2024 (5) TMI 1255 - AT - Income Tax

Estimation of profit on total turnover - as alleged AO estimated the profit @ 3% on the cost of goods sold without rejecting the audited books or pointing out any defects - AO has excluded incentive from the sales turnover while determining the income from business - HELD THAT - We find that the incentive is normally given by the manufacturers of products to promote their produce in a competitive market. The incentive is for bulk purchase of a particular brand. The dealer has to achieve the sales target to get incentive. Therefore, in order to get incentives, the dealers will offer discount to the customers. In the present case, it was the claim of the assessee that he had passed on incentives received from manufacturers to the customers. Therefore, we are of the considered opinion that the AO is erred in excluding incentives from turnover for the purpose of determining the income of the assessee. Although the assessee has claimed it has passed on incentive received from the manufacturers to the customers, but could not substantiate its claim with necessary evidences. The only option left with us is to estimate the income from the business by adopting reasonable net profit considering the nature of the business of the assessee. The assessee has already declared 4.8% net profit from his business. If we consider the total income determined by the AO from the business, it works out 9.3% which is in our opinion is on the higher side Considering the nature of business of the assessee, we deem it proper to adopt 5.5% net profit on the total turnover of the assessee including the incentive received for the year. Thus, we direct the AO to determine the income from business by adopting 5.5% net profit on the total turnover including incentive received by the assessee. Appeal filed by the assessee is partly allowed.

Summary

Issues:
1. Estimation of profit by Assessing Officer
2. Addition of incentives received by the assessee
3. Treatment of incentives in business income

Estimation of Profit by Assessing Officer:
The case involved the estimation of profit by the Assessing Officer based on 3% profit on total turnover, as the net profit declared by the assessee was considered low. The Assessing Officer also made an additional addition towards incentives received by the assessee. The first appellate authority and the CIT (A) NFAC upheld the estimation of profit and the separate addition of incentives. The Tribunal noted that the Assessing Officer excluded incentives from turnover, which was not appropriate considering that incentives are given by manufacturers to promote their products. The Tribunal found that the assessee had claimed to pass on incentives to customers but lacked evidence. Therefore, the Tribunal decided to estimate income by adopting a 5.5% net profit on total turnover, including incentives received, which was deemed more reasonable given the nature of the business.

Addition of Incentives Received by the Assessee:
The Assessing Officer had made a separate addition towards incentives received by the assessee, which was challenged by the assessee in appeal. The counsel for the assessee argued that incentives received were part of business receipts and should not be treated as non-business receipts for taxation purposes. The counsel contended that the incentive received was passed on to customers to promote brands and increase turnover. The Departmental Representative supported the Assessing Officer's decision, stating that incentives were not part of sales turnover and there was no evidence of passing on incentives to consumers. The Tribunal observed that incentives are typically given by manufacturers to promote their products and are linked to achieving sales targets. While the assessee claimed to pass on incentives to customers, the lack of evidence led the Tribunal to estimate income by including incentives in the net profit calculation.

Treatment of Incentives in Business Income:
The Tribunal deliberated on the treatment of incentives in business income, noting that the assessee had included incentives received from manufacturers in sales turnover. The Tribunal found that incentives are provided for bulk purchases of specific brands and are tied to sales targets. The Tribunal determined that the Assessing Officer erred in excluding incentives from turnover when calculating income. Despite the assessee's claim of passing on incentives to customers, the lack of substantiating evidence led the Tribunal to estimate income by adopting a 5.5% net profit on total turnover, including incentives received. The Tribunal directed the Assessing Officer to determine income accordingly.

In conclusion, the Tribunal partly allowed the appeal filed by the assessee, emphasizing the inclusion of incentives in the net profit calculation and the need for proper substantiation of claims related to incentives passed on to customers.