2022 (9) TMI 1017 - AT - Income Tax

Estimation of income - NP/GP estimation - estimation the income of the assessee by adopting the net profit rate at 8% as provided under section 44AD - HELD THAT - AO has not disputed the fact that books of accounts of the assessee have been audited and audit report was available with the AO - The adoption of net profit without bringing any comparable case of net profit as prevailing in the same trade / business is highly arbitrary and excessive. CIT(A) has accepted and confirmed the addition made by the AO based on net profit of 8%. AR has referred to the net profit declared by the assessee for the subsequent year i.e. assessment year 2017-18 at 4.5% and pointed out that the net profit declared by the assessee for the year under consideration in the line with the net profit prevailing business / trade as well as net profit declared by the assessee in the subsequent year. AO has adopted the net profit of 8% without any reasonable and proper basis however, the assessee has also not brought on record any comparable cases in respect of the net profit declared by the assessee at 4.37%. Hence where neither the AO nor the assessee has brought on record a reasonable and proper basis for estimation of the income after rejection of books of accounts the Income of the assessee is estimated to bring to the end of the litigation by adopting the net profit of 5.5%. As clarified that the estimation of the income being reasonable and proper is made in the peculiar facts and circumstances of the case for the year under consideration and therefore, the same would not apply as precedent for the other assessment years of the assessee or in any other case. Hence the AO is directed to re-compute the income of the assessee on the basis of the net profit @ 5.5%. Appeal of the assessee is partly allowed.

Summary

Issues:
1. Rejection of books of accounts under section 145(3) of the Income Tax Act.
2. Estimation of income by adopting net profit rate of 8% on sales.
3. Applicability of section 44AD.
4. Reasonableness of net profit rate applied by the Assessing Officer.
5. Lack of comparable cases for net profit rate determination.

Analysis:
1. The Assessing Officer rejected the books of accounts of the assessee under section 145(3) due to non-compliance despite audited financials being uploaded. The rejection led to estimating income by applying an 8% net profit rate on sales, resulting in an addition of Rs. 5,04,414 to turnover.

2. The assessee contended that the rejection was unwarranted as books were audited and uploaded, arguing for a lower net profit rate. The CIT(A) upheld the addition based on the 8% rate, supported by a remand report.

3. The Tribunal noted that section 44AD wasn't applicable due to audited accounts and turnover exceeding limits. The Assessing Officer's reliance on 8% net profit was deemed arbitrary without comparable trade data.

4. The Assessing Officer and the assessee failed to provide a suitable basis for net profit estimation post-rejection of accounts. Considering the lack of historical data, a net profit rate of 5.5% was deemed reasonable for the first year of business.

5. The Tribunal allowed the appeal partially, directing the Assessing Officer to recalculate income at 5.5% net profit. The judgment emphasized the unique circumstances of the case, clarifying its non-precedential nature for future assessments.

This detailed analysis addresses the rejection of accounts, net profit estimation, section 44AD applicability, reasonableness of rates, and the directive for income recalculation, ensuring a comprehensive understanding of the judgment.