2015 (7) TMI 596 - AT - Income Tax

Estimation of business income of owning fleet and operating as a transport contractor - @ 3% of the gross receipts as against 8% estimated by the AO - According to the assessee, the profit of assessee ought to have been determined at 1.03% which was the income declared in the return of income and which is comparable with the past history of profits declared in its case - Held that - the fact that the assessee s returns in the past was accepted without any scrutiny or verification because those returns were accepted u/s. 143(1) of the Act, was a proper basis not to rely on the past history of profits in assessee s own case. Therefore, the past history of income in assessee s own case cannot be the sole basis on which income of the assessee can be determined. Besides the above, as pointed out by the ld. DR in the course of his arguments, at the time of survey u/s. 133A of the Act, no books of account of assessee were found, nor was the assessee able to produce evidence in the form of vouchers in support of expenses debited to the P&L account. As to whether similar state of affairs prevailed in the past for the AYs 2004-05 to 2008-09 in assessee s case cannot be said with certainty. According to the ld. DR, similar state of affairs would have prevailed in the past assessment years also. The profits earned by the assessees in similar line of business could therefore be considered by the AO in determining the income of assessee. When books of accounts are rejected and income is estimated, the best yardstick for such estimation is the past history in Assessee s own case, provided such past history is accepted by the revenue in assessments completed after due enquiry u/s.143(3) of the Act. When assessment is completed u/s.143(1) of the Act, the return filed by the Assessee is accepted as it is. The scheme of assessment under section 143(1) of the Income-tax Act, 1961, is the policy of tax administrations across countries to adopt a two-stage procedure of assessment as part of risk management strategy. In the first stage, all tax returns are processed to correct arithmetical mistakes, internal inconsistencies, tax calculation and verification of tax payment. At this stage, no verification of income is undertaken. In the second stage, a certain percentage of the tax returns are selected for scrutiny/audit on the basis of the probability of detecting tax evasion. At this stage, the tax administration is concerned with the verification of the income In our view, therefore, the past history in Assessee s case would not be the appropriate yardstick to estimate income. We are therefore of the view that it would be just and appropriate to set aside the order of the CIT(Appeals) on this issue and remand the question of estimation the income of the assessee to the Assessing Officer for fresh consideration, keeping in view the profits earned by the assessees in similar line of business. The AO will make necessary enquiries in this regard and also afford opportunity of being heard to the assessee and thereafter estimate the income of assessee - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Determination of business income from the business of owning fleet and operating as a transport contractor.
2. Validity of rejection of books of account by the Assessing Officer (AO).
3. Appropriateness of the profit percentage applied by the AO and the CIT(A).
4. Reliance on past history and comparable cases for estimating income.

Detailed Analysis:

1. Determination of Business Income:

The primary issue in this appeal was the determination of the business income of the assessee, a company engaged in owning a fleet and operating as a transport contractor. The AO estimated the business income at 8% of the gross receipts, while the CIT(A) reduced it to 3%. The assessee contended that the profit should be determined at 1.03%, consistent with the income declared in the return and comparable with past history.

2. Validity of Rejection of Books of Account:

The AO rejected the books of account under section 145(3) of the Income-tax Act, 1961, due to the absence of supporting vouchers and bills for various expenses during a survey conducted under section 133A. The CIT(A) upheld this rejection, and the assessee did not challenge this part of the order before the Tribunal.

3. Appropriateness of the Profit Percentage Applied:

The AO determined the income by applying an 8% profit rate on the total turnover, which was reduced to 3% by the CIT(A). The Tribunal initially reduced it further to 2.5%, but the High Court remitted the matter back to the Tribunal, stating that the estimation must be based on some evidence or material and not mere guesswork. The High Court emphasized the need to consider the past history of the assessee and comparable cases in similar businesses.

4. Reliance on Past History and Comparable Cases:

The High Court highlighted that the AO must consider the past history of the assessee's returns and comparable cases in similar businesses to arrive at a fair estimate. The Tribunal noted that the past history in the assessee's case was not conclusive as the returns were accepted under section 143(1) without scrutiny. The Tribunal directed the AO to make fresh enquiries and estimate the income based on profits earned by assessees in similar lines of business.

Conclusion:

The Tribunal set aside the order of the CIT(A) and remanded the matter to the AO for fresh consideration. The AO was directed to estimate the income of the assessee by considering the profits earned by comparable cases in similar businesses and to provide the assessee with an opportunity to be heard. The appeal was treated as allowed for statistical purposes.