2016 (12) TMI 1417 - AT - Income Tax

N.P. estimation - Held that - Estimation of net profit of 5% on total stock put to sale net of all deductions is reasonable. Addition towards unproved, unsecured loans u/s 68 - Held that - In this case, the assessee has filed confirmation letters and also filed bank account copy of the creditors along with their income tax return. The creditors have enough source of income to explain the loans given to the assessee. Therefore, we are of the view that A.O. was incorrect in making additions u/s 68 of the Act. The CIT(A) without appreciating the facts simply confirmed additions made by the A.O. Hence, we direct the A.O. to delete additions made towards unsecured loans received from G. Narayana Swamy and K. Rama Rao. In so far as unsecured loans received from G. Veera Swamy, the assessee failed to prove the credit by filing necessary identity, creditworthiness and genuineness of the transactions. Even before us, the assessee failed to file any details with regard to the unsecured loans accepted from G. Veera Swamy. Therefore, we are of the view that the A.O. has rightly made additions towards unsecured loans received from G. Veera Swamy, accordingly, additions made by the A.O. are upheld.

Summary

Issues involved:
1. Estimation of net profit from the business
2. Addition towards unproved, unsecured loans under section 68 of the Income Tax Act

Estimation of Net Profit from the Business:

The appeal was against the order of the CIT(A)-2, Visakhapatnam for the assessment year 2011-12. The assessing officer rejected books of accounts and estimated net profit at 20% on total stock put for sale. The CIT(A) scaled down the net profit estimation to 10%. The assessee contended that the net profit estimated was high and cited cases where a 5% estimation was directed. The ITAT, Visakhapatnam in various cases directed a 5% net profit estimation. The Tribunal found the net profit estimated by the assessing officer to be high and directed a 5% estimation on total stock put for sale net of all deductions, following the precedent set by the coordinate bench.

Addition towards Unproved, Unsecured Loans under Section 68 of the Act:

The assessing officer made additions towards unsecured loans as the assessee failed to prove the identity, genuineness, and creditworthiness of the parties involved. The CIT(A) deleted additions for some loans but upheld for others. The Tribunal found that the assessee provided confirmation letters, bank statements, and income tax returns of creditors, proving the genuineness of transactions and creditworthiness. The Tribunal held that once the initial onus was discharged, the assessing officer was incorrect in making additions under section 68. The Tribunal directed the assessing officer to delete additions made towards certain unsecured loans while upholding additions for loans where the assessee failed to prove creditworthiness.

In conclusion, the Tribunal directed the assessing officer to estimate the net profit at 5% on total stock put for sale net of all deductions and delete additions made towards unsecured loans where the assessee proved genuineness and creditworthiness, while upholding additions for loans where such proof was lacking.