2017 (10) TMI 51 - AT - Income Tax

Net profit determination - income from the transport business of trucks - Held that - CIT(A) has rightly held that the case of assessee required rejection of book result by invoking the provisions of section 145(3) of the Act. Consequently the income was required to be determined by applying the net profit rate. Therefore in the interest of justice it was fair and reasonable to estimate the net profit by applying the rate of 3.0% on sale of tyres as adopted by the AO in earlier years as a matter of consistency and rate of 2.0% on the freight receipts. The adopted rate of 2% as the case of M/ s. Siddharth Road Carriers Faridabad pertain to A.Y. 2005-06 and not exactly to the year under appeal as well as on the reason that the turnover of the case of assessee is almost half of M/s. Siddharth Road Carriers Faridabad for which the net profit margin is likely to be higher due to lesser turnover. Consequently the income of 96, 977/- in the tyres business is estimated by applying the rate of 3% on total sales of 32.32 lacs and income of 4, 93, 434/- is estimated by applying the net profit rate of 2% on the total freight receipts of 246.71 lacs. Disallowance of expenses and depreciation - Held that - When the books of account are rejected and income is computed by applying the net profit rate the same books of accounts cannot be made the basis for making disallowance of specific expenses and the claim of various expenses including depreciation stand allowed. Hence the addition to the extent of 5, 90, 411/- was rightly confirmed and the balance additions made by the AO under specific heads was rightly deleted

Issues Involved:
1. Confirmation of income estimation percentages.
2. Disallowance of partners' interest on capital/remuneration.
3. Deletion of various additions made by AO under specific heads.
4. Rejection of books of account and best judgment assessment.
5. Application of net profit rate on sales and freight receipts.
6. Double addition on unverifiable creditors.
7. Specific disallowances and additions post net profit estimation.

Issue-Wise Detailed Analysis:

1. Confirmation of Income Estimation Percentages:
The Assessee contended that the CIT(A) erred in confirming additions by applying an estimation of income at 3% on trading in tyres and 2% on total freight receipts. The Assessee argued that in the immediate previous year, the total net income was assessed at 1.22% of the total turnover. The Tribunal upheld the CIT(A)’s decision, emphasizing consistency in applying the net profit rate of 3% on tyre sales and 2% on freight receipts, aligning with the historical assessment practices and considering the Assessee’s business turnover.

2. Disallowance of Partners' Interest on Capital/Remuneration:
The Assessee argued that the CIT(A) did not allow partners' interest on capital/remuneration while estimating the net income under section 145(3) of the Act. The Tribunal did not specifically address this issue separately but implied that the net profit estimation inherently considered all business expenses, including partners' remuneration.

3. Deletion of Various Additions Made by AO Under Specific Heads:
The Revenue challenged the CIT(A)’s deletion of various additions totaling ?51,69,895 made by the AO under specific heads. The Tribunal upheld the CIT(A)’s decision, noting that the AO's specific additions were not conclusively substantiated and that the net profit estimation already accounted for business expenses and discrepancies.

4. Rejection of Books of Account and Best Judgment Assessment:
The Tribunal acknowledged that the Assessee failed to produce books of account during the assessment proceedings, leading to the AO’s best judgment assessment under section 144. The Tribunal supported the CIT(A)’s invocation of section 145(3) to reject the book results and determine income by applying a reasonable net profit rate.

5. Application of Net Profit Rate on Sales and Freight Receipts:
The Tribunal agreed with the CIT(A)’s application of a 3% net profit rate on tyre sales and a 2% rate on freight receipts, considering it fair and reasonable. The Tribunal referenced past assessments and comparable cases to justify these rates, ensuring consistency and fairness in the estimation process.

6. Double Addition on Unverifiable Creditors:
The Tribunal noted that the AO’s addition of ?10,84,564 on account of unverifiable creditors amounted to double addition since the net profit estimation already considered such discrepancies. The Tribunal emphasized that once income is estimated by applying a net profit rate, further additions on specific expenses should not be made.

7. Specific Disallowances and Additions Post Net Profit Estimation:
The Tribunal highlighted that once the books of account are rejected and income is computed by applying a net profit rate, the same books cannot be used for making specific disallowances. The Tribunal cited judicial precedents affirming that no further disallowances should be made once a net profit rate is applied, ensuring a fair and just assessment.

Conclusion:
The Tribunal dismissed both the Assessee’s and Revenue’s appeals, upholding the CIT(A)’s order in entirety. The Tribunal confirmed the application of a 3% net profit rate on tyre sales and a 2% rate on freight receipts, rejected specific additions and disallowances post net profit estimation, and emphasized the principles of fair play and natural justice in best judgment assessments. The order was pronounced on 28/09/2017.

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