1988 (9) TMI 101 - AT - Income Tax

Summary

Issues Involved:
1. Estimate of profits earned by the assessee.
2. Rejection of certain purchases and expenses by the Income Tax Officer (ITO).
3. Application of Section 145(2) of the Income Tax Act.
4. Determination of a reasonable net profit rate.
5. Acceptance of the book results of the assessee.

Detailed Analysis:

1. Estimate of Profits Earned by the Assessee:
The primary dispute revolves around the estimate of profits earned by the assessee, a manufacturer of readymade garments. The assessee declared a net loss of Rs. 14,210, but the ITO, after a raid, found that the assessee was an allied concern of M/s Saraf Textiles Mills Pvt. Ltd. The ITO noticed manipulations in the books to inflate expenditure and reduce taxable income. The ITO disallowed certain purchases and expenses, leading to an assessment of Rs. 8,04,788 as the positive figure for the assessee's income.

2. Rejection of Certain Purchases and Expenses by the ITO:
The ITO rejected the claim for payment of Rs. 34,139 to Jamil Ahmed due to lack of proper documentation. Similarly, purchases from M/s Vimal Trading Corporation amounting to Rs. 2,10,941 were disallowed as the bills were signed by Shri S.M. Saraf, a director of the assessee company, and the books of M/s Vimal Trading Corporation were not produced. Additionally, expenses totaling Rs. 5,68,397 were disallowed as they were not supported by vouchers or proper documentation.

3. Application of Section 145(2) of the Income Tax Act:
The CIT(A) and the Tribunal had to determine whether the provisions of Section 145(2) were applicable, which allows the ITO to make an assessment if the accounts are not correct or complete. The CIT(A) held that the book results could not be accepted as such and applied a net profit rate of 4% to the total sales. The Tribunal, however, had differing opinions on whether the accounts were unreliable enough to warrant the application of Section 145(2).

4. Determination of a Reasonable Net Profit Rate:
The CIT(A) applied a net profit rate of 4% based on comparable cases such as Raj International, Pawan International, and Purnima Handicrafts, which had net profit rates between 3% to 4%. The Tribunal had to decide whether this rate was reasonable. The Judicial Member suggested a higher rate of 20%, comparing the assessee with M/s Registan Pvt. Ltd., while the Accountant Member disagreed, emphasizing the need for a more reasonable estimate based on comparable cases.

5. Acceptance of the Book Results of the Assessee:
The Tribunal had to decide whether the book results of the assessee should be accepted. The Accountant Member argued that the accounts were audited and no specific defects were pointed out, thus they should be accepted. The Judicial Member, however, pointed out the close relationship between the assessee and M/s Vimal Trading Corporation, suggesting that the onus of proving the genuineness of the transactions was higher. Ultimately, the Third Member concluded that the book results could not be accepted as such, and a reasonable addition should be made based on comparable cases.

Conclusion:
The Tribunal, considering the comparable cases and the overall circumstances, upheld the CIT(A)'s decision to apply a net profit rate of 4% on the disclosed sales of Rs. 14,71,900. The departmental appeal was allowed in part, and the assessee's cross-objection was dismissed. The Third Member's opinion confirmed that the book results could not be accepted as such, and reasonable additions were necessary.