2022 (9) TMI 869 - AT - Income Tax

Estimation of income @ 15% on the gross receipts without allowing the depreciation - HELD THAT - Admittedly the books of accounts are not susceptible for verification. In these circumstances, AO has been left with no other option but to estimate the profit @ 15% net of all deductions including depreciation. No doubt, the estimation of net profit is one of the methods of the determination of income from business considering the facts and circumstances of each case. AO has failed to bring on record any comparable cases to support the net profit estimated by him. We find that in the case of ITO vs. Sri Gundapaneni Nageswara Rao 2014 (5) TMI 344 - ITAT HYDERABAD under similar set of facts, has directed the AO to estimate net profit of 3% of all deductions including depreciation. There are divergent view from the appellate authorities, the view which is more beneficial to the assessee has to be adopted in case of CIT vs. Vegetable Products Limited 1973 (1) TMI 1 - SUPREME COURT - Therefore, we are of the considered view that since the assessee has not proved the ownership of assets to claim the depreciation and also that the facts of the present case are similar to the facts of the case considered by the ITAT 2014 (5) TMI 344 - ITAT HYDERABAD we deem it appropriate to direct the AO to estimate net profit of 3% on gross receipts net of all deductions including depreciation. We direct the AO to estimate net profit of 3% on gross contract receipts net of all deductions for the AY 2010-11. Assessee appeal allowed.

Issues:
1. Appeal against order of Learned Commissioner of Income Tax (Appeals)-9, Hyderabad.
2. Disallowance of depreciation by the Commissioner of Income Tax, Vijayawada under section 263 of the Income Tax Act, 1961.
3. Estimation of income @ 15% of Gross Receipts by the Assessing Officer.
4. Comparison with previous ITAT orders regarding net profit estimation.
5. Discrepancy in estimation of net profit and depreciation allowance.
6. Determination of net profit @ 3% on gross receipts net of all deductions including depreciation.
7. Admissibility of depreciation without proof of ownership of assets.

Analysis:
1. The appeal was filed against the order of the Learned Commissioner of Income Tax (Appeals)-9, Hyderabad, for the Assessment Year (AY) 2010-11 under section 143(3) r.w.s 263 of the Income Tax Act, 1961. The Assessing Officer (AO) had estimated the total income at Rs. 16,89,380/- by rejecting the books of accounts and allowing depreciation of Rs. 1,93,47,466/-.

2. The Commissioner of Income Tax, Vijayawada, set aside the assessment order and directed the AO to disallow the depreciation of Rs. 1,93,47,466/- as the income was being estimated. The appellant challenged this decision, leading to an appeal before the ITAT. The ITAT upheld the order passed under section 263 of the Act.

3. The main contention was the estimation of income at 15% of Gross Receipts by the AO without allowing depreciation. The appellant argued for a lower estimation based on previous ITAT orders which directed a net profit estimation of 3% on gross receipts net of all deductions, including depreciation.

4. The ITAT examined the facts and circumstances of the case, noting that the appellant did not maintain proper books of accounts for verification. Considering the lack of verifiable data, the AO's estimation at 15% net of all deductions was deemed appropriate. However, the ITAT referred to a similar case where a 3% net profit estimation was directed, following the principle of adopting the view most beneficial to the assessee.

5. The ITAT concluded that since the appellant failed to prove ownership of assets for claiming depreciation and the facts were akin to a previous ITAT case, it directed the AO to estimate the net profit at 3% on gross receipts net of all deductions, including depreciation, for the AY 2010-11. Consequently, the appeal of the assessee was allowed, and the decision was pronounced on 22nd August 2022.

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