2016 (4) TMI 554 - AT - Income Tax

Presumptive computation of profits for taxation for business - taxing the peak amount - presumptive profit u/s 44AD/44AF - Held that - A sum equal to 8% of gross receipts can be shown by assessee for being engaged in the work of exhibition of work contract (civil construction work) and as per the provisions of section 44AF when assessee is engaged in a retail business then a sum equal to 5% of the total turnover can be shown as income if the total income as per the books of accounts is less than the presumptive profit u/s 44AD/44AF of the Act. We find that the assessee is having some income from jari labour having total receipts of ₹ 4,10,560/-. Work of jari labour involves the work performed by labourers doing work on sarees putting jari meaning thereby that there is some element of contractual work which is performed by the assessee on behalf of the dealer who gives sarees/raw materials to the assessee and in turn assessee performs the contractual work with the help of labourers on the sarees. On the other hand, the undisclosed credit of ₹ 16,87,380/- have been pleaded by the assessee to have been carried on in the course of business of trading in sarees and dress materials and such type of business comes within the purview of provisions of section 44AF relating to profits and gains on retain business. In total the turnover of the assessee at ₹ 20,97,940/- (Rs.4,10,560/- 16,87,380/-) has been accepted by both the lower authorities. Ld. CIT(A) has applied the net profit rate shown by the assessee on his labour contract income i.e. 47% on the total undisclosed credits of ₹ 16,87,380/-.by replacing the two additions made by the Assessing Officer including one related to peak credit. Thus when separate provisions are available for estimation of profits u/s 44AD and 44AF of the Act then it will not be proper to apply exhorbitant net profits rate on the total undisclosed credit which too have been accepted by both the lower authorities as business receipts. Once the business has been established and there is a special provisions for a businessman having turnover less than ₹ 60 lacs for applying net profit @ 5%/8% of the gross turnover as the case may be then we do not find the action of ld. CIT(A) to be proper in applying 47% rate of profit. However, looking to the facts that assessee has not disclosed the turnover routed through State Bank of India, Surat in its regular books of account then it will be justifiable to apply the higher of the two rates i.e. out of 5% and 8% which is 8% in this case on the total turnover of ₹ 16,87,380/- which works out at 1.34.990/- and also sustaining addition of peak credit at ₹ 82,690/- because assessee has not given any satisfactory explanation about the source of investment made towards this business and also we do not find any basis in the submissions of assessee that some amounts were debited in the capital account and has been invested in this account for the very reason that the impugned bank account was not disclosed in the return of income filed. We, therefore, quash the order of ld. CIT(A) and sustain the additions made by the Assessing Officer at ₹ 2,18,249/-.- Decided partly in favour of assessee

Issues Involved:
1. Addition of Rs. 2,17,680/- by the Assessing Officer (AO) by adopting a net profit ratio of 8% instead of 5%.
2. Enhancement of income by Rs. 5,76,289/- by the Commissioner of Income Tax (Appeals) [CIT(A)] by estimating net profit at 47%.
3. Validity of the revised return filed by the assessee.
4. Application of peak theory for undisclosed investment at Rs. 82,690/-.

Issue-wise Detailed Analysis:

1. Addition of Rs. 2,17,680/- by the AO by adopting a net profit ratio of 8% instead of 5%:
The AO made an addition of Rs. 2,17,680/- by adopting a net profit ratio of 8% on the turnover of Rs. 16,87,380/- instead of the 5% claimed by the assessee. The AO calculated the net profit at Rs. 1,34,990/- and added it to the income of the assessee. Additionally, a peak balance of Rs. 82,690/- was added under Section 69 of the Income-tax Act, 1961. The total addition made was Rs. 2,18,249/-, and the income was assessed at Rs. 3,82,350/-.

2. Enhancement of income by Rs. 5,76,289/- by the CIT(A) by estimating net profit at 47%:
The CIT(A) enhanced the addition to Rs. 7,93,969/- by replacing the AO's additions with an estimation of net profit at 47% of the undisclosed credit of Rs. 16,87,380/-. The CIT(A) observed that the assessee failed to establish evidence of the existence of retail trade and concluded that the deposits represented unaccounted job work receipts. The CIT(A) justified the enhancement by stating that the assessee did not furnish evidence linking the withdrawals with the expenditure and deposits with the sale proceeds of the trading business.

3. Validity of the revised return filed by the assessee:
The AO treated the revised return filed on 24.01.2011 as invalid since it was filed after the processing of the original return under Section 143(1) of the Act. However, the CIT(A) disagreed, stating that the revised return was filed within the permissible time under Section 139(5) of the Act, making it valid. Despite this, the CIT(A) did not accept the profit disclosed in the revised return concerning the deposits of Rs. 16,87,380/-.

4. Application of peak theory for undisclosed investment at Rs. 82,690/-:
The AO applied the peak theory and added Rs. 82,690/- as undisclosed investment. The CIT(A) replaced this addition with an estimation of net profit at 47%. However, the Tribunal found that the addition of peak credit was justified as the assessee did not provide a satisfactory explanation for the source of investment.

Tribunal's Decision:
The Tribunal observed that the assessee was engaged in the business of jari labour income and trading in sarees and dress materials. The Tribunal noted that the provisions of Section 44AD and 44AF of the Act were applicable, which allow for presumptive computation of profits. The Tribunal found that the CIT(A)'s application of a 47% net profit rate was not proper. Instead, the Tribunal applied a net profit rate of 8% on the undisclosed credit of Rs. 16,87,380/-, amounting to Rs. 1,34,990/-, and sustained the addition of peak credit at Rs. 82,690/-. The total addition sustained was Rs. 2,18,249/-, as initially made by the AO.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal sustaining the AO's additions and quashing the CIT(A)'s enhancement. The total addition of Rs. 2,18,249/- was upheld, and the order was pronounced on 2nd March 2016.

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