provision of law. Thus we uphold the order of Ld. CIT(A) and this ground of Revenue is dismissed. Treating 1% of sale value of DEPB as income of the assessee - In the instant case AO has treated the revenue from the sale of DEPB as income from other source. However Ld. CIT(A) reversed the order of AO by holding that the amount of sale for DEPB is part and parcel of the total turnover of assessee. Now the issue before us arises whether the amount of DEPB represents the income from other source or income from business. We find that there is a explicit provision u/s 28(iiib) of Act which clearly says that the amount of DEPB will be taxed under the head income from business and profession

Summary

Issues Involved:

1. Restriction of net profit to 1% of turnover.
2. Addition on sale of DEPB licenses.

Issue-wise Detailed Analysis:

1. Restriction of Net Profit to 1% of Turnover:

The first issue raised by the Revenue was whether the CIT(A) erred in reducing the estimated profit from 5% to 1% of the turnover. The assessee, engaged in the export business of rice and pulses, declared a taxable income of Rs. 84,397 on a turnover of Rs. 7,26,63,305. The AO framed the assessment ex parte u/s 144 of the Act due to non-compliance by the assessee, estimating the profit at 5% of the turnover, which resulted in an addition of Rs. 36,33,165 to the total income.

Upon appeal, the assessee argued that the 5% profit estimate was excessive and lacked basis, citing that the AO’s estimate was arbitrary and not supported by any comparable cases. The CIT(A) considered the assessee’s past profit rates, which averaged 0.326%, and reduced the profit estimate to 1% of the turnover, resulting in an addition of Rs. 7,26,333 and deletion of Rs. 29,06,832.

The Revenue contended that the assessee failed to produce necessary documents and that the past profit rates were not scrutinized under section 143(3). However, the Tribunal upheld the CIT(A)’s decision, emphasizing that the AO must provide a reasonable basis for profit estimation and that past profit rates should guide the best judgment assessment. The Tribunal cited several judicial precedents, including the Supreme Court’s ruling in State of Kerala vs. C Velukutty, which mandates that best judgment assessments must be honest, fair, and based on available material.

2. Addition on Sale of DEPB Licenses:

The second issue was whether the CIT(A) erred in treating 1% of the sale value of DEPB licenses as income. The AO treated the sale proceeds of Rs. 42,93,826 from DEPB licenses as income from other sources, while the CIT(A) considered it part of the business turnover and applied a 1% profit rate.

The assessee argued that DEPB sales are part of business income under Section 28(iiib) & (iiid) of the Act, supported by the Supreme Court’s decision in Topman Exports v. CIT, which clarified that DEPB represents a cost element in exports and its sale proceeds are business income. The CIT(A) noted that the DEPB sale proceeds were integral to the business turnover and applied a 1% profit rate, resulting in an addition of Rs. 4,29,383 and a relief of Rs. 38,64,443.

The Revenue argued that the gross value of DEPB licenses should be added to the total income, but the Tribunal upheld the CIT(A)’s decision, affirming that DEPB sales are part of business income and should be included in the turnover for profit estimation. The Tribunal reiterated that the sale value of DEPB is part of the business turnover, and the same profit rate should apply.

Conclusion:

The Tribunal dismissed the Revenue’s appeal, upholding the CIT(A)’s decisions on both issues, thereby affirming the reduction of the profit estimate to 1% of the turnover and the inclusion of DEPB sales in the business turnover with a 1% profit rate.