2018 (12) TMI 1588 - AT - Income Tax

Penalty u/s 271)1)(c) - estimation of profit - Held that - Penalty was imposed on estimated profit enhancement. The assessee has also filed a chart depicting the net profit percentages during the immediately four preceding assessment years wherein it is seen that the net profit assessed was 1.84% for assessment year 2002- 03, 3.3% for assessment year 2003-04, 2.71% for assessment year 2004-05 and 5% for assessment year 2005-06. Although, in the captioned year, the assessee did not prefer further appeal after the CIT (Appeals) reduced the net profit estimation rate from 8% to 6.75%, the fact remains that this is an estimate of profit and the CIT (Appeals), while allowing partial relief by directing application of net profit rate of 6.75%, has not given any cogent reason for arriving at this percentage. Thus, the net profit rate, as directed to be applied by the CIT (Appeals), is just an estimate without having any sound basis as the past financial results of the assessee have not been duly considered. It is settled law that penalty for furnishing inaccurate particulars of income can neither be imposed nor sustained on enhancement of net profit rate based on an estimate. The Hon ble Delhi High Court in CIT vs. Aero Traders Pvt. Ltd 2010 (1) TMI 32 - DELHI HIGH COURT has held that no penalty u/s 271(1)(c) can be imposed when income is determined on estimate basis - Thus no penalty is imposable on the facts of the present case. - decided in favour of assessee. Rejection of books of accounts - N.P. determination - Held that - We find that right from assessment year 2002-03 to the year under consideration, the net profit rate has ranged between 1.84% to 6.75%. A perusal of the assessment order also shows that the books of accounts were rejected before applying the net profit rate of 8%. AO has not given any reason for justifying the rejection of books of accounts except for mentioning that the books of accounts could not be held reliable on account of a large number of self-generated cash vouchers. Thus, this cannot be held to be a justifiable reason for rejecting the books of accounts. On a direct query from the Bench, both the parties have also agreed that interest of justice would be met if the net profit rate of 6% is directed to be applied in this year - We modify the order of the Ld. CIT (Appeals) to the extent that now the Assessing Officer shall compute the net profit by applying net profit rate of 6% as against 8%. - Decided partly in favour of assessee.

Summary

Issues involved:
1. Assessment year 2006-07 - Imposition of penalty u/s 271(1)(c) for alleged income suppression.
2. Assessment year 2009-10 - Dispute regarding the application of net profit rate by the Assessing Officer.

Analysis:

Issue 1: Assessment year 2006-07 - Penalty u/s 271(1)(c)
The case involved an appeal against the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961 for assessment year 2006-07. The Assessing Officer had imposed a penalty on the differential amount of net profit declared by the assessee and the net profit computed by the Ld. CIT (Appeals). The penalty was reduced by the Ld. CIT (Appeals) from ?17 lakh to ?5,95,815. The main argument against the penalty was that it was based on an estimation of profit without any defect in the accounting method of the assessee. The appellate tribunal held that penalty for furnishing inaccurate particulars of income cannot be imposed on an enhancement of net profit rate based on an estimate. Citing relevant case laws, the tribunal set aside the order of the Ld. CIT (Appeals) and directed the Assessing Officer to delete the penalty.

Issue 2: Assessment year 2009-10 - Net profit rate computation
In the appeal for assessment year 2009-10, the dispute was regarding the application of an 8% net profit rate by the Assessing Officer. The net profit rate had ranged between 1.84% to 6.75% in the preceding assessment years. The books of accounts were rejected without sufficient justification, leading to the imposition of a higher net profit rate. The tribunal found that a net profit rate of 6% would be more appropriate in this case. Consequently, the order of the Ld. CIT (Appeals) was modified to direct the Assessing Officer to compute the net profit using a 6% rate instead of 8%. As a result, the appeal for assessment year 2009-10 was partly allowed.

In conclusion, the appellate tribunal allowed the appeal for assessment year 2006-07 and partly allowed the appeal for assessment year 2009-10, emphasizing the importance of proper justification for penalties and accurate computation of net profit rates based on past financial results.