2012 (9) TMI 354 - AT - Income Tax

Estimation of the net profit from sale of liquor at 3% as directed by CIT(A) - DR contended that even in case of exclusive wines, the ITAT recently has directed for estimation of profit at 5% - non-verifiable nature of sales admitted in the return due to non production of sale bills - Held that - As the entire understatement of sales cannot be treated as undisclosed income of the assessee for the year under consideration it is well settled law that the best guide for estimation of income after rejecting the books of accounts is either past history of the assessee or any other comparable cases - In the present case, admittedly the assessee is not an exclusive wine shop and it also runs restaurant along with Bar and food items are sold along with liquor. Therefore, the profit in case of the assessee cannot be same as in the case of exclusive wine shop - Thus, considering the fact that the sale of food items are very less compared to sale of liquor and beer and also considering the fact that the ITAT has also in some cases directed for estimation of net profit in case of wine shops at 5% it is reasonable to direct the AO to estimate the profit at 10% of purchases or stock put to sale during the year subject to the assessed income is not less than the returned income - The CIT (A) s order is modified to this extent - partly in favour of assessee.

Summary

Issues:
1. Challenge to the estimation of net profit from sale of liquor at 3%.
2. Dispute regarding the application of ITAT decision in a similar case.
3. Determination of profit estimation in the context of a Bar and Restaurant operation.

Analysis:
1. The appeal by the Revenue contested the order directing the estimation of net profit from liquor sales at 3%, challenging the CIT (A)'s decision based on the ITAT ruling in a previous case. The AO proposed a 27% profit estimation on the cost of goods sold due to non-verifiable sales data, leading to an understatement of sales by the assessee. The CIT (A) considered the nature of the establishment and the clientele, ultimately directing a 3% profit estimation, which was disputed by the Revenue.

2. The dispute arose over the applicability of the ITAT decision in a similar case involving an exclusive wine shop to the present scenario of a Bar and Restaurant operation. The Revenue argued that the profit element would differ due to the additional food sales in the latter case. The ITAT's decision to estimate profit at 5% in exclusive wine shops was highlighted, contrasting the 3% estimation directed in the current case.

3. The contention regarding profit estimation in the context of a Bar and Restaurant operation was crucial. The assessee emphasized the predominance of liquor sales over food items, catering mainly to cost-conscious customers from lower income groups. The argument centered on the necessity to maintain lower profit margins in a competitive market. The ITAT's decision to estimate profit at 3% in a similar case was cited to support the assessee's position.

Judgment:
The ITAT, Hyderabad Bench, in the Kanaka Durga Wines case, established guidelines for estimating net profit, emphasizing past performance and comparable cases. While acknowledging the differences between exclusive wine shops and Bar-Restaurant setups, the judgment modified the profit estimation for the current case to 10% of purchases or stock put for sale. This adjustment considered the limited sale of food items compared to liquor and beer sales. Consequently, the appeal by the assessee was partially allowed, modifying the CIT (A)'s order accordingly.