2015 (5) TMI 315 - HC - Income Tax

Net profit computation - Tribunal held that the rate of 5 per cent. is reasonable and since in the present year though the net profit rate of 5.38 per cent. had been shown but still sustained an ad hoc addition of ₹ 5 lakhs as against ₹ 10 lakhs made by the CIT (Appeals) & deletion of an addition of about ₹ 1.12 crores - Held that - No substantial question of law can be said to arise out of the impugned order as it is essentially a finding of fact by the two appellate authorities. It is admitted fact that the provisions of section 145(3) of the Act have rightly been invoked by the Assessing Officer so also upheld by the appellate authorities but in a case where the provisions of section 145(3) are invoked, one has to consider either the past history of the assessee or history of similarly situated other businessmen/traders. However, on a perusal of the assessment order, we notice that the Assessing Officer is absolutely silent as to justifying the net profit rate to the extent of 13.7 per cent, whether the addition/disallowance made by the Assessing Officer can be said to be appropriate. The assessment order is totally silent about similarly situated other traders/businessmen showing the net profit over and above what the assessee had shown and compared by the Assessing Officer and no evidence has been brought on record as to how the Assessing Officer was justified in applying the net profit rate at 13.7 per cent. In our view, while comparing with the past history, if the results are fair and reasonable then invariably no addition need to be made. It would be appropriate to reproduce the trading results of the assessee for the year under appeal including the last five years On a perusal of the above, it is apparent that out of the past five assessment years in three of the assessment years, i.e., 2004-05, 2005-06, 2006- 07, the matter travelled up to the stage of the Tribunal where the Tribunal applied the rate of 5 per cent. Compared with the said fact, in the present assessment year though the contract receipts have sharply increased from ₹ 10.60 crores to ₹ 12.32 crores in the immediate past assessment year at the same time the net profit has increased from 5.02 per cent. to 5.38 per cent. or now as per the order of the Tribunal it can be said to be raised at 5.78 per cent. with the addition of ₹ 5 lakhs sustained. In the face of the said facts, if it is for the Assessing Officer to bring on record some concrete material/evidence to make a proper addition. We have already noticed hereinabove that the Assessing Officer has merely disallowed 20 per cent. or 10 per cent., as the case may be, out of the various expenses, which, in our view, is not proper and he had to bring on record justifiable basis for making of an addition and bring on record some evidence for making of addition. Assessing Officer has failed to bring on record any comparable case so as to justify any estimation/addition, the addition has been deleted by the Commissioner of Income-tax (Appeals) as well as upheld by the Income-tax Appellate Tribunal. - Decided against revenue.

Issues Involved:
1. Invocation of Section 145(3) of the Income-tax Act, 1961.
2. Rejection of the book results by the Assessing Officer.
3. Disallowance of expenses by the Assessing Officer.
4. Appropriateness of the net profit rate determined by the Assessing Officer.
5. Appeals before the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.
6. Justification for deletion of the addition by the appellate authorities.
7. Consideration of past history and comparable cases by the Assessing Officer.

Detailed Analysis:

1. Invocation of Section 145(3) of the Income-tax Act, 1961:
The Assessing Officer invoked the provisions of Section 145(3) of the Act due to the respondent-assessee's inability to provide satisfactory material to justify the expenses claimed in the profit and loss account. The assessee admitted that the nature of work was unorganized, and proper accounting was not maintained due to the work being carried out at various sites by a labour supervisor with no accounting knowledge.

2. Rejection of the Book Results by the Assessing Officer:
The Assessing Officer rejected the book results based on the deficiencies and irregularities in the accounting system as admitted by the assessee. The officer was dissatisfied with the explanation provided by the assessee regarding the expenses and receipts.

3. Disallowance of Expenses by the Assessing Officer:
The Assessing Officer disallowed expenses totaling Rs. 1,17,75,202 from various heads, including purchases, labour charges, salary, vehicle expenses, water charges, welfare expenses, and vehicle insurance. The disallowance rates varied from 10% to 20% depending on the expense category, resulting in a net profit rate determination of 13.7%.

4. Appropriateness of the Net Profit Rate Determined by the Assessing Officer:
The net profit rate of 13.7% determined by the Assessing Officer was questioned as it lacked justification and comparison with similarly situated traders/businessmen. The assessment order did not provide evidence to support the higher net profit rate applied.

5. Appeals Before the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal:
The Commissioner of Income-tax (Appeals) upheld the invocation of Section 145(3) but reduced the addition to Rs. 10 lakhs, considering the past history of the assessee. The Income-tax Appellate Tribunal further reduced the ad hoc addition to Rs. 5 lakhs, maintaining that the net profit rate of 5% was reasonable based on past assessment years.

6. Justification for Deletion of the Addition by the Appellate Authorities:
The appellate authorities justified the deletion of the addition by emphasizing the need to compare the results with the assessee's past history. The Tribunal noted that the net profit rate shown by the assessee was better than the previous years and found the Assessing Officer's disallowance rates to be arbitrary without concrete evidence.

7. Consideration of Past History and Comparable Cases by the Assessing Officer:
The court observed that the Assessing Officer failed to bring on record any comparable cases to justify the higher net profit rate. The past history of the assessee indicated a consistent net profit rate around 5%, which was accepted in previous assessments without scrutiny.

Conclusion:
The court concluded that the findings of the appellate authorities were based on a proper appreciation of evidence and past history. The Assessing Officer's disallowance lacked concrete evidence and justification. Consequently, no substantial question of law arose from the Tribunal's order, and the appeal was dismissed in limine.

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