2018 (5) TMI 510 - AT - Income Tax

Estimation of income from the business of IMFL - 10% OR 5% - Held that - The coordinate bench of the Tribunal in the case of Tangudu Jogisetty (2016 (7) TMI 379 - ITAT VISAKHAPATNAM) has considered the profit level in the line of business and decided that 5% of purchase price is reasonable profit margin in the line of IMFL business and directed the A.O. to re-compute the profit of the assessee. Thus we direct the A.O. to re-compute the income of the assessee at 5% of purchase price. This ground of appeal raised by the assessee is allowed. Addition on account of unproved creditors - Held that - Addition includes the source consisting of sundry creditors and the unsecured loans. While the sundry creditors and the unsecured loans are the source for investment, the investment made by the assessee is application of funds. AO has not brought on record any asset or expenditure over and above the total investments outstanding of ₹ 18,00,288/- as at the end of the year. The addition representing unsecured creditors and the unsecured loans amounts to taxing the same source twice which amounts to double addition. Therefore we find merit in the argument of the AR that having brought the investment to tax, the liabilities representing the investments should not be treated as income once again. The unsecured loans and the unsecured creditors required to be given telescopic benefit from the addition made on account of investments. We set aside the orders of the lower authorities and delete the addition. - Decided in favour of assessee.

Summary

Issues:
1. Estimation of income from the business of IMFL.
2. Addition of unproved creditors.

Estimation of income from the business of IMFL:
The appeal was filed against the order of the Commissioner of Income-Tax (Appeals) concerning the assessment year 2011-12. The Assessing Officer (A.O.) estimated the net profit of the assessee, who was engaged in the purchase and sale of Indian made Foreign Liquor (IMFL), at 20% of the stock put to sale due to lack of proper documentation. The CIT(A) reduced the profit percentage to 10% based on purchase price. The Tribunal considered a similar case and directed the A.O. to re-compute the profit at 5% of the purchase price, aligning with the profit margin in the IMFL business. The Tribunal held that the A.O.'s reliance on a High Court judgment related to a different business was unjustified and supported the assessee's contention based on precedent cases. The A.O. was instructed to estimate the profit at 5% of total purchases net of deductions, following the coordinate bench's decision. Consequently, the appeal on this ground was allowed.

Addition of unproved creditors:
The AO added a sum on account of unproved creditors as the assessee failed to provide evidence of the loans received. The CIT(A) upheld the addition due to lack of confirmation from creditors. The assessee contended that the sum in question was part of the initial investment and requested deletion of the addition. The Tribunal noted that the total investments included the source of the creditors and loans, while the investment itself was the application of funds. As no additional assets or expenditures were identified, the addition of unsecured creditors and loans amounted to taxing the same source twice. Therefore, the Tribunal ruled in favor of the assessee, granting telescopic benefit to the unproved creditors' amount and deleting the addition. Consequently, the appeal on this ground was allowed.

In conclusion, the Tribunal directed the A.O. to re-compute the income of the assessee at 5% of the purchase price for the IMFL business and allowed the appeal regarding the addition of unproved creditors. The judgment highlighted the importance of proper documentation and accurate estimation in assessing income, ensuring fair treatment for taxpayers based on relevant legal precedents.