2023 (11) TMI 736 - AT - Income Tax

Net profit estimation of firms involved in cheque discounting and commission earned thereon - Disallowance of expenditure claimed against gross commission income while allowing only 5% of the expenditure claimed - as argued in case of similar business of cheque discounting in case of group Company Jalaram Finvest Limited, the same AO has accepted the net profit in the range of 9.50% to 12.50% of the gross commission income and hence estimation of 95% net profit by the CIT(A) without any evidence or comparable case is bad in law and illogical - HELD THAT - It is an admitted position that the assessee is keeping the record of commission income and from the statement it emerges that the commission paid to other shroffs is also reflected from various statements. The fact in case of Jalaram Finvest Limited, net profit which was shown at 9.5% to 12.5% should have been adopted in assessee s case is justifiable as the assessee is also dealing with the cheque discounting and commission on not just directly but through various other shroffs for whom the assessee has to pay commission in part. The net profit at 25% of gross commission adopted in Dahyalal I. Thakkar, the same rate should be adopted in the case of assessee as well as the same is justifiable through various records of commission income earned as well as commission paid to other shrifts by the assessee. Observation of the CIT(A) that there is no documentary evidence appears to be incorrect as the assessee has given clarification to that extent by giving the modus operandi of the working of the cheque discounting and commission paid thereon. The Revenue at no point of time disputed that the assessee is also providing cash to various parties on cheque and also taking cash for which the assessee is issuing cheque. Thus, the expenditure worked out at Rs. 75,388/- appears to be not justifiable and it is hereby directed to the Assessing Officer to give credit of the expenditure by allowing the same at 25% of gross commission as expenditure and quantify the same.

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income Tax Act.
2. Confirmation of addition on account of disallowance of expenditure claimed against gross commission income.
3. Estimation of net profit percentage for cheque discounting business.
4. Consistency in the treatment of similar cases within the same group.

Summary of Judgment:

1. Validity of Reopening of Assessment:
The appellants challenged the reopening of assessments under Section 147 of the Income Tax Act. The Tribunal noted that the reopening was based on recorded reasons and notices were duly served. However, the appellants did not press these grounds during the hearing, leading to the dismissal of these grounds.

2. Confirmation of Addition on Account of Disallowance of Expenditure:
The CIT(A) confirmed additions made by the Assessing Officer by disallowing a significant portion of expenditure claimed against gross commission income, allowing only 5% of the claimed expenditure. The appellants argued that similar businesses within the group had different profit margins accepted by the same Assessing Officer. The Tribunal found that the CIT(A)'s estimation of 95% net profit without evidence or comparable cases was "illogical and bad in law."

3. Estimation of Net Profit Percentage:
The Tribunal observed that in similar cases within the group, such as Jalaram Finvest Limited, net profit margins ranging from 9.50% to 12.50% were accepted. The Tribunal directed that a net profit rate of 25% of gross commission should be adopted, as this was consistent with the treatment in the case of Dahyalal I. Thakkar. The Tribunal found that the CIT(A)'s allowance of only 5% of commission as expenditure was not justifiable and directed the Assessing Officer to allow 25% of gross commission as expenditure.

4. Consistency in Treatment of Similar Cases:
The Tribunal emphasized the need for consistency in the treatment of similar cases within the same group. The Tribunal found that the CIT(A)'s approach lacked consistency, particularly when compared to the treatment of Jalaram Finvest Limited and Dahyalal I. Thakkar. The Tribunal directed that the same principles applied in those cases should be applied to the appellants.

Conclusion:
The Tribunal partly allowed all 27 appeals, directing the Assessing Officer to allow 25% of gross commission as expenditure, consistent with the treatment in similar cases within the group. The judgment emphasized the need for consistency and logical reasoning in the estimation of net profit and disallowance of expenditure.

← Previous Next →