2018 (8) TMI 1648 - HC - Income Tax

Gross profit estimation - estimation of profit at 7.17% - assessment was made based on the statement given by the assessee that the amount did not represent the sale of jewelery to the said Mr.Perumal, but was a commission earned for arranging for sale of jewelery from third parties - substantial question of law - Held that - As perused the reasons assigned by the Assessing Officer in the assessment order dated 29.1.1999 and do agree with the conclusion arrived at by the Assessing Officer that it would be highly improper and imprudent on the part of the assessee firm, who themselves are manufacturers and sellers of gold jewelry to engage in arranging for sale of gold jewelery manufactured by third parties for a commission of about 3%. Thus, going by the statement given by the assessee, the Assessing Officer estimated the profit at 7.17% as was declared by the assessee in respect of sales effected by them. The CIT (A) does not interfere with the finding recorded by the Assessing Officer on this aspect, but only reduced the percentage of gross profit. In fact, the reason assigned by the CIT (A) stating that there was no extra rent, salary, traveling, interest payment for the unaccounted sales, was not borne out by any material and appears to be the personal view of the CIT (A), which could not have been the basis for reversing the decision of the Assessing Officer. Thus, in our considered view, the Tribunal rightly restored the order passed by the Assessing Officer - decided against assessee

Summary

Issues:
1. Appeal against Income Tax Appellate Tribunal's order for block assessment years.
2. Estimation of profit at 7.17% without evidence of transaction with a specific individual.
3. Discrepancy in the income declared by the assessee and the assessment made by the authorities.
4. Interpretation of the law regarding the estimation of profit percentage in the jewelry business.

Analysis:
1. The appeal was filed against the Income Tax Appellate Tribunal's order for block assessment years from 1987-88 to 1997-98. The assessee, a jewelry firm, admitted undisclosed income for the block period ending 30.1.1997. However, the assessment by the Assessing Officer raised doubts about the income source, leading to a dispute regarding the estimation of profit percentage.

2. The main contention revolved around the estimation of profit at 7.17% by the Assessing Officer, which was challenged by the assessee. The assessee claimed that the income represented a commission earned for arranging jewelry sales, not actual sales to a specific individual named Mr. Perumal. The Tribunal reversed the order passed by the Commissioner of Income Tax (Appeals) and reinstated the 7.17% profit estimation.

3. The authorities disbelieved the assessee's explanation regarding the source of income, emphasizing the improbability of a jewelry firm settling for a low commission when engaged in manufacturing and selling jewelry themselves. The Commissioner of Income Tax (Appeals) modified the gross profit estimation to 4.5%, but the Tribunal reverted to the original 7.17% estimation by the Assessing Officer.

4. The High Court upheld the Tribunal's decision, stating that the matter was factual rather than a substantial question of law. The Court agreed with the Assessing Officer's reasoning that it would be imprudent for the assessee to earn a mere 3% commission for arranging jewelry sales. The Court found no legal basis for the Commissioner of Income Tax (Appeals) to reduce the profit percentage without substantial evidence.

In conclusion, the High Court dismissed the tax case appeal, affirming the 7.17% profit estimation by the Assessing Officer for the jewelry firm.