2021 (1) TMI 779 - AT - Income Tax

Estimation of income - Suppressed turnover/ sales - NP estimation - Additions based on deposits made in the bank account of the assessee - HELD THAT -The income of the assessee is required to be estimated by adopting some proper and reasonable criteria being GP/NP on the turnover of the assessee. The assessee has surrendered the income at N.P. rate of 2% on the total turnover as detected by the AO whereas AO has estimated the income of the assessee by adopting NP at 5% on such turnover. There is no quarrel on the point that while estimating the income come the Assessing Officer has to apply some reasonable and proper criteria and the comparative rate of profit in the same trade/business is a proper guidance for estimation of income. t is settled preposition of law that the past history of the assessee regarding GP/NP is a proper guidance and in the absence of past history the prevailing GP/NP in the same trade/business is also considered as a proper guidance. Therefore, there cannot be different para meters for estimation of income in case of assessee who is maintaining books of account but were rejected by the Assessing Officer and in the case where the assessee is not maintaining the books of account. Estimation of the income of the assessee should be based on some reasonable and proper criteria and not based on an arbitrary rate adopted by the Assessing Officer. The Assessing Officer has not given any reasonable basis of adopting NP rate at 5% except the fact that the assessee is not maintaining the books of account. Non maintenance on books of account cannot be a ground leading to higher NP to be adopted by the Assessing Officer . Hence, the income of the assessee ought to have been estimated by adopting the prevailing rate of N.P. in the same trade/business. Looking into the comparative cases produced by the assessee, it is found that the N.P. declared by those entities/persons in the same trade is less than 2%, whereas the assessee has offered the income at N.P. of 2% which in line with the prevailing rate of NP in the business of wholesale trading of cloth. Hence, the income offered by the assessee by applying NP at 2% is proper and is reasonable - Decided in favour of assessee.

Summary

Issues:
1. Dismissal of appeal by CIT(A) without appreciating facts and law
2. Addition of income by Assessing Officer at 5% NP rate instead of 2% admitted by assessee
3. Justification of NP rate applied for estimating income
4. Comparison of NP rates with other entities in the same business
5. Rejection of comparative NP cases by authorities due to lack of maintained books of account

Issue 1:
The appeal by the assessee was directed against the order of the CIT(A) for the AY 2014-15, challenging the dismissal of the appeal without proper appreciation of facts and law presented through written and oral submissions.

Issue 2:
The Assessing Officer estimated the income of the assessee at 5% NP on the total turnover, amounting to ?9,25,586, as opposed to the 2% NP admitted by the assessee. The CIT(A) confirmed this addition, leading to a discrepancy in the assessed income.

Issue 3:
The Tribunal considered the necessity of estimating the income of the assessee based on a reasonable and proper criteria, such as GP/NP on the turnover. The assessee offered income at 2% NP, supported by comparative cases, while the Assessing Officer's adoption of 5% NP lacked a reasonable basis.

Issue 4:
The assessee provided comparative cases of entities in the same business with NP ratios below 2%, aligning with the assessee's declared 2% NP. The Tribunal emphasized that the prevailing NP in the business of wholesale cloth trading supported the assessee's offered NP rate and deemed it proper and reasonable.

Issue 5:
Authorities rejected the comparative NP cases due to the assessee not maintaining audited books of account. However, the Tribunal highlighted that the rejection of book results should lead to estimation based on a reasonable and proper criteria, such as past history or prevailing NP in the trade, rather than an arbitrary rate. The Tribunal found the 5% NP adopted by the Assessing Officer unjustified, leading to the deletion of the addition made.

In conclusion, the Tribunal allowed the appeal filed by the assessee, emphasizing the importance of estimating income based on reasonable criteria and supporting the assessee's offered NP rate of 2% over the Assessing Officer's arbitrary 5% NP rate.