2018 (4) TMI 330 - AT - Income Tax

Estimation of profit without rejecting the books of account u/s 145(3) - Addition of net profit on the basis of comparative cases - ignoring the profit declared by it in its books of account - Held that - the history of the assessee becomes very important once the profit has to be determined on estimated basis. - Though there was no scrutiny proceeding u/s 143(3) of the Act in earlier years but for that the assessee cannot be held responsible as it is not under his control. Once the assessee furnished his return of income then assessee has no role in the selection of the same under scrutiny proceedings. Thus, coming to profit declared by the assessee in earlier year cannot be brushed aside for estimating the profit of the current year until and unless, there are changes in the facts and circumstances. Addition towards income account of bulk agency ticket - On question by the AO the assessee submitted that the bulk agency bonus was distributed among the sellers handling the prize winning tickets. However, the assessee failed to substantiate the claim made by him on the basis of documentary evidence. - Held that - The additional documents filed by the assessee are explaining the dispute which is already available on record. Therefore, we hold that the additional documents filed by assessee are necessary for disposal of dispute in hand. Therefore, we admit the same and restore the issue back to the file of AO for fresh adjudication in accordance with law and after considering the fresh evidence filed by assessee. Thus, the ground of assessee is allowed for statistical purpose in terms of above direction.

Summary

Issues Involved:
1. Sustaining the addition of Net Profit based on comparative cases.
2. Sustaining the addition of ?77,08,718/- on account of Bulk Tickets (bulk agency bonus).
3. Sustaining the addition of ?4,31,155/- under Section 40A(3) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Sustaining the Addition of Net Profit Based on Comparative Cases:

The assessee, engaged in the business of lottery tickets, failed to furnish purchase invoices and sales memos despite several opportunities provided by the Assessing Officer (AO). Consequently, the AO estimated the gross profit at 2% of the total turnover, leading to an addition of ?13,35,424/- to the total income of the assessee.

The Commissioner of Income Tax (Appeals) [CIT(A)] partially allowed the appeal by directing the AO to estimate the net profit based on comparable cases rather than accepting the gross profit declared by the assessee. The CIT(A) noted that while the AO doubted the veracity of the books, they were not formally rejected. The CIT(A) suggested that the AO should consider the average rate of gross profit from comparable cases and make necessary adjustments.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, emphasizing that the assessee's failure to produce necessary documents justified the estimation of profit. However, the ITAT directed the AO to consider the assessee's financial history and comparable cases for a fair estimation of profit.

2. Sustaining the Addition of ?77,08,718/- on Account of Bulk Tickets (Bulk Agency Bonus):

The assessee adjusted the credit balance with the main stockiest, M/s Tiger Associates (TA), through prize-winning tickets, bulk agency bonus, and cash payments. The AO observed that the assessee did not show any income under bulk agency bonus, which TA had adjusted against the assessee. The AO disallowed ?77,08,718/-, being 1/4th of the total bulk agency bonus, due to the assessee's failure to substantiate the claim with documentary evidence.

The CIT(A) confirmed the AO's addition, noting that the assessee did not clarify how the bulk agency bonus was distributed among its debtors. The ITAT admitted additional evidence submitted by the assessee explaining the transactions of bulk agency bonus. The ITAT restored the issue to the AO for fresh adjudication, considering the additional evidence.

3. Sustaining the Addition of ?4,31,155/- under Section 40A(3) of the Income Tax Act, 1961:

The AO disallowed ?86,231/- (20% of ?4,31,155/-) under Section 40A(3) for cash payments exceeding ?20,000/- made to TA. The CIT(A) confirmed the AO's addition, finding no evidence supporting the assessee's claim that the payments were collected directly by TA from the assessee's debtors.

The ITAT referred to a previous decision in the assessee's own case, where a similar addition under Section 40A(3) was deleted. The ITAT noted that the genuineness of the payments was not doubted, and various courts have held that where the genuineness of the transaction is not in question, the disallowance under Section 40A(3) should not be made. The ITAT deleted the addition, following the precedent set in the earlier case.

Conclusion:

The ITAT allowed the assessee's appeal for statistical purposes, directing the AO to re-adjudicate the issues of net profit estimation and bulk agency bonus based on the guidelines provided. The addition under Section 40A(3) was deleted, following the precedent in the assessee's own case.