2019 (9) TMI 260 - AT - Income Tax

N.P. rate determination - Reliance of Audit report in the absence of books of accounts - CIT-A restricting net profit rate to 8% of Gross Receipts in place of net profit rate of 12% estimated by the A.O - Assessee seeking more relief - rejection of the books of account. - HELD THAT - AO who has chosen to apply N.P rate of 12% without bringing on record any comparable case where such an exorbitant rate of N.P was either shown by the assessee or assessed by the AO which has become final. AO while framing assessment has totally lost sight of the fact that during the year under consideration the turnover of the assessee has grown up by more than five times as compared to last year and therefore, assessee cannot be expected to report the same rate of Net Profit as was earned in last year. The Audited Accounts for year under consideration as well as for past assessment years were undisputedly available with the Department. It is not the case of the AO by drawing comparison with the past years Audited Accounts in the year under consideration assessee had either shown certain expenses in abnormal terms or that certain expenses were debited for an abnormal amount. Hon ble Delhi High Court in the case of Additional CIT Vs Jai Engineering Works 1978 (2) TMI 94 - DELHI HIGH COURT had the occasion to consider a question that whether the report of the Auditor could be said to be material on which reliance could be placed by the Income Tax Authorities. The Hon ble High Court while approving the order passed by the Tribunal ruled that in case where books are not made available for AO s verification the AO should rely on the Audit Report because the said evidence is admissible under Indian Evidence Act, 1872. Reasonable rate of Net Profit - Since, the turnover, has gone up manifold in the year under consideration from ₹ 5,59,62,965/ to ₹ 27,72,26,469/- therefore, reliance to past years trading results may not be an appropriate guide. We reject the submission of the assessee to apply 2.65% as Net Profit as was applied in the case of M/s. Sri Siddheshwar Engineer India (P) Ltd. 2018 (3) TMI 1667 - ITAT AGRA as assessee therein is based in Etawah, and is a Private Limited Company and the Assessing framing the assessment happened to be different. Therefore, preference cannot be given to M/s. Sri Siddheshwar Engineer India (P) Ltd (supra). Thus, we direct the learned Assessing officer to apply N.P rate of 6% on gross receipts. We also make it clear that assessee shall not be entitled for any other deduction such as depreciation and interest paid. Thus, ground of appeal No.1 to 4 are partly allowed.

Issues Involved:
1. Estimation of Net Profit rate.
2. Rejection of books of accounts under Section 145(3) of the Income Tax Act.
3. Validity of assessment under Section 144 of the Income Tax Act.
4. Comparison with similar cases and historical data for profit estimation.
5. Applicability of judicial precedents.
6. Maintainability of the revenue's appeal based on tax effect.

Issue-wise Detailed Analysis:

1. Estimation of Net Profit Rate:
The primary issue is the estimation of the Net Profit (N.P) rate. The assessee challenged the authorities' application of a 12% N.P rate, which was reduced to 8% by the CIT(A). The assessee argued that the rate is "grossly arbitrary, highly unjust, wrong, illegal and in any view highly excessive." The department, on the other hand, contested the reduction from 12% to 8%, asserting that the assessee did not produce the necessary books of accounts, forcing the AO to estimate the income.

2. Rejection of Books of Accounts under Section 145(3):
The rejection of the books of accounts was upheld as the assessee did not press this ground during the hearing, thus accepting the rejection. The Tribunal noted that the books were rejected due to non-compliance during assessment proceedings, invoking Section 145(3) of the Income Tax Act.

3. Validity of Assessment under Section 144:
The assessment was made under Section 144 due to the non-production of books of accounts. The assessee's challenge to this was dismissed as it was not pressed during the hearing, making the rejection of accounts final.

4. Comparison with Similar Cases and Historical Data for Profit Estimation:
The Tribunal considered comparable cases and historical data for profit estimation. The assessee cited several cases with lower N.P rates, arguing for a rate of 2.65%. However, the Tribunal found the cases cited by the assessee not comparable due to differences in business nature and location. Instead, it referred to a recent case with a similar business in Mathura where a 7.50% N.P rate was applied. Considering the significant increase in turnover, the Tribunal deemed a 6% N.P rate reasonable.

5. Applicability of Judicial Precedents:
The Tribunal referenced several judicial precedents, including the Hon’ble Supreme Court and High Courts, emphasizing that estimation is a question of fact. It cited cases like Sanjay Oilcake Industries Vs CIT and CIT Vs Sahu Construction (P) Ltd, which support the view that estimation should be based on comparable cases and historical data. The Tribunal also highlighted the principle that taxing authorities must act fairly, ensuring neither the revenue nor the assessee faces unreasonable hardship.

6. Maintainability of the Revenue's Appeal Based on Tax Effect:
The revenue's appeal was dismissed on the grounds that the tax effect on the disputed addition was less than ?50,00,000/-, making the appeal non-maintainable as per the latest CBDT Circular No. 17/2019 dated 08/08/2019.

Conclusion:
The Tribunal directed the AO to apply a 6% N.P rate on gross receipts of ?27,72,26,469/-, rejecting both the assessee's plea for a 2.65% rate and the AO's 12% rate. The assessee's appeal was partly allowed, and the revenue's appeal was dismissed due to the low tax effect. The decision was pronounced in the open court on 04/09/2019.

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