2017 (6) TMI 561 - AT - Income Tax

N.P. estimation - rejection of books of accounts - Held that - We are not in agreement with the arguments of the ld AR that the books of accounts were never rejected by the department in the year under appeal. We find that both the ld AO as well as ld CITA had brought on record several defects in the books and details produced by the assessee and had resorted to ignore the book results and resorted to estimate of profits in different ways. In the instant case, the only way for determining the total income of the assessee is by resorting to estimation of net profits. In these peculiar facts and circumstances, we hold that the net profits should be estimated as a percentage of total turnover taking into account all the defects in the books during pre-survey and post survey period. We feel that the estimation of net profits (before partners remuneration) at 8% of total turnover would meet the ends of justice in the facts and circumstances of the instant case. The ld AO is directed the allow deduction of partners remuneration of ₹ 31.40 lacs from the net profit so determined above at 8% on total turnover of ₹ 1058.91 lacs. Accordingly the grounds raised by the assessee are partly allowed.

Summary

Issues Involved:
1. Justification of estimating the net profit of the assessee.
2. Reliability of the gross profit rates declared by the assessee during pre-survey and post-survey periods.
3. Rejection of the assessee's books of accounts.
4. Estimation of income based on the survey and subsequent statements.
5. Admissibility and evidentiary value of statements recorded during the survey.
6. Applicability of gross profit ratio on unrecorded sales.

Detailed Analysis:

1. Justification of Estimating the Net Profit of the Assessee:
The central issue in this appeal was whether the authorities were justified in estimating the net profit of the assessee. The assessee, a partnership firm engaged in manufacturing tea blending machines and equipment, had discrepancies in the gross profit rates declared during the pre-survey and post-survey periods. The Assessing Officer (AO) observed a low gross profit rate of 5.96% during the pre-survey period compared to 105.19% during the post-survey period, leading to an estimation of gross profit at 15% for the pre-survey period and an addition of ?82,42,786.

2. Reliability of the Gross Profit Rates Declared by the Assessee:
The AO found the gross profit rate of 5.96% during the pre-survey period unreasonably low compared to the 105.19% post-survey period. The AO concluded that the accounts for both periods were not satisfactorily correct and complete, leading to the estimation of gross profit at 15% for the pre-survey period. The CIT(A) found contradictions in the accounting results and stated that the book results were not reliable, suggesting that the AO should have rejected the books altogether and estimated the business income.

3. Rejection of the Assessee's Books of Accounts:
The CIT(A) noted several contradictions in the book results and concluded that the assessee's income results could not be accepted. The CIT(A) suggested an estimation of income based on the survey and the commitment made by the assessee to pay ?25.5 lacs of tax on an estimated income of ?85 lacs. The CIT(A) ultimately estimated the income at ?73 lacs after adjusting for excess remuneration paid to partners.

4. Estimation of Income Based on the Survey and Subsequent Statements:
The CIT(A) highlighted that the survey officials and the assessee had agreed on an estimated income of ?85 lacs during the survey. However, the assessee only offered ?24 lacs in the return, leading to an estimation of income at ?73 lacs after adjusting for excess remuneration to partners. The CIT(A) deleted the balance addition of ?33 lacs.

5. Admissibility and Evidentiary Value of Statements Recorded During the Survey:
The assessee argued that the addition was based on the statement given during the survey, which has no evidentiary value. The CIT(A) and the tribunal acknowledged that statements recorded under section 133A of the Income Tax Act have no evidentiary value, as established by the Supreme Court in CIT vs S Khader Khan Sons. Thus, any admission made during such statements cannot be the sole basis for addition. The tribunal emphasized that the AO and CIT(A) had identified several defects in the books of accounts, justifying the rejection of book results and resorting to estimation of profits.

6. Applicability of Gross Profit Ratio on Unrecorded Sales:
The tribunal noted that the estimation of net profits should be based on the total turnover, considering the defects in the books during pre-survey and post-survey periods. The tribunal held that estimating net profits at 8% of the total turnover before partners' remuneration would be just. The AO was directed to allow a deduction of ?31.40 lacs for partners' remuneration from the net profit determined at 8% on the total turnover of ?1058.91 lacs.

Conclusion:
The appeal of the assessee was partly allowed. The tribunal directed the AO to estimate the net profits at 8% of the total turnover and allow the deduction of partners' remuneration, resulting in a revised assessment of the assessee's income. The tribunal's decision emphasized the importance of corroborative evidence and reasonable estimation in cases where book results are found unreliable.