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2016 (5) TMI 355 - AT - Income TaxRejection of books of accounts - estimation of profit - Held that - Additional Commissioner has nowhere mentioned as to why the working given by the assessee cannot be accepted. More so, he has not given any reasoning as to how the duplicate entries taken in Annexure-A/7 as well as in the books, would be taken care. He simply treated Annexure-A/7 as gospel truth. On the other hand, the ld.CIT(A) has ironed out the anomalies or the error in the entries in an Annexure-A/7. We do not find any error in the finding of the ld.CIT(A) to this extent. The next aspect is application of net profit rate. On one hand, the assessee is armed with two sets of circumstances, viz. (i) net profit rate accepted by the Settlement Commission, after a discussion with both the parties, and secondly, average net profit rate as worked out on the basis of entries recorded in the books as well as as worked out in Annexure-A/7. The average in Annexure-A/7 is 3.44% of the entries mentioned therein. In our opinion, ends of justice would meet, if we apply net profit rate at 5% of the unaccounted sales accepted by the ld.CIT(A). The ld.AO is directed to re-work out the income of the assessee on the basis of 5% net profit rate on the sales worked out by the assessee and accepted by the CIT(A) in both these years.
Issues Involved:
1. Reopening of the assessment. 2. Rejection of the books of accounts. 3. Estimation of profit on unaccounted sales. 4. Disallowance of expenses by the AO. Issue-wise Detailed Analysis: 1. Reopening of the Assessment: The assessee did not press the grounds challenging the reopening of the assessment. The assessments for the years 2001-02 and 2002-03 were reopened by issuing a notice under section 148 of the Income Tax Act. The original returns for these years were revised and filed in response to the notice. 2. Rejection of the Books of Accounts: The assessee also did not challenge the rejection of the books of accounts. The books were deemed defective as they did not reflect the correct and complete picture of the assessee's transactions. The CIT(A) accepted this stand and estimated the profit by applying a net profit rate on the unaccounted sales. 3. Estimation of Profit on Unaccounted Sales: The primary issue was the determination of income on an estimate basis. The Excise Department's search operation led to the seizure of Annexure-A/7, which contained both recorded and unrecorded transactions. The assessee argued that the document did not disclose a true picture as it was not found at its premises and was prepared by a third person. The CIT(A) accepted the assessee's quantification of unaccounted sales based on the peak theory, which was also accepted by the Settlement Commission for excise purposes. The CIT(A) adopted a net profit rate of 8% on the alleged turnover/sales to estimate the profit. However, the Tribunal found that applying a net profit rate of 5% on the unaccounted sales would be more appropriate, considering the average net profit rate in the books and Annexure-A/7. 4. Disallowance of Expenses by the AO: The AO made various disallowances under section 40A(3) of the Act, which were deleted by the CIT(A) on the grounds that once the books of accounts are rejected and income is estimated, no separate disallowance should be made. This was supported by several judgments, including CIT Vs Banwarilal Bansidhar, CIT Vs. Smt. Santosh Jain, and CIT Vs. Mohammed Durabuddin. The Tribunal upheld this view, stating that the estimation of income by applying a net profit rate would take care of the expenses, and no separate disallowance was necessary. Conclusion: The Tribunal directed the AO to re-compute the income of the assessee by applying a net profit rate of 5% on the unaccounted sales for the assessment years 2001-02, 2002-03, and 2004-05. The appeals of the assessee were partly allowed, while the appeals of the Revenue were dismissed. The determination of income by applying a net profit rate on an estimate basis was deemed sufficient to address the expenses, negating the need for separate disallowances.
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