2015 (11) TMI 405 - HC - Income Tax

Determination of net profit rate - Held that - A perusal of the order passed by the Income-tax Appellate Tribunal reveals that though a reference is made to these principles but while recording its opinion that a net profit rate of 5 per cent. should be applied, the Tribunal has not referred to the relevant factors that formed the foundation of its opinion, applying a net profit rate of 5 per cent. It would be appropriate to point out that on the basis of the same material, the Assessing Officer determined a net profit rate of 10 per cent. the Commissioner of Income-tax (Appeals) at 8 per cent. and the learned Tribunal at 5 per cent. The learned Tribunal was, therefore, required to record reasons by reference to relevant facts before determining the net profit rate of 5 per cent. Consequently, without expressing any opinion on the merits of the controversy and while affirming the rejection of account books, the matter is restored to the Income-tax Appellate Tribunal, Amritsar Bench. Amritsar, for determining net profit rate in terms of the ratio in Telelinks v. CIT (2014 (12) TMI 570 - PUNJAB & HARYANA HIGH COURT ). - Decided in favour of revenue for statistical purposes.

Summary

Issues:
Challenge to order of Income-tax Appellate Tribunal on substantial questions of law regarding net profit rate application.

Analysis:
The Revenue challenged the order of the Income-tax Appellate Tribunal regarding the application of a net profit rate of 5% for the assessment year 2009-10. The substantial questions of law raised included the validity of applying a 5% net profit rate while accepting the returned income of the assessee and the Tribunal's decision to reduce the rate from 10% applied by the Assessing Officer. The Revenue argued that the order was arbitrary and lacked reasoning for the chosen rate, emphasizing the need for considering relevant factors like past history, nature of business, and economic conditions.

The assessee contended that the Tribunal considered past history and previous assessment rates, justifying the 5% net profit rate. It was argued that the Revenue's claim of arbitrariness in applying the rate was factually incorrect. After hearing both parties and reviewing the order, the court leaned towards the Revenue's arguments, favoring a higher net profit rate based on the principles established in previous cases.

The court referred to the Telelinks case, emphasizing that the discretion to determine a net profit rate should be guided by reason and relevant factors. Factors such as past tax history, nature of business, economic conditions, and price indices were highlighted as essential considerations. The court criticized the Tribunal for not providing sufficient reasoning for choosing a 5% rate over the higher rates applied by the Assessing Officer and Commissioner of Income-tax (Appeals).

Considering the lack of detailed reasoning in the Tribunal's order, the court decided to restore the matter to the Income-tax Appellate Tribunal for a reassessment of the net profit rate in line with the principles outlined in the Telelinks case. The parties were directed to appear before the Tribunal for further proceedings on the issue.