2021 (7) TMI 796 - AT - Income Tax

Rejection of books of accounts - Addition by applying net profit rate of 7% as against net profit declared by assessee at 6.5% - HELD THAT - The rejection of books of account would not be ipso facto result in an addition to the income declared by assessee if G.P./N.P. declared by assessee is better than the past history of G.P./N.P. or any other reasonable criteria/guidance to be considered as basis for estimation of income. The assessee has declared net profit at 6.5% on turnover of 7.25 crores is higher than the N.P. declared by assessee in preceding year and in the absence of any reasonable basis, criteria or guidelines applied by AO the adoption of net profit at 7% is not justified. The decision relied upon by Ld. DR in the case of PCIT Vs. Rimjhim Ispat Ltd. 2016 (1) TMI 374 - ALLAHABAD HIGH COURT is in respect of the disallowance of expenses which were made by Assessing Officer @ 10% which were sustained by appellate authorities at 5%, therefore, the said decision is only on the point of reasonable disallowance of expenses and not on the estimation of income after rejection of books of account. Hence, the said decision would not help the case of revenue. Similarly under similar the decision in the case of Goodyear India Ltd. 2000 (7) TMI 32 - DELHI HIGH COURT was again on the issue of disallowance of the expenses and not regarding estimation of income after rejection of books of account. Hence in view of the facts and circumstances as discussed above the addition mde by Assessing Officer is not sustainable and the same is deleted. Appeal filed by the assessee is partly allowed.

Summary

Issues:
The only issue in this appeal is the addition made by the Assessing Officer by applying a net profit rate of 7% instead of the 6.5% declared by the assessee.

Analysis:
The assessee challenged the assessment order dated 30.03.2015 under Section 143(3) of the Income Tax Act for the A.Y. 2013-14. The primary contention was that the net profit rate of 7% applied by the Assessing Officer was unjustified, especially when the books were properly maintained and verified. The assessee argued that if the net profit declared was better than past history, no addition should be made. Reference was made to previous tribunal decisions upheld by the High Court to support this argument.

The Assessing Officer rejected the books of accounts and estimated the income by applying a 7% net profit rate, invoking Section 144AD. The Assessing Officer's decision was based on the substantial increase in turnover compared to the previous year. However, the assessee contended that the rejection of books of account does not automatically warrant an addition if the declared net profit is better than past history. The Tribunal emphasized the need for a proper and reasonable basis for estimating income after rejecting books of account, citing past history as a valid guideline. The Tribunal found the Assessing Officer's 7% net profit rate arbitrary and unjustified, especially since no reasonable criteria were applied in the estimation process.

The Departmental Representative argued that the net profit declared for the previous year was not comparable due to different assessment procedures and a significant increase in turnover. However, the Tribunal held that the rejection of books of account should not lead to an addition if the declared net profit is better than past history. The Tribunal highlighted that the Department's reliance on previous court decisions regarding expense disallowance was not applicable to the current issue of income estimation after rejecting books of account.

In conclusion, the Tribunal partly allowed the appeal, ruling that the addition made by the Assessing Officer was not sustainable and therefore deleted. The decision was pronounced on 15/07/2021 at Allahabad through Video Conferencing.