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2021 (2) TMI 706 - AT - Income TaxEstimation of income - NP determination - non rejection of books of accounts - search u/sec. 132 was conducted in the business premises of the assessee as well as residential premises - Assessee objecting for estimation of income stating that assessee has agreed the addition due to pressure and on apprehension of levying the penalty - HELD THAT - There was no material and no defects were pointed out by the AO. Even though search was conducted no evidence was found by the AO evidencing the suppression of income or the inflation of purchase or inflation of expenditure. The assessee has maintained regular books of account which are duly audited. A search u/sec. 132 was conducted but no evidence was found indicating concealment of income. The assessee relied on the decision of ITAT, Rajkot Bench in the case of ACIT Vs. RushabhVatika 2013 (11) TMI 211 - ITAT RAJKOT wherein the coordinate bench has held that without rejection of books of account question of application of net profit does not arise. In the case of Pr.CIT Vs. Marg Ltd. 2017 (7) TMI 823 - MADRAS HIGH COURT also held that profits of the assessee cannot be estimated without rejection of books of account. In the case of Dhakeswari Cotton Mills Ltd. Vs. CIT 1954 (10) TMI 12 - SUPREME COURT held that AO is not entitled to make a pure guess work or suspicion without any reference or without any material at all. Taking into consideration of all the above aspects, in the instant case, there is no basis for estimation of income, therefore, estimation of income made without having any material is bad in law, thus, we uphold the order of the ld. CIT(A) and dismiss the appeal of the Revenue.
Issues Involved:
1. Estimation of income by the Assessing Officer (AO) 2. Validity of books of account and stock registers 3. Admission of additional income by the assessee 4. Rejection of books of account under Section 145(3) of the Income Tax Act 5. Legal basis for estimation of income without material evidence Issue-Wise Detailed Analysis: 1. Estimation of Income by the Assessing Officer (AO): The AO observed a significant decline in the net profit of the assessee for the Assessment Years (A.Ys) 2016-17 and 2017-18 compared to previous years. The AO proposed an estimation of income at an average net profit rate of 6.26% based on the net profit rates from A.Ys 2011-12 to 2015-16. The AO issued a show-cause notice and, after considering the assessee's objections, estimated the income at 2.15% on the total turnover, to which the assessee agreed under pressure. The AO computed the income for A.Y. 2016-17 at ?3,91,24,072 and for A.Y. 2017-18 at ?7,95,21,933. 2. Validity of Books of Account and Stock Registers: The assessee argued that it maintained regular books of account, which were audited, and no defects were found by the AO. The assessee explained that the decline in profit was due to competition from big corporate players, increased spending on advertisements, and other market conditions. The AO, however, could not identify the details of opening and closing stock and thus doubted the reliability of gross profit or net profit ratios for the year under consideration. 3. Admission of Additional Income by the Assessee: The assessee admitted additional income during the search operation under pressure and apprehension of penalty. The assessee filed an affidavit stating that the admission was made due to pressure and lack of understanding. The assessee contended that the AO cannot base the estimation of income solely on the admission without any material evidence. 4. Rejection of Books of Account under Section 145(3) of the Income Tax Act: The Commissioner of Income Tax (Appeals) [CIT(A)] held that the AO is not permitted to estimate the income without rejecting the books of account. The CIT(A) noted that the AO did not point out any defects in the books of account and did not find any evidence of suppression of income or concealment of transactions during the search. The CIT(A) relied on case laws, including the Hon'ble Allahabad High Court in CIT Vs. Smt. Malti Mishra, which held that without pointing out defects in the books of account, the AO cannot resort to estimation of income. 5. Legal Basis for Estimation of Income Without Material Evidence: The CIT(A) emphasized that the AO must have material evidence to support the estimation of income and cannot rely solely on the admission given by the assessee. The CIT(A) cited various case laws, including the Hon'ble Supreme Court in Dhakeswari Cotton Mills Ltd. Vs. CIT, which held that the AO is not entitled to make a pure guesswork or suspicion without any material evidence. The CIT(A) concluded that the AO's estimation of income without rejecting the books of account and without any material evidence is impermissible and bad in law. Conclusion: The Tribunal upheld the order of the CIT(A), dismissing the appeals of the Revenue and the cross objections of the assessee. The Tribunal agreed with the CIT(A) that the AO cannot estimate the income without rejecting the books of account and without any material evidence. The Tribunal found that the admission of additional income by the assessee was made under pressure and misapprehension, and thus, cannot be the basis for the addition. The Tribunal emphasized the need for the AO to collect legitimate taxes based on material evidence and not on mere admission or guesswork.
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