2016 (6) TMI 892 - AT - Income Tax

Rejection of books of accounts - N.P. adoption - Held that - The Assessing Officer has rightly rejected the books of account since various discrepancies have been pointed out in the books of account maintained by the assessee. As rightly pointed out by the CIT (Appeals) the rejection of books of account was not solely for the reason that the stock register was not maintained. The Assessing Officer has elaborated upon inflation of expenses on account of lack of vouchers etc. The Assessing Officer had also pointed out that commission payments were about five times more compared to the commission paid in the last year. It was stated by the Assessing Officer that the commission payments are excessive when sale turnover was less than the previous year. Thus Assessing Officer has correctly rejected the books of account of the assessee. As regards the estimation of income CIT (Appeals) s finding that the assessee is dealing in retail trade of pharmaceutical is erroneous. Section 44AF of the Act prescribes presumptive rate of taxation for retail traders. In this case the assessee being in the business of wholesale trading adopting the same rate that is prescribed under section 44AF of the Act is not justified since the net margin in wholesale trade is much less than in the retail trade. Moreover taking into account the assessee s case we find that due to the losses the business of the assessee had closed down in the succeeding assessment year. Therefore the rate adopted by the CIT (Appeals) at 5% of the net profit is excessive in the facts and circumstances of the case. In the interest of justice and equity Net profit rate of 3% of the total turnover would suffice. - Decided partly in favour of assessee

Issues involved:
1. Rejection of books of account by Assessing Officer and estimation of net profit rate at 6.5% on turnover.
2. Appeal to first appellate authority against rejection of books of account and net profit estimation.
3. Confirmation of rejection of books of account and reduction of net profit estimation to 5% by CIT (Appeals).
4. Appeal before ITAT against CIT (Appeals) order challenging rejection of books, net profit estimation, and business classification.

Analysis:

Issue 1: Rejection of books of account and net profit rate estimation at 6.5%
The Assessing Officer rejected the books of account due to discrepancies, including inflated expenses and excessive commission payments. The rejection was upheld as various discrepancies were identified. The net profit rate was set at 6.5% of turnover, resulting in a significant addition to the declared income.

Issue 2: Appeal against rejection of books and net profit estimation
The assessee appealed to the first appellate authority, contesting the rejection of books and the high net profit rate. Various contentions were raised, arguing that the rejection of books was unjustified and arbitrary, leading to an illegal application of the net profit rate.

Issue 3: CIT (Appeals) decision
The CIT (Appeals) confirmed the rejection of books but reduced the net profit rate to 5% instead of 6.5%. The decision was based on Section 44AF of the Act, which prescribes a presumptive rate for retail traders. However, the CIT (Appeals) misclassified the business as retail trading, leading to an erroneous estimation.

Issue 4: Appeal before ITAT
The assessee appealed to the ITAT against the CIT (Appeals) order, challenging the rejection of books, net profit estimation, and business classification. The ITAT reviewed the case and found that the business was wholesale trading, not retail, leading to an incorrect application of the net profit rate. The ITAT reduced the net profit rate to 3% of turnover, considering the business nature and circumstances, thereby partially allowing the appeal.

In conclusion, the ITAT partially allowed the appeal, emphasizing the correct classification of the business and adjusting the net profit rate to 3% of turnover for a fair assessment of income.

← Previous Next →