2017 (8) TMI 326 - AT - Income Tax

Estimate the profit @ 5% of the gross receipts excluding service tax - rejection of books of accounts - A.O noted that no documentary evidence in respect of liabilities under various heads including wages, service tax, etc. - Held that - Estimate of profit @ 5% appears to be on the higher side. We find merit in the above argument of the ld. AR. It is an admitted fact that in the subsequent A.Ys, the A.O has not rejected the books results and has made nominal additions on account of various expenses being unverifiable in nature. Therefore, adoption of 5% N.P. rate on gross receipts for the impugned A.Y appears to be on the higher side. At the same time, it is also a fact that despite repeated opportunities given by the A.O, the assessee has not produced books of accounts. We are of the considered opinion that adoption of 3% net profit on the gross receipts excluding service tax will meet the ends of justice. It may be pertinent to mention here that this rate of estimated profit is only for this year and cannot be taken as a precedent for other years. Grounds raised by the assessee are accordingly partly allowed.

Summary

Issues:
Estimation of profit rate on gross receipts excluding service tax for assessment year 2009-10.

Analysis:
The case involved a dispute regarding the estimation of profit on gross receipts excluding service tax for the assessment year 2009-10. The assessee, engaged in the business of labor supply, declared a net profit of ?3,13,042 on gross receipts of ?1,79,18,998. However, the Assessing Officer (A.O) rejected the book results under section 145(3) of the Income-tax Act, 1961, as the assessee failed to produce books of accounts and supporting documentary evidence. The A.O estimated the net profit at 8% of the gross receipts as per the service tax return, resulting in a net profit of ?18,44,673.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] directed the A.O to verify the gross receipts and adopt a net profit rate of 5% on the gross receipts excluding service tax. The CIT(A) noted discrepancies in the A.O's calculation and emphasized that rejection of books of accounts under section 145(3) does not imply rejection of results shown in the income tax return in the absence of books of accounts. The CIT(A) considered the nature of the business and estimated the profit at 5% of the gross receipts excluding service tax.

The assessee further appealed, arguing that in subsequent assessment years, the A.O did not reject the book results and made only nominal additions to expenses. The assessee contended that the 5% profit estimation was high and requested a reduction to 2-2.5%. The Departmental Representative (DR) supported the CIT(A)'s decision to adopt a 5% net profit rate.

The Income Tax Appellate Tribunal (ITAT) considered the arguments and observed that while the A.O did not reject the book results in subsequent years, the failure of the assessee to produce books of accounts remained a concern. Considering the circumstances, the ITAT held that a 3% net profit on the gross receipts excluding service tax would be appropriate for the assessment year 2009-10. The ITAT clarified that this rate was specific to the year in question and should not set a precedent for future years.

In conclusion, the ITAT partly allowed the assessee's appeal, directing the adoption of a 3% net profit rate on the gross receipts excluding service tax for the assessment year 2009-10, emphasizing the unique circumstances of the case and the failure to produce books of accounts.