2018 (12) TMI 596 - AT - Income Tax

N.P. determination - Determining a rate of 4% to disclosed turnover - allowability of depreciation allowance - Held that - From past profit history chart of the assessee, it is abundantly clear that the average rate of profit of last four years was @ 2.74% of Turnover before Depreciation. Even if immediately preceding year s percentage is considered, it is 3.90%. On that basis estimated net profit @ 4% of turnover of ₹ 59,83,70,923/- will be ₹ 2,39,34,837/-. This net profit would be before depreciation, and depreciation allowance should be provided separately. Whether depreciation allowance should be provided separately or not - Held that - Depreciation shall have to be allowed separately, even if in case of estimation of net profit. Hence, in assessee s case under consideration the assessable income is to the tune of ₹ 2,39,34,837/- which would be further reduced by depreciation. It has been held in the case of Lali Construction Co. vs. Asstt. CIT 2014 (9) TMI 500 - PUNJAB & HARYANA HIGH COURT that depreciation is allowable from net profits, even if total income is computed by applying net profit rate. Thus we consider it fair and direct the A.O. to apply the rate of 4% to disclosed turnover and depreciation should be allowed separately from the profit so arrived by applying rate of 4% to disclosed turnover. - Decided against revenue.

Summary

Issues:
1. Determination of net profit rate on disclosed turnover.
2. Justification of relief granted by the Commissioner of Income Tax (Appeals).
3. Consideration of past history of the assessee's business in estimating profit.

Issue 1: Determination of net profit rate on disclosed turnover:
The appeal pertains to the Assessment Year 2012-13, where the Revenue challenged the order of the ld. Commissioner of Income Tax (Appeals) regarding the determination of the net profit rate on the disclosed turnover. The Assessing Officer, after noting discrepancies in the books of accounts and malpractices in the share application money, estimated the net profit at 8% of the disclosed turnover. The ld. CIT(A) reduced this estimated net profit rate to 4%, leading to the Revenue's appeal. The Revenue contended that the ld. CIT(A) did not consider the past history of the assessee's business in justifying the 4% rate. However, after considering the submissions and materials on record, the Tribunal upheld the ld. CIT(A)'s order, emphasizing that the Assessing Officer rightly rejected the books of accounts due to specific defects and malpractices, and the estimated profit rate of 4% was reasonable based on the past history of the business.

Issue 2: Justification of relief granted by the Commissioner of Income Tax (Appeals):
The Revenue raised concerns regarding the substantial relief granted by the ld. CIT(A) without providing sufficient reasons. The ld. CIT(A) allowed a significant tax relief of ?1,35,73,413 without detailed justification. However, the Tribunal noted that the ld. CIT(A) considered the past history of the assessee's business and reasonably estimated the profit at 4% of the turnover. The Tribunal found the order passed by the ld. CIT(A) to be reasoned and based on a true estimate, considering the comparative chart of the net profit from previous years. Therefore, the Tribunal upheld the order of the ld. CIT(A) in granting the relief with tax effect.

Issue 3: Consideration of past history of the assessee's business in estimating profit:
The Tribunal emphasized the importance of considering the past history of the assessee's business while estimating the profit rate on turnover. Despite the Assessing Officer applying an 8% net profit rate without adequately considering the past assessment records and comparable cases, the Tribunal highlighted the average profit rate of the last four years at 2.74%. The Tribunal referred to relevant judicial decisions and circulars to support the allowance of depreciation separately from the estimated net profit. By analyzing the past profit history and relevant legal provisions, the Tribunal directed the Assessing Officer to apply a 4% rate to the disclosed turnover and allow depreciation separately. The Tribunal declined to interfere in the ld. CIT(A)'s order, upholding the decision based on the past history of the business and fair estimation of profit.

In conclusion, the Appellate Tribunal upheld the order of the ld. Commissioner of Income Tax (Appeals) regarding the determination of the net profit rate on disclosed turnover and the justification of relief granted, emphasizing the significance of considering the past history of the assessee's business in estimating profit. The Tribunal dismissed the Revenue's appeal and directed the Assessing Officer to apply a 4% rate to the disclosed turnover while allowing depreciation separately.