2023 (12) TMI 136 - AT - Income Tax

Estimation of income - estimation of net profit @ 8% in AY 2018-19 as against the net profit rate of 2.5% declared by the assessee - presumptive taxation for business u/s 44AD relied upon - AO based on the income tax return wherein the assessee inadvertently tick the column for no account case and based on such act at the part of the assessee in filing the return, ld. AO resorted to apply the provisions of Section 44AD of the Act and estimated the profit of the assessee @ 8% - HELD THAT - So far as Section 44AD is concerned the same relates to special provision for computing profits and gains of business on presumptive basis in the case of an eligible assessee engaged in an eligible business. So far as estimating of profits is concerned, we notice that in the income tax return filed by the assessee on ITR 3 even though it has taken the column no account case but in the Form complete details of the audit report u/s 44AB of the Act are mentioned wherein the assessee stated that it is covered u/s 44AB of the Act and books of accounts have been audited by a Chartered Accountant. The assessee also mentioned the details of the Chartered Accountant company along with date of audit report which is 29.10.2018 and the same stands duly uploaded on the income tax portal. These glaring facts are very much available in the income tax return copy of which was placed before the AO and he ought not to have directly resorted to the provisions of Section 44AD of the Act and should have examined the tax audit report and, if necessary, should have got the limited scrutiny converted to complete scrutiny and thereafter, carry out the assessment proceedings to examine the complete books of accounts and then if any discrepancy could have been noticed then estimation of profits could have come in picture. Since in the instant case, the assessee has properly maintained the books of accounts which have been duly audited and ld. AO has not disputed the book results appearing in the audited financial statement uploaded on the income tax portal we fail to find any justification in the action of ld. AO of estimating the net profit rate of 8% and the book results declared by the assessee showing net profit rate of 2.5% ought to have been accepted. We, thus, set aside the finding of ld. CIT(A) and delete the addition made by ld. AO towards estimating profits over and above the income declared by the assessee. Thus, ground no. 1 2 raised by the assessee are allowed.

Summary

Issues involved:
The appeal pertains to the Assessment Year 2018-19 challenging the order passed by the Commissioner of Income-tax (Appeals) regarding the addition of estimated business profit under the head "Income from Business Profession" by the Assessing Officer.

Issue 1 - Estimation of Business Profit:
The Assessing Officer estimated the business profit at 8% of the total turnover, adding Rs. 85,59,348 to the income declared by the assessee. The assessee contended that the estimation was unjustified and sought a reasonable profit estimation instead of the 8% figure.

Details:
- The assessee, engaged in business, declared income of Rs. 28,69,250 for AY 2018-19.
- The Assessing Officer, after scrutiny, estimated net profit at 8% of the turnover of Rs. 14.28 Crore, resulting in an addition of Rs. 85,59,348 to the assessed income.
- The assessee argued that presumptive taxation under Section 44AD of the Act does not apply as turnover exceeds Rs. 2 Crore, and the audited accounts were disregarded by the authorities.

Issue 2 - Application of Section 44AD and Profit Estimation:
The dispute centered on the application of Section 44AD, which allows for presumptive taxation for eligible businesses with turnover below Rs. 2 Crore. The Tribunal examined the details provided in the income tax return and the audit report to determine the correctness of the Assessing Officer's profit estimation.

Details:
- The Tribunal noted that Section 44AD does not apply to the assessee due to turnover exceeding the threshold.
- Despite the assessee marking as a "non-account case" in the return, the audit report under Section 44AB confirmed proper auditing of accounts.
- The Tribunal found that the Assessing Officer erred in directly applying Section 44AD without considering the audited financial statements and converting limited scrutiny to complete scrutiny if necessary.

Decision:
The Tribunal allowed the appeal, setting aside the addition of Rs. 85,59,348 made by the Assessing Officer. It was concluded that since the assessee maintained duly audited books of accounts, the Assessing Officer's estimation of profit at 8% was unwarranted. The Tribunal directed acceptance of the net profit rate of 2.5% declared by the assessee, emphasizing the importance of proper scrutiny before estimating profits.

This judgment highlights the significance of accurate profit estimation based on audited accounts and the necessity for thorough scrutiny before making additions to the assessed income.