2023 (6) TMI 1455 - AT - Income Tax

Rejection of books of accounts - estimation of Net profit - AO had estimated business income of the assessee being 20% of the gross receipt - HELD THAT - As perused the audited accounts i.e profit and loss and balance sheet filed in the paper book which demonstrate that the assessee company was formed in the F.Y. 2009-10 and year under consideration was the second year of operation of the company but the assessee company had incurred recurring losses since its formation. We find it is unreasonable to estimate the net profit of the assessee company @ 20% of gross receipt however after considering the aforesaid facts of recurring losses incurred by the assessee company we consider that it is reasonable to restrict the net profit @ 6% of the gross receipt for want of verification by the AO since the assessee has failed to furnish all the supporting bills/vouchers during the course of assessment. We direct the assessing officer accordingly. Therefore, the grounds of appeal of the assessee are partly allowed.

Summary

Issues:
1. Estimation of income under section 145(3) of the Income Tax Act, 1961.
2. Rejection of books of account and bills/vouchers by the Assessing Officer.
3. Treatment of income received from G.D. Foods Mfg. (India) Pvt Ltd.
4. Dismissal of appeal by CIT(A) and confirmation of estimated income.
5. Failure to file return of income and audit report.
6. Reasonableness of estimating net profit at 20% of gross receipt.
7. Consideration of recurring losses incurred by the assessee company.

Analysis:
1. The appeal was filed against the CIT(A)'s order confirming the income estimation of Rs. 50,09,956, 20% of Gross Receipt, under section 145(3) for A.Y. 2011-12. The company had suffered a loss before depreciation, challenging the estimation.

2. The Assessing Officer invoked section 145(3) and rejected the Books of Account and Bills/Vouchers, despite being audited by a Statutory Auditor. The non-filing of the Audit Report under section 44AB by the Auditor was highlighted.

3. The CIT(A) confirmed the estimation of income at Rs. 85,000, being 20% of Rs. 4,25,000, received from G.D. Foods Mfg. (India) Pvt Ltd. The appellant reconciled the income as per 26AS statement with the gross receipt.

4. The CIT(A) partially dismissed the appeal by confirming the estimated income of Rs. 50,94,956, leading to the appeal before the ITAT Mumbai.

5. The company failed to file its return of income under section 139, resulting in the case being reopened under section 147. The Assessing Officer estimated the business income at 20% of the gross receipt and added it to the total income.

6. The ITAT Mumbai considered the substantial receipt without a filed return and the failure to produce bills/vouchers. The Tribunal noted the appointment of a new Chartered Accountant and the deletion of penalty under section 271B by the coordinate bench.

7. The audited accounts showed recurring losses since the formation of the company in F.Y. 2009-10, with the second year under consideration. The ITAT found it unreasonable to estimate net profit at 20% of gross receipt and restricted it to 6% due to the recurring losses.

8. Considering the circumstances and recurring losses, the ITAT allowed the appeal partly, directing the Assessing Officer to restrict the net profit at 6% of the gross receipt due to the lack of verification from the assessee.

9. Consequently, the appeal of the assessee was partly allowed by the ITAT Mumbai, with the order pronounced on 20.06.2023.