2020 (9) TMI 36 - HC - Income Tax

Estimation of turnover - No order passed u/s 144 - non rejection of books of accounts - HELD THAT - The assessee has produced all books of accounts, vouchers, bills and other documents but the Assessing Officer without pointing out any mistake and error in the bills/vouchers and in the books of accounts made addition @ 8% which was reduced by the ld CIT(A) to 5%. Assessee s books of accounts were not rejected by the assessing officer although these were not audited under section 44AB of the Act by a Chartered Accountant. We note that the AO could have ventured into estimation only after rejecting the books of accounts of the assessee u/s 145(3) and thereafter by best judgment assessment u/s 144 of the Act. Here in this case, the AO has not passed any order u/s 144 of the Act. The AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures that the assessee may be inflating its expenses and showing net profit ratio at a very low rate. Therefore in our opinion the ends of justice would be met, if a net profit rate of 2.50% is adopted. Thus, we direct the assessing officer to estimate the income @ 2.5% of the turnover - Decided in favour of assessee partly .

Summary

Issues Involved:
1. Justification of the addition made by the Assessing Officer on an estimated basis.
2. Justification of the CIT(A) in issuing directions affecting assessments of other years.
3. Determination of the appropriate net profit rate for the assessee's turnover.

Issue-wise Detailed Analysis:

1. Justification of the Addition Made by the Assessing Officer on an Estimated Basis:
The assessee declared a net profit of ?2,21,539 on a turnover of ?2,23,59,967, which translates to a net profit ratio of 0.99%. The Assessing Officer (AO) found this to be less than the 8% stipulated under Section 44AD of the Income-tax Act, 1961. As the assessee did not get the accounts audited as required under Section 44AB, the AO estimated the net profit at 8% of the turnover, amounting to ?17,88,797, and added the difference of ?15,67,258 to the total income as suppressed income from business. The AO's decision was based on the failure of the assessee to comply with audit requirements and the low net profit percentage.

2. Justification of the CIT(A) in Issuing Directions Affecting Assessments of Other Years:
The Commissioner of Income-tax (Appeals) [CIT(A)] reduced the estimated profit rate from 8% to 5%, noting that the AO did not identify specific defects in the assessee's evidence and expenses. The CIT(A) acknowledged the assessee's non-compliance with audit requirements but found merit in the assessee's contention that the net profit percentage was low due to the nature of the business. The CIT(A) partially upheld the addition by estimating the net profit at 5%, resulting in a reduced addition of ?8,96,459 and deletion of ?6,70,799. The CIT(A) also issued directions to the AO to disturb assessments of other years, which was contested by the assessee.

3. Determination of the Appropriate Net Profit Rate for the Assessee's Turnover:
The assessee appealed against the CIT(A)'s order, seeking a further reduction of the estimated net profit rate to 2.5%. The Tribunal examined the facts and noted that the AO did not reject the books of accounts or identify specific defects. The Tribunal also considered the comparative profitability statements for subsequent years, which showed net profit rates of 2.64%, 2.65%, and 4%. Based on this, the Tribunal found merit in the assessee's contention and directed the AO to estimate the income at 2.5% of the turnover, resulting in a net profit of ?5,58,999.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the AO to adopt a net profit rate of 2.5% for the assessee's turnover, thereby reducing the addition to ?5,58,999. The Tribunal found that the AO's estimation was based on suspicion without rejecting the books of accounts and that the CIT(A)'s partial relief was justified but required further adjustment.