2016 (8) TMI 205 - AT - Income Tax

Computation of net income - return of income filed by the assessee was accompanied by the report of an accountant u/s.44AB - Held that - Following the decision CIT v. Balchand Ajit Kumar (2003 (4) TMI 76 - MADHYA PRADESH High Court ) and CIT v. Hariram Bhambhani (2015 (2) TMI 907 - BOMBAY HIGH COURT ), it is of the view that the lower authorities ought to have determined the net income of the assessee on the basis of net profit earned by the assessee and ought to have adopted the net profit @ 5.80%.

Summary

Issues:
1. Assessment of undisclosed income due to unrecorded receipts.
2. Determination of net income based on unrecorded receipts and related expenses.
3. Discrepancy in the assessment by the Assessing Officer and the CIT(A).
4. Application of net profit rate in determining the income of the assessee.

Analysis:
1. The assessee, engaged in providing security services and running a detective agency, filed a return of income for the assessment year 2005-06, reporting an income of &8377; 3,08,770. However, the Assessing Officer noted unrecorded receipts of &8377; 40,79,790, leading to an addition in the total income assessed at &8377; 43,88,560.

2. The CIT(A) partially allowed the appeal, modifying the addition to &8377; 15,80,302, considering the Gross Profit (GP) at 38.98% of the receipts. The CIT(A) determined the income at &8377; 18,89,072, emphasizing the need to account for all expenses incurred, not just wages and direct expenses, to compute the net income accurately.

3. The ITAT, in a subsequent appeal, directed the Assessing Officer to consider all facts comprehensively in computing the net income, acknowledging that not all receipts could be deemed as income as the assessee would have additional expenses beyond wages. The ITAT emphasized the need to account for all business expenses for accurate income calculation.

4. The final judgment directed the determination of the net income based on the net profit earned by the assessee, applying a rate of 5.80% to the total revenue. The decision drew on precedents from the Hon'ble Madhya Pradesh High Court and the Hon'ble Bombay High Court, emphasizing the importance of considering net profit rather than gross receipts in assessing income.

Overall, the judgment highlights the significance of accurately determining income by accounting for all expenses incurred in the course of business operations, not just focusing on gross receipts. The decision underscores the need for a holistic approach in computing net income, aligning with established legal principles and precedents.