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2022 (3) TMI 520 - AT - Income TaxRejection of books of accounts - Estimation of total income - addition at 25% of the gross receipt of the assessee by AO - CIT(A) restricting the addition by estimating the net profit @ 1% of the total turnover - HELD THAT - CIT(A) has noted that the assessee has at an average returned profit of 0.03% in the preceding two years which is verifiable from the Tax Audit Report placed on record and which was not disputed by the A.O. in remand proceedings. CIT(A) has also taken note of the submissions of the counsel of the assessee before him that in the line of business in which the assessee indulged in the wholesale trading business of white paper and craft paper used for packaging, the net profit varies from 1% to 3%. CIT(A) also took note of the fact that in the impugned year, the assessee had claimed bad debts written off to the tune of ₹ 1,85,52,149/- which further reduced its net profit. He noted that the A.O. had accepted the allowability of this claim to the extent of ₹ 1,19,95,434/- subject to the condition that the income with respect to the same was offered by the assessee in previous year which the A.O. noted that the fact on record. Therefore considering the exceptional item of bad debts written off and the submissions of the assessee, he held a net profit rate of 1% of gross sales to be reasonable and justified. D.R. has been unable to controvert any of the facts found by the ld. CIT(A) as above vis- -vis the net profits returned by the assessee in its line of business as also the claim of bad debts written off. Moreover he was unable to justify 25% net profit rate, in the backdrop of the aforesaid facts. We find the estimation of net profit by the Ld. CIT(A) @ 1% of the gross turnover to be justified and reasonable and see no reason to interfere in the same. We therefore uphold the order of the Ld. CIT(A) estimating the income of the assessee by applying the net profit rate of 1% to be gross turnover of the assessee. - Decided against revenue.
Issues Involved:
1. Legitimacy of ex-parte assessment under Section 144 of the Income Tax Act. 2. Rejection of the assessee's book results. 3. Appropriate rate for estimating net profit. 4. Allowability of bad debts written off. Issue-wise Detailed Analysis: 1. Legitimacy of Ex-parte Assessment under Section 144 of the Income Tax Act: The assessment was framed ex-parte under Section 144 of the Income Tax Act as the assessee failed to respond to various notices issued during the assessment proceedings. The Assessing Officer (AO) noted that the assessee did not comply with the show cause notice issued under Section 144, leading to the finalization of the assessment without the assessee's cooperation. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's action in framing the ex-parte assessment, noting the repeated non-compliance by the assessee. 2. Rejection of the Assessee's Book Results: The AO rejected the book results of the assessee, which declared a loss of ?6,18,78,990/-, due to the absence of supporting evidences, ledger accounts, and primary books. The AO estimated the total income at 25% of the gross receipt, resulting in an assessed income of ?2,60,22,854/-. The CIT(A) confirmed the rejection of the book results, agreeing that the books of account were incorrect and incomplete, thus deserving rejection under Section 145(3). 3. Appropriate Rate for Estimating Net Profit: The AO applied a net profit rate of 25% to the gross turnover, based on the decision of the Hon'ble Gujarat High Court in the case of M/s. Vijay Proteins Ltd. The CIT(A), however, found this rate to be unreasonable and reduced it to 1%, directing the net profit to be estimated at ?10,40,914/-. The CIT(A) distinguished the case of M/s. Vijay Proteins Ltd., noting that it involved bogus purchases, whereas the present case did not. The CIT(A) considered the past history of the assessee, which showed an average net profit of 0.03% over the last two years, and the nature of the business, where net profit typically varies from 1% to 3%. 4. Allowability of Bad Debts Written Off: The assessee claimed bad debts written off amounting to ?1,85,52,149/-, which further reduced the net profit. The AO accepted the allowability of bad debts to the extent of ?1,19,95,434/-, subject to the condition that the income was offered in previous years. The CIT(A) found that the conditions of Section 36(1)(vii) and 36(2) were satisfied, making these bad debts allowable as deductions. Conclusion: The Tribunal upheld the CIT(A)'s decision, agreeing that the estimation of net profit at 1% of the gross turnover was reasonable and justified. The Tribunal found no infirmity in the CIT(A)'s findings and dismissed the Revenue's appeal. The cross-objection by the assessee, being merely supportive and not challenging the CIT(A)'s order, was disposed of accordingly. The order was pronounced in the open court on 23-02-2022.
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