2018 (10) TMI 587 - AT - Income Tax

Estimation of income - N.P. determination - adopting net profit rate at 3.5% of the turnover after upholding rejection of book result under section 145(3) - AO has estimated at the rate of 5% whereas ld.CIT(A) has substantially reduced the rate to 3.5% - Held that - Estimation of income would always involve guess work. To our mind 2nd appellate authority ought not to disturb the discretion exercised by the ld.CIT(A) simply for the reason that some minor variation on account of results shown by the assessee in earlier and subsequent year is possible to be made. The basic reason for this is that, the AO has an occasion to visualize about status of the assessee on the basis of his personal knowledge. The kind of inquiry made for rejecting the book results must have lead to harbouring a belief that some higher element of income is involved in the case of the assessee. This has been re-appreciated by the ld.CIT(A). Formation of such estimated opinion ought not to be disturbed by the second appellate authority unless something very serious flaws are being pointed out or it has been established that such belief was formed by the ld.CIT(A) on some extraneous decision. No such situation has been brought to our notice, and hence, we do not wish to interfere in the discretion of the ld.CIT(A) on the estimated rate of profit required to be applied while computing the income of the assessee - Decided against assessee

Summary

Issues:
1. Computation of income based on net profit rate.
2. Rejection of book results under section 145(3) of the Income Tax Act, 1961.
3. Application of best judgment for estimating income.

Issue 1: Computation of income based on net profit rate:
The assessee appealed against the order confirming the computation of income by adopting a net profit rate of 3.5% of the turnover, after rejecting the book result under section 145(3) of the Income Tax Act, 1961. The AO initially estimated the net profit at 5% and made an addition to the income. The CIT(A) reduced the rate to 3.5% based on the appellant's past net profit percentages. The appellant argued that the rates accepted in previous and subsequent years were not disturbed by the department, questioning the justification for the 3.5% rate. The Tribunal upheld the CIT(A)'s decision, emphasizing the importance of the AO's personal knowledge and inquiry in estimating income.

Issue 2: Rejection of book results under section 145(3) of the Income Tax Act, 1961:
The AO rejected the book results due to discrepancies and estimated income at a higher rate than disclosed by the appellant. The CIT(A) confirmed the rejection but reduced the profit rate to 3.5%, considering the appellant's historical net profit percentages. The Tribunal agreed with the CIT(A)'s decision, highlighting that the AO's estimation should be based on fair judgment and reasonable nexus to available material and circumstances, without interference unless serious flaws or extraneous decisions are evident.

Issue 3: Application of best judgment for estimating income:
Section 144 of the Income Tax Act provides guidance for the Assessing Officer to make assessments to the best of their judgment. The Tribunal emphasized that in exercising best judgment, the AO should act fairly and consider local knowledge, the assessee's reputation, and previous history. The Tribunal upheld the CIT(A)'s decision to reduce the profit rate to 3.5%, emphasizing that the discretion exercised by the CIT(A) should not be disturbed without substantial flaws or extraneous influences.

In conclusion, the Tribunal dismissed the assessee's appeal, affirming the CIT(A)'s decision to compute income at a net profit rate of 3.5% of the turnover, based on the best judgment exercised by the authorities and considering the historical performance of the assessee.