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2020 (5) TMI 120 - AT - Income TaxEstimation of gross profit - Rejection of books of accounts - AO has applied the provisions of section 44AF - HELD THAT - AO has estimated the gross profit rate of 5% as against 1.76% without even rejecting the books of accounts so maintained by the assessee. Even where the complete books of accounts could not be produced for verification and the assessee has only produced copy of audited financial statements along with audit report, where the figures of sales and purchases have been accepted and in absence of opening and closing stock, we find that there cannot be a case of deemed rejection of books of accounts and estimation of gross profit rate. Estimating gross profit rate, the AO has applied the provisions of section 44AF ignoring the fact that the assessee was engaged in the purchase and sale of animals which doesn t technically falls under the category of retail trade of goods and merchandise, and in any case, the turnover so declared by the assessee and accepted by the Assessing officer for the year well beyond the prescribed limits u/s 44AF. There is a change in the business model of the assessee as compared to the previous year which has apparently escaped the attention of the AO where he has compared the current year results with that of the previous year and in absence of any reasonable basis for estimation of gross profit rate in form of any comparable third party data, the estimation of gross profit rate of 5% cannot be sustained - Appeal filed by the assessee is allowed.
Issues Involved:
1. Legality of reopening the assessment under Section 148. 2. Comparison of business results with the preceding assessment year. 3. Application of net profit rate of 5% under Section 44AF. 4. Completion of assessment under Section 144 due to non-production of books. 5. Addition to the income and completion of assessment on a higher total income. Issue-wise Detailed Analysis: 1. Legality of Reopening the Assessment under Section 148: The assessee contended that the reopening of the assessment was based on suspicion relating to cash deposits in the bank account, which is not permissible for verification purposes as per settled legal propositions. The recorded reasons did not specify whether the transactions were deposits or withdrawals and lacked proper material or records. The approval by the Pr. CIT, Jaipur was mechanical and lacked application of mind. The Tribunal found that the Assessing Officer (AO) had not highlighted any discrepancy or mismatch in the transactions and no addition was made towards unrecorded sales or purchases. Hence, the subsequent estimation of profits on the declared turnover could not be sustained, and the addition deserved to be set aside. 2. Comparison of Business Results with the Preceding Assessment Year: The assessee argued that the AO erred in comparing the business results with the preceding year as the activities were different. The gross profit (G.P.) rate had reduced due to a change in business operations from selling meat to direct sales of animals. The Tribunal noted that there was a change in the business model which escaped the AO's attention. The AO compared the current year results with the previous year without any reasonable basis for estimation of the gross profit rate. 3. Application of Net Profit Rate of 5% under Section 44AF: The AO applied a net profit rate of 5% on the declared turnover despite the assessee's case being covered under Section 44AB. The assessee maintained that the books were audited, and the turnover was accepted. The Tribunal found that the AO had not rejected the books of accounts and the estimation of the gross profit rate was not justified. The AO's application of Section 44AF was incorrect as the assessee was engaged in the purchase and sale of animals, which does not fall under the category of retail trade of goods and merchandise. Moreover, the turnover was beyond the prescribed limits under Section 44AF. 4. Completion of Assessment under Section 144 due to Non-production of Books: The assessee could not produce the original books of account as the assessment was reopened after six years, and the required period for maintaining the books had expired. The Tribunal noted that the assessee had filed the return of income with audited statements and the audit report under Section 44AB. The AO completed the assessment under Section 144 for non-production of books and applied a net profit rate of 5%. The Tribunal found that the AO's finding regarding non-production of bills and vouchers was incorrect as the assessee was not required to maintain such records after the specified period. 5. Addition to the Income and Completion of Assessment on a Higher Total Income: The AO made an addition of ?34,28,749 to the income, completing the assessment on a total income of ?38,72,370 as against the returned income of ?4,43,620. The Tribunal found that the AO had not made any addition in respect of the reasons for which the matter was reopened. The estimation of profits on the declared turnover was not sustainable, and the addition deserved to be set aside. Conclusion: The Tribunal allowed the appeal filed by the assessee, directing the deletion of the addition of ?34,28,749 made by the AO. The assessment reopening under Section 148 was found to be based on insufficient grounds, and the application of Section 44AF and estimation of the net profit rate were deemed unjustified. The Tribunal emphasized the need for proper material and reasonable basis for any additions or estimations in the assessment process. Order Pronounced on 28/04/2020.
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