2015 (8) TMI 762 - AT - Income Tax

Estimation of profit - whether net profit rate adopted is add-hoc and arbitrary and the rate applied i.e., 8.5 per cent. is on the higher side? - Held that - Commissioner of Income-tax (Appeals) has made correct observations that if the assessee had earned so much of profit then some assets would have been found during the search. Further, even the Revenue s claim was that the assessee was not having any books of account. Therefore, in such a situation the only course left to the learned Commissioner of Income-tax (Appeals) was estimation of profit. However, at the same time we find that learned Commissioner of Income-tax (Appeals) has not given detailed reasons for not finding any merit in the finding of the Assessing Officer that the assessee has shown bogus creditors. We have already seen that in the case of Gulam Mohidheen, the amounts of ₹ 14,01,013, ₹ 13,28,813, ₹ 17,53,813 and ₹ 14,70,413 during year ending March 31, 1997, March 31, 1998, March 31, 1999 and March 31, 2000 respectively were shown as sundry creditors. First of all, it is not possible to believe that a labour contractor can extend continuous credit of such huge amounts regularly. Secondly, whatever cheques were issued later on were shown as receipts which is quite clear which means that this is a book entry for sundry creditors. Similarly, in the case of Shri Murari Lal, from the receipt side of the day book i.e., document Nos. 1 to 111 of Annexure A-6 it was found that amount was entered as cash. Therefore, in our opinion, the profit should be estimated in this case at a little higher rate or a separate addition for creditors should have been made. Since the Assessing Officer himself has not made separate addition for creditors, in our opinion, considering the peculiarity of this case we estimate the profit at 11 per cent. - Decided partly in favour of revenue.

Issues Involved:
1. Net profit rate adoption and its arbitrariness.
2. Applicability of surcharge.
3. Charging of interest under section 158BFA.
4. Existence of undisclosed assets and investments.
5. Applicability of section 44AD in block assessments.
6. Directions by Commissioner of Income-tax (Appeals) to compute income using net profit rate.
7. Consideration of evidence and affidavits of alleged creditors.
8. Affording reasonable opportunity to the Assessing Officer.
9. Validity of income computation based on documents found during the search.
10. Separate addition for bogus liabilities under section 68/69.

Detailed Analysis:

1. Net Profit Rate Adoption and its Arbitrariness:
The assessee challenged the net profit rate of 8.5% applied by the Commissioner of Income-tax (Appeals) as arbitrary and high. The Commissioner of Income-tax (Appeals) justified this rate by comparing it with the assessee's own declared profit rate of 8% under section 44AD for the assessment year 1995-96. The Tribunal found that the Commissioner of Income-tax (Appeals) had correctly estimated the profit rate, considering the absence of regular books of account and the nature of the business.

2. Applicability of Surcharge:
The assessee contended that the Commissioner of Income-tax (Appeals) did not address the issue of surcharge applicability. The Tribunal did not specifically address this issue in the judgment, implying that the surcharge was not a significant point of contention in the final decision.

3. Charging of Interest under Section 158BFA:
The assessee argued that interest under section 158BFA was wrongly charged. The Tribunal did not provide a detailed discussion on this issue, suggesting that it upheld the charging of interest as per the provisions of the Income-tax Act.

4. Existence of Undisclosed Assets and Investments:
The Revenue argued that the assessee had undisclosed investments in fixed deposits, machinery, land, and cars. However, the Commissioner of Income-tax (Appeals) found that apart from 29 bighas of agricultural land, no significant assets were discovered during the search. The Tribunal agreed, noting the absence of tangible evidence of undisclosed assets.

5. Applicability of Section 44AD in Block Assessments:
The Revenue contended that section 44AD was not applicable for block assessments. However, the Commissioner of Income-tax (Appeals) and the Tribunal held that section 44AD could be applied, as it forms part of Chapter IV of the Income-tax Act, which is relevant for computing total income in block assessments.

6. Directions by Commissioner of Income-tax (Appeals) to Compute Income Using Net Profit Rate:
The Revenue challenged the Commissioner of Income-tax (Appeals) for directing the computation of income using the net profit rate of 8.5%. The Tribunal found that this direction was justified, given the lack of regular books of account and the need to estimate profits reasonably.

7. Consideration of Evidence and Affidavits of Alleged Creditors:
The Revenue argued that the Commissioner of Income-tax (Appeals) erred in considering the affidavits and statements of alleged creditors, which were rebutted during assessment proceedings. The Tribunal noted that the Commissioner of Income-tax (Appeals) had considered these affidavits but found them unreliable due to inconsistencies and lack of corroborative evidence.

8. Affording Reasonable Opportunity to the Assessing Officer:
The Revenue contended that the Commissioner of Income-tax (Appeals) did not afford a reasonable opportunity to the Assessing Officer. The Tribunal did not find merit in this argument, as the Commissioner of Income-tax (Appeals) had considered the submissions and evidence presented by both parties.

9. Validity of Income Computation Based on Documents Found During the Search:
The Revenue argued that the income should be computed based on documents found during the search, which indicated undisclosed income. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to estimate the profit rate, noting that the documents found were incomplete and could not be solely relied upon for accurate income computation.

10. Separate Addition for Bogus Liabilities Under Section 68/69:
The Revenue contended that the Commissioner of Income-tax (Appeals) should have made a separate addition for bogus liabilities under section 68/69. The Tribunal agreed that the Commissioner of Income-tax (Appeals) did not provide detailed reasons for rejecting the Assessing Officer's findings on bogus creditors. Consequently, the Tribunal increased the estimated profit rate to 11% to account for potential bogus liabilities.

Conclusion:
The appeal of the Revenue was partly allowed, and the appeal of the assessee was dismissed. The Tribunal upheld the estimation of profits but increased the profit rate to 11% to account for potential bogus liabilities. The order was pronounced in the open court on January 28, 2015.

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