2023 (3) TMI 1189 - AT - Income Tax

Addition on comparative loss with profit of last years - undisclosed profit - profit was lower and the ld. AO made the addition on the estimated basis by applying average of last three years book profit/turnover ratio - Non rejecting the books of accounts u/s 145(3) - HELD THAT - AO made the addition on the estimated basis without having rejected the books of accounts filed by the assessee at the time of hearing before him as the accounts maintained by the assessee were duly audited u/s 44AB of the Act and all purchases and sales were recorded in the books of accounts too and when books of accounts were not rejected as decided in the case of Swadeshi Commercial Co. Ltd. 2008 (12) TMI 823 - CALCUTTA HIGH COURT held that gross profit cannot be estimated. In the instant case, AO has not pointed out or any discrepancy in the books of accounts filed by the assessee and the AO has no evidence to come to a conclusion that the assessee has undisclosed profit. The entire addition was made surmises and conjectures - assessee has explained the issue with facts and figures, under these facts and circumstances, the addition made by the assessing officer as sustained by the CIT(A) is bad in law. In view of the discussions made above, we delete the addition made by the ld. AO and set aside the order passed by the ld. CIT(A) by allowing the appeal filed by the assessee.

Summary

Issues involved:
The appeal filed by the assessee against the order of ld. CIT(A), NFAC dated 28.10.2021 passed u/s 250 of the I.T. Act relating to assessment year 2017-18.

Grounds of Appeal:
i. The ld. CIT(A) confirmed the addition of Rs. 10,13,922/- based on comparative loss with profit of last years without evidence.
ii. The ld. CIT(A) did not consider that the Assessing Officer never rejected the book result u/s 145(3) or detected any defects in the accounts.
iii. The ld. CIT(A) confirmed the addition without investigating the impact of opening a new shop on profit.
iv. The ld. CIT(A) held the explanation of low profit submitted by the appellant as unsatisfactory without proper evidence.
v. The appellant sought to file additional grounds of appeal.

Facts of the Case:
The assessee, a partnership firm, filed its return of income for the assessment year 2017-18 with disclosed income of Rs. 1,35,400. The case was selected for scrutiny, and the ld. AO calculated the book profit ratio based on previous years' data. The assessee's disclosed ratio was lower than the average turnover ratio of the preceding years.

Judgment:
The assessing officer made the addition without rejecting the books of accounts, which were duly audited. The Calcutta High Court precedent stated that gross profit cannot be estimated when books of accounts are not rejected. As there was no evidence of undisclosed profit and the addition was based on surmises, the Tribunal found the addition to be unlawful. The appeal was allowed, and the addition made by the assessing officer was deleted.

Conclusion:
The Tribunal set aside the order of ld. CIT(A) and allowed the appeal filed by the assessee, emphasizing the importance of proper evidence and adherence to legal principles in making additions based on estimated profits without rejecting audited accounts.