2014 (6) TMI 435 - AT - Income Tax

Deletion by estimation of sales at higher value Estimation of profit rate @ 14.5% - Held that - The assessee has disclosed gross profit of Rs. 3.28 crores, which works out to 29.97% - in respect of IMFL/Beer, the assessee had shown sales of Rs. 12.07 crores , on which gross profit of Rs. 3.93 crores was declared giving G.P. rate of 25.66% - because of short lifting of country liquor, the assessee was required to pay short license fees of Rs. 79.25 lacs and similarly in respect of IMFL/Beer, short license fee of Rs. 3.10 crores was paid and it is the main reason for declining of net profit - once the AO has rejected books results by applying provisions of Section 145(3) of the Act, best judgment assessment is required to be done - best judgment assessment is not a provision to penalize the assessee, but is a machinery provision to enable the Revenue to assess a person when situation warrants such an assessment. There is an element of guess work in best judgment assessment , it shall not be wild one, but shall have reasonable nexus to the available material and circumstances of each case - While estimating the Gross Profit, the AO should be fair & reasonable and should keep into account the turnover and the Gross Profit of earlier years along with all the facts and circumstances of the case - by rejecting book result, the Assessing Officer does not get absolute and unbridled powers to estimate whatever profit he wants, as per his sweet-will CIT(A) was rightly of the view that the addition made is not logical, since it is excessive in view of the estimation made in the sales - the difference in the circumstances of the assessee with that of M/s Banna Ali Girdhari & Party has also been shown with this submission that the business of assessee is 5 times larger than them. The assessee had shown better g.p. rate in IMFL & Beer sales, there was no much scope for the AO for interference and the possibility of sales out of books, which held unreliable has already been taken into account by the ld. CIT(A) - the extent of profit in the nature of liquor business depends upon several factors i.e. geographical condition of the area, social and economic condition of the people in the area, mixing habit of the population - rapport amongst the contractors of the area - their experience and economic position; political position and status of the population in area and excise policy of the Government - there were both types of instances of lower and higher G.P. rate than the declared G.P. rate of the assessee - the AO was not justified in applying the higher G.P. rate to work out the income of the assessee on the enhanced estimated sales thus, there was no infirmity in the order of CIT(A) Decided against Revenue.

Summary

Issues Involved:
1. Deletion of addition made by the AO by estimating the sales at a higher figure.
2. Estimation of the profit rate at 14.5%.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by the AO by Estimating the Sales at a Higher Figure:
The Revenue was aggrieved by the deletion of the addition made by the AO by estimating the sales at a higher figure. The AO had rejected the books of accounts under Section 145(3) of the IT Act, 1961, due to the assessee's failure to maintain daily sales bills and brand-wise/size-wise quantity details of liquors sold. The AO applied a G.P. rate of 70% on sales of country liquor and 48% on sales of IMFL/Beer, resulting in a significant addition. The CIT(A) restricted the addition to Rs. 5 lacs for country liquor and Rs. 4 lacs for IMFL/Beer after detailed findings. The Tribunal noted that the AO did not provide valid reasons for enhancing the sales by 5% and applying such high G.P. rates. The Tribunal agreed with the CIT(A) that the AO's estimation was excessive and not logical, considering the facts and circumstances of the case, including past history and comparable instances. Therefore, the Tribunal upheld the CIT(A)'s decision to restrict the additions.

2. Estimation of the Profit Rate at 14.5%:
The AO had applied a G.P. rate of 70% for country liquor and 48% for IMFL/Beer, citing instances of other contractors with higher G.P. rates. However, the Tribunal found that the AO failed to consider the specific circumstances of the assessee's case and its past history, which is a crucial guideline for estimating income. The Tribunal emphasized that "best judgment assessment" should be fair and reasonable, based on honest guesswork with a valid basis. The CIT(A) had observed that the assessee's G.P. rate for country liquor was 29.97%, and for IMFL/Beer, it was 25.66%, which were better compared to the previous year. The CIT(A) also noted that the assessee had paid significant short license fees, impacting the net profit. The Tribunal agreed with the CIT(A) that the AO's application of higher G.P. rates was not justified without considering the assessee's specific circumstances and past history. Thus, the Tribunal upheld the CIT(A)'s decision to restrict the profit rate estimation.

Conclusion:
The Tribunal concluded that the AO's rejection of the books of accounts and the subsequent estimation of sales and profit rates were not justified. The CIT(A) had appropriately restricted the additions based on a detailed analysis of the facts and circumstances, comparable instances, and past history. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

Order Pronounced:
The appeal of the Revenue was dismissed, and the order was pronounced in the open court on 30/05/2014.