2014 (1) TMI 1925 - AT - Income Tax

Rejection of books of accounts - estimation of profit - HELD THAT - AO computed the suppressed turnover, which is not disputed by the assessee. This is also an undisputed fact that the assessee has not filed any return u/s 139(1) in each of the assessment years, neither any return was filed in response to notice issued u/s 153A. Assessee even did not produce the books of accounts before the AO. Under these provisions, the AO, in our opinion, does not have any alternative except to reject the books u/s 145(3) and compute the income in the manner laid down u/s 144. AO has estimated the net profit, after deducting all the expenditure including the depreciation and estimated the profit on the basis of the profit for the assessment year 2009-10 and 2010-11 at 35%. We also find force in the submissions of the ld. AR that in the initial year, the percentage of the profit cannot be higher and there cannot be any thumb rule that a particular enterprise will earn the profit at a particular rate - assessee might have earned more profit but in the initial year, there are number of teething problems. The assessee takes time to establish and with a name in the market. Therefore profit has to be estimated. In view of this fact, in our opinion, this will meet the canons of justice to both the parties, if profit for the assessment year is estimated @10%, for the assessment year 2005-06 @12.5%, for the assessment year 2006-07 @15%, for the assessment year 2007-08 @20% and for the assessment year 2008-09 @25%. Addition of the other income - As we noted that since the AO has estimated the profit on the basis of the profit percentage and based on the assessment year 2009-10 and 2010-11. While working out the percentage of the profit during the assessment year 2009-10 and 2010-11, we noted that the AO has included the miscellaneous income in the profit earned. In view of this, in our opinion, no separate addition is required in respect of other income. Thus, ground no.1 in each of the assessment year is partly allowed while ground no.2 in each of the assessment year is fully allowed. Depreciation on fixed assets as deduction from estimated profit - HELD THAT - As noted that since the AO has estimated the profit on the basis of the profit percentage and based on the assessment year 2009-10 and 2010-11. While working out the percentage of the profit during the assessment year 2009-10 and 2010-11, we noted that the AO has included the miscellaneous income in the profit earned. Therefore, in view of this, in our opinion, no separate addition is required in respect of other income.

Issues Involved:
1. Estimation of profit by the Assessing Officer (AO) based on subsequent years' profit rates.
2. Non-consideration of expenses claimed by the assessee.
3. Addition of other income by the AO.
4. Entitlement to depreciation on fixed assets.

Detailed Analysis:

1. Estimation of Profit:
The primary issue in these appeals is the AO's action in estimating the assessee's profit at 35% of the turnover disclosed, based on the profit rates of subsequent years (2009-10 and 2010-11). The assessee argued that no evidence was found during the search suggesting higher income than what was discovered. The Tribunal noted that the AO computed suppressed turnover, which was not disputed by the assessee. Since the assessee did not file returns under section 139(1) or in response to section 153A notices and failed to produce books of accounts, the AO invoked section 145(3) and computed income under section 144. The Tribunal acknowledged the AO's estimation but adjusted the profit rates considering the initial years' challenges, setting profit rates at 10% for 2004-05, 12.5% for 2005-06, 15% for 2006-07, 20% for 2007-08, and 25% for 2008-09.

2. Non-Consideration of Expenses:
The assessee claimed that the CIT(A) erred in not considering the expenses made to earn income, arguing that the accounts were not audited. The Tribunal found that the AO had already considered all expenses, including depreciation, while estimating the net profit. Therefore, the Tribunal did not find merit in the assessee's claim for additional expenses.

3. Addition of Other Income:
The AO had added other income to the estimated profit, which the assessee contested. The Tribunal noted that the AO included miscellaneous income while working out the profit percentages for 2009-10 and 2010-11. Therefore, it concluded that no separate addition for other income was necessary as it was already factored into the profit estimation. Thus, the Tribunal allowed the assessee's ground on this issue.

4. Entitlement to Depreciation on Fixed Assets:
The assessee raised an additional ground seeking depreciation on fixed assets if the profit estimation ground was rejected. The Tribunal admitted this ground, citing it as a legal issue. However, it observed that the AO had already considered depreciation while estimating the net profit. Allowing separate depreciation would result in double deduction. Hence, the Tribunal dismissed the additional ground, emphasizing that the net profit estimation already accounted for depreciation.

Conclusion:
The Tribunal partly allowed the appeals, adjusting the profit estimation rates for different assessment years but dismissed the additional ground for separate depreciation. The decision balanced the AO's estimation with the initial years' operational challenges faced by the assessee.

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