2017 (2) TMI 1516 - AT - Income Tax

Estimation of GP - estimation of income as per section 145(3) - HELD THAT - CIT(A) has erred in observing that section 145(3) could not be applied in this case because AO could not examine records as these accounts were not produced before him. In our opinion section 145(3) contemplates that the AO can resort to estimate the income if he is unable to deduce true result from the accounts or other details. Strictly books were not produced before the AO and it was not rejection of books as such but impliedly it is estimation of income as per section 145(3) of the Act. CIT(A) has not considered any of these aspects viz. why there is a decline in GP why assessee does not want to scrutinise its books of accounts from the AO. Therefore considering all these aspects we are of the view that the order of the CIT(A) is not sustainable. Total addition cannot be deleted. As observed in the foregoing paragraphs that income even after rejection of books can be estimated on some guess work. It is to be estimated keeping in view surrounding facts and circumstances. In the present case the assessee herself has shown GP at 4.21% in the immediately preceding year. AO ought to have adopted GP nearby this figure and not at 20%. The assessee in her submission before the ld.CIT(A) has expressed the rate of at 4.25%. Thus taking into consideration written submissions filed by the assessee before the ld.CIT(A) and other material we deem it appropriate that ends of justice would be met if the gross profit is being calculated at the rate of 5.5% (five point five percent) of the total turnover. With the above observation order of the ld.CIT(A) is set aside and the AO is directed to recalculate the addition by applying GP at 5.5% (five point five percent) of the total turnover. The appeal of the Revenue is partly allowed for statistical purpose.

Summary

Issues Involved:
Revenue's appeal against deletion of addition on account of estimation of GP.

Analysis:
The Revenue's appeal before the Tribunal focused on the deletion of an addition of Rs.45,68,625 made by the Assessing Officer (AO) on account of estimation of Gross Profit (GP). The case involved the rejection of books of accounts under section 145(3) of the Income Tax Act due to the assessee's failure to produce them. The AO estimated the income at 20% of turnover, resulting in the addition. However, the ld.CIT(A) deleted the addition, highlighting that the rejection of books was not in line with the law as the AO did not have the necessary records to make such an estimation. The Tribunal noted that the AO's estimation should have been based on a reasonable nexus to the available material and circumstances of the assessee, rather than an arbitrary figure. The Tribunal set aside the CIT(A)'s order and directed the AO to recalculate the addition by applying a GP rate of 5.5% of the total turnover, considering the submissions and material on record. The appeal of the Revenue was partly allowed for statistical purposes.

The Tribunal's analysis delved into the relevant provisions of the Income Tax Act, specifically Section 145, which outlines the computation of income for an assessee. It emphasized that income should be computed in accordance with the method of accountancy regularly followed by the assessee, subject to accounting standards notified by the Central Government. Section 145(3) allows the Assessing Officer to make an assessment if not satisfied with the correctness or completeness of the accounts, leading to estimation of income based on the best judgment. Additionally, Section 144 provides guidance on making assessments to the best of the AO's judgment, emphasizing the need for a fair estimate based on relevant material gathered.

The Tribunal highlighted the importance of exercising best judgment in assessments, requiring the AO to consider local knowledge, business reputation, and past history of the assessee. It noted that while some guesswork might be involved, it should be reasonable and based on established principles of justice. In this case, the Tribunal found that the CIT(A) had erred in not considering crucial aspects such as the decline in GP and the assessee's reluctance to provide accounts for scrutiny. By recalculating the addition at a GP rate closer to the figures presented by the assessee, the Tribunal aimed to ensure a fair and just assessment based on the available material and circumstances.