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2018 (4) TMI 22 - AT - Income TaxRejecting books results and estimating profit at 12% of the turnover - non discharge of the onus of proving genuineness of commission payment - Held that - Existence or otherwise of proprietary concern is of no relevance as the AO has considered total turnover of 5 concerns. This issue has no bearing on rejection of books of account. But we find that the assessee has not discharged the onus of proving genuineness of commission payment which can be valid reason to reject book results and resort to estimation of profit. AO cannot indulge in wild guess work for adopting the rate of profit. It is now trite law that the rate of profit should be based on past history of the assessee or the profit earned by assessee in similar line of business, whereas in the present case, though the AO referred to profits shown in the immediately preceding year, these figures were disputed by the assessee stating that the AO had not considered net profit rate of assessment year 2004-05, considered only net profit of assessment year 2002-03 and 2003-04 - we remit this issue back to the file of the AO to adopt rate of profit based either on past history or by comparable profits of concerns in the similar line of business. - Decided partly in favour of assessee for statistical purposes.
Issues:
1. Rejection of books of accounts under Section 145(3) of the Act 2. Adoption of Notional profits 3. Commission payment 4. No loss to the Revenue Department 5. Interest under Section 234B of the Act Issue 1: Rejection of books of accounts under Section 145(3) of the Act: The case involved cross appeals by the revenue and the assessee against the order of the ld. Commissioner of Income-tax(Appeals) for the assessment year 2005-06. The Assessing Officer (AO) estimated the profit at 12% on the total turnover, doubting the genuineness of commission payment and low profits compared to previous years. The ld. CIT(A) upheld the profit estimation but directed profit to be calculated at 8%. The assessee contended that the rejection of books of accounts was unjustified, citing legal precedents. The Tribunal found that the assessee failed to prove the genuineness of commission payments, allowing for estimation of profit. However, the Tribunal remanded the issue back to the AO to determine the profit rate based on past history or comparable profits. Issue 2: Adoption of Notional profits: The ld. CIT(A) directed the AO to adopt a notional profit of 8% of gross sales for the assessee, which was contested by the appellant. The Tribunal noted that estimation of profits on a notional basis should be avoided when true profits can be ascertained from the books of accounts. The Tribunal emphasized that losses in the current year compared to profits in earlier years should not be the sole basis for adopting a notional profit rate. The Tribunal found that the ld. CIT(A) erred in directing the adoption of a notional profit without considering the business specifics and profits of similar concerns. Issue 3: Commission payment: The Tribunal addressed the contention regarding the substantiation of commission payments. The revenue argued that the genuineness of commission payments was not proven by the assessee. The Tribunal found that the assessee failed to discharge the onus of proving the genuineness of commission payments, justifying the estimation of profit. The Tribunal emphasized the need for valid reasons to reject book results and resort to profit estimation. Issue 4: No loss to the Revenue Department: The ld. CIT(A) confirmed the action of the AO, leading to the contention that there was no loss to the Revenue Department due to the use of proprietorship concerns for business. The Tribunal noted this argument but did not provide a detailed analysis or ruling on this specific issue. Issue 5: Interest under Section 234B of the Act: The appellant sought the deletion of interest under Section 234B of the Act. However, the judgment did not provide a detailed discussion or ruling on this issue. In conclusion, the Tribunal partly allowed the appeal filed by the assessee for statistical purposes, remanding the profit rate determination back to the AO. The appeal filed by the revenue was treated as partly allowed due to the remand of the profit rate issue. The judgment highlighted the importance of proving the genuineness of transactions and the need for valid reasons to reject book results and estimate profits.
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