2014 (5) TMI 387 - AT - Income Tax

Estimation of income Low GP declared Rejection of Books of accounts - Entitlement for deduction u/s 80C and 80D of the Act Held that - Assessee contended that the rate of net profit is very low on the reason that earlier year job work charges were included in the trading account and for this assessment year it was accounted in Profit and Loss A/c - even if the argument of assessee is accepted, the net profit rate cannot go so less at 0.54% - the expenditure is not properly vouched and also assessee has not given proper explanation for low gross profit - estimation of income on the basis of gross profit is not proper - The AO should have compared the net profit rate of previous years for the discrepancies noticed in the books of account of the assessee. Considering the discrepancies in the books of account rejection of books of account is proper - estimation of income of the assessee on the basis of the gross profit is not proper thus, the order is modified and the AO is directed to estimate the income of the assessee on the basis of average net profit rate for AYs. 2007- 08 and 2008-09 as the past records could be the basis for estimation of income of the assessee the AO is directed to estimate income of the assessee at 1.22% of gross receipts - there cannot be any addition after estimating the income of the assessee - The assessee shall produce necessary details before the AO regarding the claim for deduction u/s. 80C and 80D of the Act Decided partly in favour of Assessee.

Summary

Issues:
1. Estimation of income based on low gross profit without rejecting books of account.
2. Entitlement for deduction under sections 80C and 80D of the Income-tax Act, 1961.

Estimation of Income based on Low Gross Profit:
The appeal was against the CIT(A)'s order for A.Y. 2009-10, where the AO made additions to the declared income due to low gross profit and unvouched expenditure. The CIT(A) upheld the rejection of books as appropriate details were not provided by the assessee. The CIT(A) noted that the assessee's arguments lacked substantiation and evidence, with no proper details of expenses or raw materials provided. The AO estimated the gross profit based on the assessee's previous GPs through average income calculation. The Tribunal found the gross profit rate for the current assessment year significantly lower compared to previous years. The assessee argued that the net profit rate was low due to changes in accounting treatment, but the Tribunal disagreed. It held that while the rejection of books was justified, estimating income solely based on gross profit was inappropriate. The Tribunal directed the AO to estimate income based on the average net profit rate of the previous years, modifying the lower authorities' order accordingly.

Entitlement for Deduction under Sections 80C and 80D:
The assessee also raised a ground regarding entitlement for deductions under sections 80C and 80D of the Income-tax Act, 1961. The Tribunal partly allowed the appeal, directing the assessee to produce necessary details before the AO regarding the claim for these deductions. The order was pronounced in open court on 29th April 2014, with the appeal being partly allowed in favor of the assessee.