2021 (1) TMI 1329 - AT - Income Tax

Estimation of the income of the assessee after rejection of books of account and by adopting the NP rate at 7.25% - assessee contended that NP for the preceding years i.e. AYs 2007-08 and 2008-09 cannot be considered as a proper basis for estimation of income for the year under consideration due to the reason that there are extra item of expenditure and one of them is an extra-ordinary item for these two years which has resulted declined in NP ratio - HELD THAT - As considering the average NP declared by the assessee for the preceding year as well as extra item of expenditure for these two years and one of which is an extra-ordinary item even the NP declared by the assessee in past without considering the extra-ordinary item of the expenditure for the year cannot be taken as a comparative rate for estimation of income of the assessee. Once the assessee sought to produce the supporting evidence to show that there are the demurrage charges which is an extra-ordinary item the CIT(A) ought to have examined this issue whether these are revenue item or capital in nature so as to give the finding that these expenditure on account of royalty payment and demurrage are relevant for estimating the NP of assessee after rejection of books of account. As regards the contention of the DR that after estimation of income by adopting NP no further claim of deduction is allowable we find that there is no quarrel on that point as held by the Hon ble jurisdictional High Court in the cases relied upon by the ld. DR. Thus after rejection of books of account the income of the assessee has to be estimated on some reasonable basis. Once the NP is taken as the basis for estimation of the income the claim of the expenditure become irrelevant. When it is apparent from the record that there are extra ordinary items of expenditure/business loss during the year under consideration then the estimation of income should be based on a criteria taken after due consideration of such extra-ordinary item. Accordingly in the facts and circumstances of the case and in the interest of justice we recall the impugned order of the Tribunal for fresh adjudication and direct the Registry to fix the appeals for hearing on 25.02.2021. The notice of hearing be issued to the parties. Decided in favour of assessee.

Summary

Issues:
Rectification of mistake in the order dated 7.02.2017 regarding the adoption of Net Profit (NP) rate at 7.25% for the assessment years (AYs) 2009-10 and 2010-11 by the Assessing Officer.

Analysis:
The assessee sought rectification of the order due to the adoption of NP at 7.25% instead of the declared 5.75% and 5.73% for the AYs 2009-10 and 2010-11, respectively. The contention was based on the presence of royalty and demurrage charges for these years, not present in the preceding years. The Assessing Officer's decision was challenged as arbitrary, considering the additional expenses affecting the NP ratio. The ld. AR argued for rectification based on the unique circumstances of the years under consideration.

The respondent argued against rectification, citing the Tribunal's rejection of the deduction claims for demurrage charges and royalty payment in the impugned order. The respondent relied on legal precedents indicating that no further deduction is allowable after income estimation through NP adoption. The respondent emphasized that the Tribunal's decision was based on established legal principles and no apparent mistake existed for rectification under Section 254(2) of the Act.

Upon review, the Tribunal noted the discrepancy in NP rates between the years under consideration and the preceding years due to the additional expenditure items. The Tribunal found that the rejection of additional evidence by the ld. CIT(A) was a crucial factor affecting the estimation of income. The Tribunal highlighted the comparative NP rates for various assessment years, emphasizing the impact of the extra-ordinary expenditure items on the overall NP ratio.

The Tribunal acknowledged the legal principle that no further deduction is allowable after NP adoption but stressed the importance of considering extraordinary items of income or expenditure for accurate income estimation. In light of the unique circumstances and the need for a proper basis for income estimation, the Tribunal recalled the impugned order for fresh adjudication. The decision was made in the interest of justice, directing the Registry to schedule a new hearing date for the appeals.

Therefore, the Tribunal allowed both Miscellaneous Applications filed by the assessee, emphasizing the significance of considering extraordinary items in income estimation and ensuring a fair assessment process.