2016 (4) TMI 906 - AT - Income Tax

Disallowance on account of net profit - Held that - AO has not given any justification for applying 12% net profit on the estimated sale in the hands of licensee. In case of AOP, the case has been scrutinized U/s 143(3) of the Act where income disclosed by the AOP has been accepted by the Assessing Officer. The income result has been accepted by the Assessing Officer. Copy of scrutiny assessment has been placed in the paper book. The findings given by the ld CIT(A) are also not on merit in estimating the income @ 2% as in the hands of AOP, same income has been taxed by holding that Assessing Officer of the AOP namely Royal Wines has not considered the issue of license issued displayed at the shop and TCS made by the excise department. When the Assessing Officer in scrutiny has accepted the assessee s income as such and no disallowance on account of net profit has been made wherein net profit has been accepted by the Assessing Officer @ 12%. - Decided in favour of assessee. Addition on account of unexplained investment - Held that - The ld CIT(A) has examined this issue thoroughly, which has not been controverted by the ld DR, thus the Assessing Officer have doubted the cash payment made to the sellers of the house property, which is not prohibited under the IT laws. The source in the hands of AOP had been explained by the assessee, therefore, we uphold the order of the ld CIT(A). - Decided in favour of assessee.

Summary

Issues Involved:
1. Reduction of Net Profit (NP) rate from 12% to 20% of the turnover.
2. Deletion of addition of Rs. 67,00,000/- on account of unexplained investment.
3. Confirmation of addition of Rs. 5,62,633/- by applying the NP rate of 0.12% on estimated sales.

Issue-wise Detailed Analysis:

1. Reduction of NP Rate from 12% to 20% of the Turnover:

The first issue concerns the reduction of the NP rate applied by the Assessing Officer (AO) from 20% to 12% by the CIT(A). The AO observed that the assessee did not maintain books of accounts, bills, and vouchers, despite the requirement under excise law. The AO estimated the turnover based on TCS certificates and calculated the total purchases at Rs. 2,49,39,435/-. The AO applied a maximum gross profit margin of 20%, resulting in a turnover of Rs. 2,99,27,322/- and estimated the NP at 12%, leading to an addition of Rs. 35,91,278/-.

The CIT(A) found that the assessee did not obtain permission from the State Excise Department to do business in the name of AOP. However, the CIT(A) noted that the purchases and sales were made in the name of the assessee, and the AOP did not examine this issue. The CIT(A) concluded that the profits should be assessed in the hands of the assessee and reduced the NP rate to 2%, considering various expenses and industry standards, resulting in an income of Rs. 5,98,546/-. The CIT(A) also excluded Rs. 35,913/- to avoid double taxation, directing the AO to take Rs. 5,62,633/- as income from liquor shops.

2. Deletion of Addition of Rs. 67,00,000/- on Account of Unexplained Investment:

The second issue pertains to the deletion of an addition of Rs. 67,00,000/- made by the AO on account of unexplained investment. The AO observed that the assessee purchased a house for Rs. 67,34,210/- and claimed to have withdrawn Rs. 67,00,000/- from Royal Wines. The AO doubted the genuineness of the transaction, noting the assessee's capital in AOP was only Rs. 11,99,860/-, and considered the excess amount as an unexplained investment.

The CIT(A) held that the creation of AOP was not illegal and that the AO did not examine the availability of cash with the AOP. The CIT(A) verified the cash book of Royal Wines and found sufficient funds were available. The CIT(A) concluded that the AO did not disprove the genuineness of the transaction or the creditworthiness of the creditor and directed the deletion of the addition of Rs. 67,00,000/-.

3. Confirmation of Addition of Rs. 5,62,633/- by Applying the NP Rate of 0.12% on Estimated Sales:

The third issue involves the confirmation of an addition of Rs. 5,62,633/- by applying the NP rate of 0.12% on estimated sales. The assessee argued that the income from liquor shops should not be assessed in his hands as it was already included in the turnover of Royal Wines, resulting in double taxation. The CIT(A) reduced the NP rate to 2% but still confirmed the addition of Rs. 5,62,633/-.

The Tribunal noted that the license was granted in the name of the assessee, and the sale of liquor was disclosed in the AOP's business. The Tribunal found that the AO did not justify applying a 12% NP rate and that the income was already taxed in the hands of the AOP. The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, concluding that the income should not be taxed twice.

Conclusion:

The Tribunal dismissed the revenue's appeal, allowed the assessee's appeal, and dismissed the cross-objection as infructuous. The Tribunal upheld the CIT(A)'s findings, noting that the income from liquor shops was already assessed in the hands of the AOP and that the unexplained investment was adequately explained. The Tribunal emphasized avoiding double taxation and ensuring that the income was assessed correctly.