2018 (12) TMI 634 - AT - Income Tax

Reopening of assessment - Estimation of income on the suppressed turnover - Held that - Having assured the department should not resort for reopening of earlier assessments. Though reopening is legal but not ethical and it damages the image of the department in the eye of public. In the instant case as stated in the statement recorded on 05. 03. 2015, the profit and loss account was prepared to boost the turnover figures for the purpose of bank loan. AO instead of taking the net profit adopted the turnover figures and estimated the gross profit on the difference of the turnover. The details of turnover found during the course of survey the contents of the statements recorded were not made available at the time of appeal hearing. For a query from the Bench, DR replied that there is no material available with regard to the details found at the time of survey. In the absence of any information from the revenue, we have no option except to believe that profit and loss account was found which was prepared for bank loan and net profit required to be brought to tax, but not the gross profit. Having admitted the additional income of ₹ 11,04,500/- for an aggregate turnover of ₹ 3. 84 crores on the suppressed turnover at 3. 23% which the AO has accepted, we find no reason to tax the gross profit once again. At the cost of repetition we observe that the AO failed to establish that the turnover found was pertaining to the assessee and did not bring any material to support the contention, Therefore we hold that estimation of income on the suppressed turnover as per the net profit at 3. 23% is reasonable and meets the ends of justice. The estimation of profit at 3. 23% each year is in addition to the income already admitted by the assessee for the A. Y. 2011-12. Accordingly, we direct the AO to compute the income estimating the net profit @3. 23% on the difference of turnover each year independently - decided partly in favour of assessee.

Issues Involved:
1. Addition made by the Assessing Officer (AO) due to discrepancies found during the survey.
2. Validity of the notice issued u/s 148.
3. Discrepancies in turnover declared by the assessee.
4. Acceptance of additional income by the assessee.
5. Method of estimating income (gross profit vs. net profit).

Issue-wise Detailed Analysis:

1. Addition made by the Assessing Officer (AO) due to discrepancies found during the survey:
The AO made additions to the assessee's income for the Assessment Years (A.Ys) 2008-09 to 2010-11 based on discrepancies found during a survey conducted u/s 133A at the premises of Mr. Rao, a partner of the assessee firm. The AO found differences between the turnover declared in the returns and the turnover as per the papers found during the survey. The AO made additions of ?19,82,362/- for A.Y. 2008-09, ?54,10,998/- for A.Y. 2009-10, and ?42,21,367/- for A.Y. 2010-11.

2. Validity of the notice issued u/s 148:
The AO issued a notice u/s 148 on 28.03.2014 due to the discrepancies found during the survey. The assessee responded stating that it had cooperated during the survey and paid the taxes due, thus the proceedings under the notice were not acceptable. Despite this, the AO continued with the proceedings, leading to the assessee challenging the validity of the notice.

3. Discrepancies in turnover declared by the assessee:
During the survey, it was found that the turnover as per the papers was significantly higher than the turnover declared in the returns. The AO directed the assessee to explain the differences, but the assessee contended that the turnover found in Mr. Rao's premises did not belong to the firm. The AO rejected this explanation, stating that the material clearly indicated the name of the firm, Nakshatra Hotels.

4. Acceptance of additional income by the assessee:
The assessee admitted additional income of ?11,04,500/- for A.Y. 2011-12, covering the deficiencies of the survey discrepancies. This admission was made on the suggestion of the department to avoid further litigation. The AO, however, did not accept this as covering the discrepancies for the earlier years and proceeded to tax the gross profit on the suppressed turnovers for A.Ys 2008-09 to 2010-11.

5. Method of estimating income (gross profit vs. net profit):
The AO estimated the gross profit on the difference in turnover and brought it to tax. The assessee argued that the profit & loss account was prepared on an estimation basis for obtaining bank loans and that only the net profit should be taxed. The Tribunal noted that the AO did not verify the books of accounts or make any enquiry with the then Managing Partner. The Tribunal held that the net profit should be considered instead of gross profit, especially since the additional income of ?11,04,500/- was already taxed for A.Y. 2011-12.

Conclusion:
The Tribunal found that the AO failed to establish that the turnover found during the survey belonged to the assessee firm. The Tribunal directed the AO to estimate the net profit at 3.23% on the difference of turnover for each year independently, rather than taxing the gross profit. The appeals of the assessee were partly allowed, and the Tribunal emphasized that the department should not reopen assessments after accepting additional income to cover survey discrepancies, as it damages the department's image.

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