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2022 (6) TMI 1020 - AT - Income TaxEstimation of profit - addition of receipts pertaining to contract receipts not shown in the total turnover and cash deposits into SBI Bank account - CIT-A computed the estimated addition based on gross profit ratio 12.89% (as compared to estimated net profit ratio at the rate of 8% computed by the assessing officer) - HELD THAT - We note that Assessing Officer as well as ld. CIT(A) failed to consider the past history of net profit ratio shown by the assessee, which is very much relevant to make estimated addition.It is well settled that in estimation there is always a certain degree of guesswork. No doubt the authorities concerned should try to make an honest and fair estimate of the income and should not act totally arbitrarily. Department must act judiciously, while making estimated addition and must be guided by judicial consideration and by rule of justice, equity and good conscience. And also that there must be honest and fair estimate of the proper figure of assessment, for which consideration of local knowledge and repute, besides the previous returns an assessment of the assessee concerned, and all other matters must be taken into account for fair and proper estimate which of course, would fall in the category of guesswork, but a honest guesswork. We are of the view that estimation made by assessing officer is not based on sound reasoning in comparison with the past results shown by the assessee. We note that in AY.2009-10, the assessee s audit results shows net profit at the rate of 5.12% and for A.Y.2010-11, net profit ratio is 4.32% and for AY.2011-12 the net profit ratio is 4.99%. Therefore, if we consider the average of these three years, the average net profit comes at 4.79%. Thus, based on past three years average net profit, the addition, on turnover ought to have been made by the assessing officer at the rate of 4.79%. As total turnover of the assessee comes at Rs. Rs.3,08,25,664/-( Rs.64,23,832 Rs.84,75,415 Rs.1,59,26,417) on which estimation should be made at the rate of average net profit @ 4.79%. Taking into account all these facts, we are not inclined to accept the contention of the Assessing Officer in any manner to make estimated addition @ 8%, hence, the assessee s income should be estimated @ 5% of turnover of Rs. 3,08,25,664/-, which comes to Rs.15,41,283/-. As the assessee has declared net profit on turnover at Rs. 7,86,505/- therefore, we direct the assessing officer to make addition of Rs.7,54,778/- ( Rs.15,41,283- Rs. 7,86,505). Thus, ground Nos. 1 and 2 are partly allowed. Addition in respect of 12 parties from whom the assessee borrowed small amount for business purposes - Amount borrowed from each party is between Rs.13000 to Rs. 19000/-, which is received by the assessee from friend circle to meet immediate business requirements. The ld Counsel submits that assessee paid these amounts in subsequent years, therefore the addition may be deleted. However, ld DR relied on the findings of the assessing officer. We note that assessing officer failed to bring any evidence on record to show that said amount borrowed from friends and relatives are bogus and for non-business purposes. The assessee is a small businessman and in needy hours, he borrowed money from his friends and relatives, and in subsequent years he has paid to them. We note that there are no findings of the assessing officer that it is assessee s money which came back to the assessee in the form of cash credit. Hence, a small amount borrowed by assessee to meet the urgent business requirements should not be added in the hands of the assessee, therefore, based on this factual position the addition of Rs.2,00,000/- is hereby deleted. Reopening of assessment u/s 147 - On appeal by the department to the Supreme Court, 2010 (1) TMI 11 - SUPREME COURT it was held that though the power to reopen under the amended section 147 is much wider, one needs to give a schematic interpretation to the words reason to believe failing which section 147 would give arbitrary powers to the AO to re-open assessments on the basis of mere change of opinion , which cannot be per se reason to re-open. One must also keep in mind the conceptual difference between power to review and power to re-assess. AO has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of change of opinion is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of change of opinion as an in-built test to check abuse of power by the AO. Hence, after 1.4.1989, the AO has power to re-open, provided there is tangible material to come to the conclusion that there is escapement of income from assessment. Considering, these facts and circumstances, we note that the re-assessment u/s 144 r.w.s. 147 dated 21.03.2016 was rightly quashed by the ld CIT(A). That being so, we decline to interfere with the order of Id. CIT(A) in deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed.
Issues Involved:
1. Gross Profit (G.P.) and Net Profit (N.P.) estimation on contract receipts. 2. Addition based on cash deposits in the State Bank of India (SBI) account. 3. Addition under Section 68 of the Income Tax Act for small borrowings. 4. Quashing of reopening of assessment under Section 147 of the Income Tax Act. Issue-wise Detailed Analysis: 1. Gross Profit (G.P.) and Net Profit (N.P.) Estimation on Contract Receipts: The assessee's appeal challenged the addition of Rs. 64,23,832/- pertaining to contract receipts not shown in the total turnover. The Assessing Officer (AO) added this amount to the total contract receipts and estimated profit at 8%, resulting in a net addition of Rs. 16,79,548/-. The CIT(A) reduced this estimation by applying a gross profit ratio of 12.89% on the contract receipts, resulting in an income of Rs. 8,28,032/-. The Tribunal noted that the AO and CIT(A) failed to consider the past history of net profit ratios. The Tribunal concluded that the estimation should be based on the average net profit ratio of the past three years, which was 4.79%. Consequently, the Tribunal directed the AO to estimate the income at 5% of the total turnover of Rs. 3,08,25,664/-, resulting in an addition of Rs. 7,54,778/-. 2. Addition Based on Cash Deposits in SBI Account: The AO added Rs. 84,75,415/- deposited in the SBI account to the total contract receipts, considering it unaccounted income. The CIT(A) made an addition based on peak credit at Rs. 2,35,501/-. The Tribunal noted that the cash deposits in the SBI account were part of the assessee's turnover. Therefore, the total turnover was calculated at Rs. 3,08,25,664/-, and the income was estimated at 5% of this turnover, resulting in an addition of Rs. 7,54,778/-. 3. Addition Under Section 68 for Small Borrowings: The AO made an addition of Rs. 2,00,000/- in respect of 12 parties from whom the assessee borrowed small amounts. The Tribunal found that the AO failed to provide evidence that these borrowings were bogus or for non-business purposes. The Tribunal noted that the assessee borrowed money from friends and relatives to meet urgent business requirements and repaid these amounts in subsequent years. Therefore, the addition of Rs. 2,00,000/- was deleted. 4. Quashing of Reopening of Assessment Under Section 147: The Revenue's appeal challenged the CIT(A)'s decision to quash the reopening of assessment. The Tribunal noted that the reopening was based on the same receipts of Rs. 64,23,832/- and Rs. 84,75,415/- that were already considered in the original assessment order. The Tribunal cited the Supreme Court's decision in CIT vs. Kelvinator India Ltd., which held that reopening on the same set of facts amounts to a change of opinion and is not permissible. The Tribunal upheld the CIT(A)'s decision to quash the reopening of assessment, as there was no new tangible material to justify it. Conclusion: The Tribunal partly allowed the assessee's appeal by directing the AO to estimate the income at 5% of the total turnover and deleted the addition under Section 68. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to quash the reopening of assessment.
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