2019 (1) TMI 1013 - AT - Income Tax

Computation of income of the assessee - applicability of provisions of section 44AD - application of the profit percentage at 8% on estimated turnover - Held that - Referring to the submission of assessee before CIT(A) that if this amount of turnover is adopted then the provisions of section 44AD are not applicable because the same is applicable only up to turnover of ₹ 1 Crore we feel it proper to restore back the matter to the file of CIT(A) for fresh decision by way of a speaking and reasoned order as to what is the actual turnover of the assessee because if amount of turnover of ₹ 2,04,15,866/- is obtained by adding back the amount of purchases and sales then the same cannot be considered as turnover because in my considered opinion only the amount of sale is turnover and not the amount of purchase. But in this regard, the guidelines issued by The Institute of Chartered Accountants of India (ICAI) should also be considered. CIT-A should decide this aspect first by way of a speaking and reasoned order as to what is the turnover of the assessee. If it is found that the turnover of the assessee is less than ₹ 1 Crore then on the turnover so determined, rate of 8% rates can be applied to compute the income of the assessee but if it is found that the turnover is more than ₹ 1 Crore, then section 44AD of IT Act cannot be applied and the income has to be computed on a reasonable basis after examining the entire material available on record. - Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues:
1. Applicability of section 44AD on estimated turnover exceeding the prescribed limit.
2. Addition of estimated amount based on ICAI Guidance Note.
3. Disallowance of set-off of loss related to speculative share transactions.
4. Computation of income based on turnover attributable to share sales.
5. Determination of actual turnover for assessing applicability of section 44AD.

Issue 1: Applicability of section 44AD on estimated turnover exceeding the prescribed limit
The assessee challenged the order of the ld. CIT(A) contending that the turnover estimated by the AO exceeded the prescribed limit of ?1 crore, making the application of the 8% profit percentage under section 44AD inappropriate. The assessee argued that the turnover figure included both purchase and sales amounts, and only sales should be considered as turnover. The ITAT directed the matter to be reconsidered by the CIT(A) to determine the actual turnover of the assessee, emphasizing that if the turnover is less than ?1 crore, the 8% rate can be applied; otherwise, a reasonable basis should be used for income computation.

Issue 2: Addition of estimated amount based on ICAI Guidance Note
The assessee disputed the addition of ?16,33,269 based on the ICAI Guidance Note by the AO, arguing that the Note is applicable only when accounts are auditable under section 44AB, which was not the case for the appellant. The ITAT agreed with the assessee, noting that the AO had not considered both positive and negative transactions, resulting in a substantial loss. The ITAT directed the CIT(A) to pass a reasoned order after determining the actual turnover, emphasizing the need to consider the ICAI guidelines.

Issue 3: Disallowance of set-off of loss related to speculative share transactions
The CIT(A) disallowed the appellant's claim of set-off of loss from speculative share transactions, stating that the loss was not claimed in the income statement or through a revised return. The ITAT noted the substantial loss incurred by the appellant and directed the CIT(A) to reconsider the matter after determining the actual turnover and considering all transactions, including losses, for a fair computation of income.

Issue 4: Computation of income based on turnover attributable to share sales
The appellant highlighted that the turnover attributable to share sales was ?58,86,012, questioning the application of the 8% rate on the entire turnover. The ITAT emphasized the need for a proper determination of turnover and directed the CIT(A) to reevaluate the computation of income based on the actual turnover, ensuring a fair assessment in line with the provisions of the IT Act.

Issue 5: Determination of actual turnover for assessing applicability of section 44AD
The ITAT stressed the importance of determining the actual turnover to assess the applicability of section 44AD accurately. The ITAT instructed the CIT(A) to provide a reasoned and speaking order after reevaluating the turnover, considering all transactions, and applying the relevant provisions of the law. The appeal was allowed for statistical purposes, emphasizing the need for a fair and just assessment based on the actual turnover figure.

This detailed analysis of the judgment highlights the key issues raised by the appellant and the directions provided by the ITAT for a fair and accurate assessment in line with the provisions of the IT Act.