2024 (11) TMI 640 - AT - Income Tax

Estimation of profit percentage @12.50% of gross receipts - assessment of assessee's income - CIT(A) applied estimated net profit of the assessee @ 12.5% on gross receipts assessed by the AO and consequently, restricted the additions - assessee pointed out that the advertisement business in which the assessee was engaged, operates on a wafer- thin margins and estimations @12.50% of gross receipts do not accord with ground realities - HELD THAT - For determination of taxable income, involvement of some guesswork would be indispensable in the absence of requisite financial data. CIT(A) has not provided reference to any material to weigh 12.50% to be a fair estimate. The assessee on the other hand has given reference to profits derived by the other party in the same business. The profits declared in the range of 1.5% to 2% is thus claimed by the assessee to be a fair estimate. However, it is the duty of the assessee to support the claim of profits in such narrow and low range. The assessee itself is to blame for not doing so. The estimation in the vicinity of such profits of 2 % or thereabout proposed on behalf of the assessee thus cannot be accepted. Section 44AD of the Act provides for statutory presumptions whereby the sum equal to 8% of the total turnover or gross receipts of the assessee in a previous year on account of the business by the eligible assessee is deemed as profit and gains of such business chargeable to tax. Impliedly such statutory estimations at 8% of the total turnover are based on empirical studies and data gathered with the Legislature. Such statutory estimations of profits thus may serve as useful guide for the purposes of estimations. Guided by the rules of justice, equity and good conscience, we thus consider it just and expedient to adopt the rate of 8% of the gross turnover receipts as fair estimation of taxable income and more so in the light of comparable data placed for lower profit margin earned by other assessee in same business. We thus, modify the first appellate order towards estimation of profits from 12.5% to 8%. Appeal of the assessee is partly allowed.

Summary

Issues Involved:

1. Whether the Assessing Officer (AO) was justified in treating the entire gross receipts as taxable income.
2. Whether the estimation of profit percentage by the Commissioner of Income Tax (Appeals) [CIT(A)] at 12.5% of gross receipts was appropriate.
3. Whether the penalty proceedings initiated under sections 271F, 271(1)(b), and 271(1)(c) of the Income Tax Act were valid.

Detailed Analysis:

1. Treatment of Gross Receipts as Taxable Income:

The primary issue was whether the AO correctly treated the entire gross receipts of the assessee as taxable income. The assessee, a partnership firm, did not file a return of income for the Assessment Year 2014-15. The AO, relying on information from the Departmental software ITBA, observed that the assessee earned income from commission, brokerage, rent on plant and machinery, and professional or technical fees. Consequently, the AO issued notices under section 148 of the Income Tax Act and assessed the entire gross receipts as taxable income, resulting in an addition of INR 46,50,05,403/-.

The CIT(A) reviewed the case and determined that the AO's approach was unjustified. It was noted that the statute provides for the levy of tax on income, not gross receipts. The CIT(A) highlighted that earning income involves corresponding expenditures, and only the income component is chargeable to tax. The CIT(A) criticized the AO for mechanically completing the assessment without considering the facts and law, thus treating the entire gross receipts as income was deemed arbitrary and unjust.

2. Estimation of Profit Percentage:

The CIT(A) estimated the profit percentage at 12.5% of the gross receipts, considering the average profit margin in the advertisement business based on market and industry data. The CIT(A) modified the assessed income to INR 5,81,25,675/-, reducing the additions made by the AO. The assessee challenged this estimation as excessive, arguing that the advertisement business operates on thin margins and that a lower profit percentage would be more realistic. The assessee referred to a peer firm's Tax Audit Report, which showed a net profit rate of approximately 1.69% to 1.05% in similar business activities.

The Tribunal agreed with the CIT(A) that the entire gross receipts could not be taxed and that estimations were necessary. However, it found the 12.5% estimation excessive and reduced it to 8%, aligning with statutory presumptions under section 44AD of the Income Tax Act, which provides for an 8% profit estimation on gross receipts for eligible businesses. This decision was based on empirical data and comparable industry practices.

3. Penalty Proceedings:

The CIT(A) addressed the issue of penalty proceedings initiated under sections 271F, 271(1)(b), and 271(1)(c) of the Act. The appellant did not press this ground, and since appeals are against orders levying penalties, not their initiation, this ground was dismissed.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, modifying the profit estimation from 12.5% to 8% of gross receipts. The decision for the Assessment Year 2015-16 followed the same rationale and outcome as the Assessment Year 2014-15, applying the principle of consistency. The Tribunal emphasized that while some estimation is necessary in the absence of proper records, it must be reasonable and grounded in industry norms.