2018 (3) TMI 381 - AT - Income Tax

Rejection of the books of accounts - estimation of the profit at the rate of 8% of the gross profit - Held that - Assessee has merely made certain submissions despite specific request by the Ld. assessing officer to produce the books of accounts on several occasions. The assessee has not come out with the clean hands by producing the books of accounts. Therefore, it is clear from the records that assessee did not wish to produce the books of accounts. According to us, if the books of accounts are not produced, there is no option left with Ao other than to estimate the net profit of the business of the assessee. Therefore no fault can be found with the Ld. assessing officer in applying the provisions of section 145 (3). Decisions relied up on by the assessee are perused and it is found that in all those years the assessee produced the books of accounts and AO verified it. However in the facts in this case are startling that assessee has not produced the books of accounts at all. Estimation of the net profit of the business - benchmarking of the net profit for the current year cannot be made in comparison with those years. The net profit at the rate of 8% is also too high in case of the business of the civil construction for this year compared to the assessment history of other years of the assessee. No reasons have been given by the assessing officer for estimating the net profit at the rate of 8%. No comparative instances have also been cited. Further even in section 44AD for the small business where the turnover is less tha 60 lakhs rate of profit is 8 %. In the present case the assessee has turnover of more than 9 croes therefore such a high rates cannot be applied to the business of the assessee. No injustice would be caused if the net profit of the assessee were estimated at the rate of 5% of the gross receipt of the assessee. AO is directed to estimate the net profit of the assessee at the rate of 5% instead of 8%. - Decided partly in favour of assessee partly.

Summary

Issues:
- Rejection of books of accounts under section 145 of the Income Tax Act
- Estimation of net profit at the rate of 8% of the gross receipts
- Assessment of taxable income for the appellant

Analysis:

1. Rejection of Books of Accounts:
The appellant, an individual engaged in civil construction business, declared a net profit of 2.07% on a turnover of ?95,201,519. The assessing officer requested the production of books of accounts and supporting evidence, but the appellant failed to comply. Despite multiple opportunities, the appellant did not furnish any explanation for the decrease in net profit. Consequently, the assessing officer rejected the books of accounts under section 145 of the Income Tax Act. The appellant contended that the rejection was unjustified, citing past assessment years where net profit ratios ranging from 2.04% to 2.66% were accepted. However, the tribunal found that the appellant's failure to produce books of accounts left no option but to estimate the net profit, upholding the assessing officer's decision.

2. Estimation of Net Profit at 8%:
The assessing officer estimated the net profit at 8% of the gross receipts, resulting in an addition to the taxable income. The appellant argued that the 8% rate was arbitrary and referenced previous years' assessments where lower net profit ratios were accepted. The tribunal acknowledged that the 8% rate was high for civil construction business and directed the assessing officer to estimate the net profit at 5% instead. This decision was based on fairness and the business turnover exceeding ?9 crores, where a lower rate was deemed appropriate. Therefore, the tribunal partly allowed the appellant's appeal on this ground.

3. Assessment of Taxable Income:
The appellant's appeal against the Commissioner of Income Tax (Appeals) decision, which confirmed the rejection of books of accounts and the 8% net profit estimation, was partly allowed by the tribunal. The tribunal emphasized the importance of producing books of accounts for proper assessment and upheld the assessing officer's decision to estimate the net profit due to the appellant's non-compliance. The tribunal adjusted the net profit estimation to 5% in consideration of the business turnover and fairness in the assessment process.