2016 (12) TMI 170 - AT - Income Tax

Additions based on net profit ratio - Held that - As we have noticed that it is not necessary that a businessman should always earn the profit. The profit includes loss also. The AO did not bring any cogent material on the record to show that there is a suppression of income or there is a siphoning of funds, the addition made by the AO is purely based on the surmises, conjectures and guess. Therefore, we do not hesitate to confirm the order of the ld. CIT(A). - Decided against revenue

Summary

Issues:
Appeal against assessment year 2010-11 - Addition based on net profit ratio - Discrepancy in accounts with M/s. Tata Motors Ltd. - Rejection of books of accounts - Application of net profit rate - Justification for addition by AO - Legitimacy of books of accounts - Rejection of accounts under section 145(2) - Principles of maintaining account books - Challenge to transaction entries - Suppression of income or siphoning of funds - Confirmation of CIT(A) order.

Analysis:
The appeal before the Appellate Tribunal ITAT Kolkata pertains to the assessment year 2010-11 and challenges an addition made by the Assessing Officer based on the net profit ratio. The primary issue revolves around discrepancies in the accounts with M/s. Tata Motors Ltd., specifically related to the cost of inferior material supplied. The Revenue contended that the books of accounts were not maintained properly, leading to the application of a net profit rate. The Assessing Officer justified the addition based on estimated net profit, prompting the assessee to appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], who deleted the addition.

The CIT(A) based the deletion of the addition on various grounds, including the different business activities of the branches, dissimilar profit margins, and the absence of qualitative records. The CIT(A) highlighted that the Assessing Officer did not doubt the purchases or call for accounts with Tata Sons for verification. The CIT(A) emphasized the importance of maintaining quantitative details and supported the legitimacy of the accounts with past assessment history. Various legal principles were cited to argue that the rejection of accounts should not be done lightly and that the burden lies on the department to prove the unreliability of the accounts.

Upon review, the Appellate Tribunal found merit in the submissions of the assessee, emphasizing that a businessman may incur losses along with profits. The Tribunal noted the lack of concrete evidence presented by the Assessing Officer to establish income suppression or fund siphoning, leading to the addition being based on assumptions rather than facts. Consequently, the Tribunal upheld the CIT(A) order, dismissing the Revenue's appeal.

In conclusion, the Appellate Tribunal affirmed the decision of the CIT(A) and dismissed the Revenue's appeal, highlighting the importance of substantiated evidence in tax assessments and the burden of proof on the department to demonstrate the unreliability of accounts. The judgment underscores the significance of maintaining accurate accounts and the necessity for justifying additions based on concrete facts rather than conjectures.