2016 (6) TMI 930 - AT - Income Tax

Estimation of net profit @ 0.75% - rejection of trading & profit and loss account - business of export of rice and mustard cake - Held that - The assessee had not produced any books of accounts and supporting documents before the Learned AO. Under these circumstances, we find that net profit of the business had to be determined only on estimated basis. We find that the Learned CITA in the absence of past history of the assessee, had resorted to refer to subsequent year s net profit which was disclosed at 0.60% by the assessee. The Learned CITA had determined the net profit @ 0.75% . We find, in the facts and circumstances of the case and the line of business in which assessee is engaged, that the determination of net profit @ 1% would cover up all the other deficiencies in the business of the assessee and we direct accordingly . All other additions made by the Learned AO would stand deleted once income is determined at 1% of turnover. Hence the grounds raised by the revenue are partly allowed.

Issues:
1. Justification of estimating net profit of the assessee.
2. Validity of rejection of trading & profit and loss account under section 145(3) of the Income Tax Act.
3. Addition towards sundry creditors.
4. Appeal by the revenue regarding the net profit percentage estimation and rejection of books under section 145(3).

Estimation of Net Profit:
The appeal by the revenue questioned the justification of estimating the net profit of the assessee at 0.75%. The CIT(A) had upheld the rejection of the trading & profit and loss account of the assessee under section 145(3) of the Act. The CIT(A) reasoned that the assessing officer's addition for undisclosed profit lacked evidence of actual suppression, as the ratio of purchase and sale prices was extrapolated from a single month's data. The CIT(A) found the assessing officer's approach flawed as prices fluctuate in the commodities market, and no specific instances of inflated purchase prices or suppressed sale prices were identified. The CIT(A) directed the assessing officer to reduce the addition and estimated the net profit at 0.75%, considering the lack of book verification and the nature of the business. The tribunal upheld the CIT(A)'s decision, determining the net profit at 1% to cover all deficiencies in the assessee's business, leading to the deletion of other additions made by the assessing officer.

Validity of Rejection of Trading & Profit and Loss Account:
The assessing officer rejected the trading & profit and loss account filed by the assessee under section 145(3) due to insufficient documentation provided during the assessment proceedings. The CIT(A) supported the rejection, emphasizing the need for a reasonable basis in best judgment assessments. The CIT(A) criticized the assessing officer's reliance on a single month's data to extrapolate purchase and sale ratios for the entire year, highlighting the fluctuating nature of commodity prices. The CIT(A) suggested applying a suitable net profit rate instead. The tribunal agreed with the CIT(A)'s assessment, emphasizing the importance of a reasonable basis for estimating net profit and directing the assessing officer to reduce the addition based on a revised net profit percentage.

Addition Towards Sundry Creditors:
Regarding the addition towards sundry creditors of ?8,40,000, the CIT(A) found that the assessing officer had not verified the details provided by the assessee during the assessment proceedings. The CIT(A) noted that the assessing officer could have conducted verification based on the information available. The tribunal concurred with the CIT(A)'s decision to delete the addition towards sundry creditors, stating that such amounts were already considered in estimating the net profit and did not warrant separate additions.

Appeal by the Revenue:
The revenue appealed the CIT(A)'s decision on various grounds, including the reduction of the net profit addition and the rejection of books under section 145(3). The revenue argued against the CIT(A)'s estimation of net profit at 0.75% based on subsequent year's profit, advocating for a fresh examination of the issue. The tribunal considered the arguments presented by both parties and concluded that in the absence of past history and book verification, estimating the net profit at 1% would address the deficiencies in the assessee's business. Consequently, the tribunal partly allowed the revenue's appeal, directing the income to be determined at 1% of turnover and deleting other additions made by the assessing officer.

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