2021 (8) TMI 794 - AT - Income Tax

Rejection of books of accounts - Estimation of income - Addition by adopting net profit rate of 4.5% before depreciation on the gross receipts of transportation business - HELD THAT - Since the entire activity has resulted in negligible income and even the amount received for transport work has also not generated any profit then this explanation of the assessee cannot be accepted for doing the trading activity of bricks and sand without any income. It is pertinent to note that after rejection of books of accounts the income of the assessee was required to be estimated on some reasonable basis. The assessee has also not brought on record any past history of net profit declared by the assessee as well as any comparable rate to contradict the net profit rate applied by the Assessing Officer at 1%. Accordingly, in the facts and circumstances of the case, when the assessee has not produced any material or facts to dispute the reasonableness of the net profit applied by the Assessing Officer @ 1% after rejection of books of accounts then this ground of the assessee's appeal is de void of any merit. appeal of the assessee is partly allowed.

Summary

Issues:
1. Assessment made on an income discrepancy
2. Addition to income based on net profit rate in transportation business
3. Addition to income based on net profit rate in trading business
4. Validity of findings and observations by CIT(A)

Analysis:
1. The appeal challenged an assessment for the year 2010-11, disputing the income assessed compared to the returned income. The assessee argued that the income declared based on closed books of accounts should have been accepted, questioning the assessment's validity both factually and legally.

2. Regarding the addition in Singh Transports, the Assessing Officer used a net profit rate of 4.5% compared to the assessee's disclosed rate of 3.96%. The AR contended that the depreciation amount considered by the Assessing Officer was incorrect, leading to an unjustified higher net profit rate. The Tribunal found the Assessing Officer's approach arbitrary and directed a re-computation based on the average net profit of the preceding years.

3. In the case of Singh Traders, the Assessing Officer applied a net profit rate of 1% against the assessee's disclosed rate of 0.13%. The AR explained the low profit due to purchasing sand at an inflated rate, but the Tribunal upheld the Assessing Officer's decision, finding the explanation insufficient to justify the low profit margin.

4. The Tribunal emphasized the importance of using a reasonable basis for income estimation after rejecting books of accounts. It highlighted the need for past history or comparable rates to guide such estimations. The Tribunal deemed the Assessing Officer's application of a 4.5% net profit rate without proper basis as arbitrary, directing a re-calculation based on a 1.34% average net profit rate from preceding years.

5. Ground No. 4, being general, was disposed of in conjunction with Grounds 2 and 3. Ultimately, the appeal was partly allowed, recognizing discrepancies in the Assessing Officer's approach and directing recalculations based on more reasonable and justifiable criteria.