2019 (11) TMI 1223 - AT - Income Tax

Rejection of books of accounts u/s 145(3) - AO estimated the income of the assessee by applying NP rate at 4% of turnover as against NP declared by the assessee at 2.51% - HELD THAT - The past history of the assessee which is accepted by the department is a proper guidance and reasonable basis for estimation of income of the assessee for the year under consideration. AO has applied 4% net profit without citing any basis or comparable instance. Therefore, ignoring the past history of the assessee and estimating the income based on NP at 4% without giving any basis as to how NP rate of 4% is reasonable and proper, the action of AO is contrary to the settled proposition of law. The power of estimation does not mean an arbitrary power with the AO but the estimation has to be on some reasonable and proper basis. CIT (A) though restricted the addition by applying 3.5% NP, however, there was no basis explained by the ld. CIT (A) for applying the NP at 3.5%. Thus it is clear that the assessee has declared a better result for the year under consideration in comparison to the result of the preceding years which were accepted by the department. Accordingly, in view of the above facts and circumstances of the case as discussed above, the addition sustained by the ld. CIT (A) is not justified and the same is deleted. - Appeal of the assessee is partly allowed.

Issues:
1. Rejection of Books of accounts and invoking of provisions of section 145(3) by the AO.
2. Estimation of income by the AO and subsequent appeal to CIT (A).
3. Applicability of net profit rate in determining income.
4. Discrepancies in the assessment by AO and CIT (A).
5. Justification of the sustained addition by CIT (A).

Issue 1: Rejection of Books of accounts and invoking of provisions of section 145(3) by the AO:
The AO rejected the books of accounts of the assessee due to noted defects in bills, vouchers, and accounts, invoking section 145(3) of the IT Act. The AO estimated income at 4%, resulting in a trading addition of ?13,33,296. The appellant challenged this decision before the CIT (A), arguing that audited books were maintained daily with supporting documents. The AO's observations were deemed conjectural, and the application of section 145(3) was considered unjustified. The CIT (A) upheld a partial rejection of ?4,46,542, which the appellant contended was excessive and requested deletion of the remaining ?8,86,754.

Issue 2: Estimation of income by the AO and subsequent appeal to CIT (A):
The appellant, a partnership firm in the transportation business, declared a total income of ?22,39,220. The AO, after rejecting the books, estimated income at 4% net profit, leading to the trading addition. On appeal, the CIT (A) reduced the addition by adopting a net profit rate of 3.5% instead of 4%. The appellant argued that the declared profit was consistent with previous years, and the addition was unwarranted.

Issue 3: Applicability of net profit rate in determining income:
The AO's estimation of income at 4% net profit was challenged by the appellant, citing past history and progressive results. The appellant contended that when the declared profit surpasses previous years, no additional income should be imposed. The CIT (A) upheld a 3.5% net profit rate without providing a basis for this decision. The Tribunal emphasized the importance of a reasonable and proper basis for income estimation, considering the appellant's historical performance.

Issue 4: Discrepancies in the assessment by AO and CIT (A):
The AO's arbitrary application of a 4% net profit rate without justification was deemed improper by the Tribunal. The CIT (A) reducing the addition to 3.5% without explanation raised concerns regarding the lack of a reasonable basis for the decision-making process. The Tribunal highlighted the need for assessments to be based on sound reasoning and historical performance rather than arbitrary estimations.

Issue 5: Justification of the sustained addition by CIT (A):
The Tribunal found that the appellant's declared profit for the year under consideration exceeded previous years, which were accepted by the department. Considering this, the sustained addition by the CIT (A) was deemed unjustified, leading to its deletion. The Tribunal partially allowed the appeal, emphasizing the importance of fair and reasoned assessments based on historical data and performance.

This judgment addresses the rejection of books of accounts, the estimation of income, the application of net profit rates, discrepancies in assessments, and the justification of sustained additions. It underscores the necessity for assessments to be grounded in reasonable and proper bases, considering historical performance and avoiding arbitrary decisions.

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