2017 (8) TMI 555 - AT - Income Tax

Unverifiable expenses - determining appropriate profit chargeable to tax in absence of books of accounts which have been lost in an road accident - trading results not verifiable - Held that - It is not the case of the Revenue that leasing income of the assessee is not in the nature of business income and all the Revenue s contention is that the expenses are on a higher side as compared to last year more so on account of leasing out of the theatre for a part of the year. There is no material available on record to determine the running and fixed cost and the cost part to running of theatre and leasing of theatre. Based on material available on record, we find the approach of the ld CIT(A) as reasonable as he has followed the assessee s past history and instead of disallowing individual expenses, has compared the net profit of the last year will the net profit declared by the assessee and he has estimated net profit at 10% as against 7.34% last year, thus taking into account low operating cost in relation to letting of theatre. In the result, grounds of the Revenue are dismissed.

Issues Involved:
- Addition of suppressed receipts by the assessee
- Deletion of unverifiable expenses claimed by the assessee
- Estimation of income by applying a net profit rate without considering suppressed receipts and inflated expenses

Analysis:

Issue 1: Addition of suppressed receipts by the assessee
The Revenue appealed against the order of the ld. CIT(A) regarding the deletion of additions of ?15,60,341 on account of suppressed receipts by the assessee. The AO observed that the assessee failed to furnish books of accounts and supporting bills & vouchers, making the receipts and expenditures unverifiable. Due to the absence of primary records, the AO estimated the income by considering the past history of the assessee, which is a recognized method for estimating income. The AO noted discrepancies in the receipts shown by the assessee compared to the previous year and estimated the receipt from running the theatre during the year at ?3,23,654. Consequently, an addition of ?15,60,341 was made due to the understatement of receipts.

Issue 2: Deletion of unverifiable expenses claimed by the assessee
The Revenue also challenged the deletion of the addition of ?58,15,229 on account of unverifiable expenses debited in the P&L account by the assessee. The AO found that the percentage of expenses to income had significantly increased, and the increased expenditure claimed by the assessee was not justifiable, especially considering the change in the nature of business during the year. As the assessee could not provide documentary evidence to support the claimed expenses, the AO disallowed 50% of the expenses and added it back to the income of the assessee.

Issue 3: Estimation of income by applying a net profit rate
The appeal also raised concerns about the estimation of income by applying a net profit rate without considering the suppressed receipts and inflated expenses. The ld. CIT(A) compared the results of the current year with the immediately preceding year, noting that the nature of the business remained the same despite changes in the method of operation. The ld. CIT(A) applied a net profit rate of 10% on the total turnover, resulting in a net profit of ?8,94,455 after depreciation. The ld. CIT(A) found the addition on account of expenses debited in the P&L account unjustified and deleted it.

In conclusion, the Tribunal upheld the decision of the ld. CIT(A) based on the assessee's past history and the reasonable estimation of income. The Tribunal found the approach of the ld. CIT(A) to be reasonable, considering the changes in the method of business operation and the nature of the business. The appeal of the Revenue was dismissed, affirming the decisions regarding suppressed receipts, unverifiable expenses, and the estimation of income based on the net profit rate.

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