2021 (10) TMI 1203 - AT - Income Tax

Rejection of books of accounts - best judgment assessment - gross profit estimation - CIT(A) was of the view that 1% to 2% on profits may be estimated depending upon the market situation in such cases - CIT(A) noted that all transactions in assessee s case are with the associated concerns and no physical transfer of goods took place thus profit cannot be estimated at a normal market rate. In fact, it calls for appropriate rate HELD THAT - It is well settled that in a best judgment assessment there is always a certain degree of guesswork. No doubt the authorities concerned should try to make an honest and fair estimate of the income even in a best judgment assessment and should not act totally arbitrarily. Department must act judiciously, while passing the order u/s 144 of the Act and must be guided by judicial consideration and by rule of justice, equity and good conscience. And also that there must be honest and fair estimate of the proper figure of assessment, for which consideration of local knowledge and repute, besides the previous returns an assessment of the assessee concerned, and all other matters must be taken into account for fair and proper estimate which of course, would fall in the category of guesswork, but a honest guesswork. In the assessee s case under consideration, we note that assessee did not submit books of accounts. On examination of the profit and loss account of the assessee, the ld CIT(A) noted that total expenditure other than purchases mentioned in the profit and loss account, is a negligible amount of ₹ 2,71,150/- for business turnover of ₹ 2,39,05,01,881/-. Therefore, books of accounts of the assessee cannot be believed. The breakup of these expenses also shows that no expenses were recorded towards transportation. With negligible amount of transportation cost, how the assessee has achieved turnover of ₹ 2,39,05,01,881/-? Therefore, it simply implies that the transactions of purchase and sales are made through book entry. Needless to say, that no physical transfer of goods has taken place in view of the fact that there was no transportation expenses recorded. Hence, we are of the view that Gross Profit rate at 1% sustained by ld CIT(A) is quite reasonable. There is gross failure on the part of the assessee, as the assessee has deliberately refrained from producing the books of account till the very last stage of the assessment proceedings. The reason being that the books of account were not good enough to pass the test of verification of the Assessing Officer. It needs to be appreciated that verification of the books of account is a primary and fundamental tool for finalizing the assessment under section 143(3) - in the light of the judgment of the Hon ble Apex Court in the case of CIT Vs. Simon Carves Ltd 1976 (8) TMI 4 - SUPREME COURT , and taking into account the assessee s facts, as narrated above, we are of the view that estimation made by ld CIT(A) is based on sound reasoning. That being so, we decline to interfere with the order of Id. CIT(A) in sustaining the additions at the rate of 1% of gross profit. His order on these additions are, therefore, upheld and the grounds of appeal of the assessees, as well as Revenue are dismissed.

Summary

Issues Involved:
1. Addition of 1% of gross profit by CIT(A) versus gross profit declared by assessee.
2. Reduction of gross profit from 3% to 1% by CIT(A) in Revenue's appeals.

Issue-wise Detailed Analysis:

1. Addition of 1% of Gross Profit by CIT(A) versus Gross Profit Declared by Assessee:

The primary issue raised by the assessee in all eleven appeals is that the CIT(A) erred in upholding the addition of 1% of gross profit against the gross profit declared by the assessee in their books of accounts, which varied between 0.01% to 0.07%. The assessee argued that the gross profit declared in their audited financial statements should be accepted and the addition confirmed by the CIT(A) should be deleted.

The Assessing Officer (AO) had issued notices under sections 143(2) and 142(1) of the Income Tax Act, 1961, but the assessee failed to produce the necessary books of accounts, purchase invoices, sales invoices, and other relevant details. The AO observed that the gross profit ratio declared by the assessee was unusually low and estimated the gross profit at 3% of the total turnover. Consequently, the AO added the difference amount to the total income of the assessee.

Upon appeal, the CIT(A) noted that the assessee's transactions were primarily with group associates and there were no transportation expenses recorded, indicating that the transactions were merely book entries without any physical transfer of goods. The CIT(A) upheld the AO's decision to estimate the gross profit but reduced the rate from 3% to 1%, considering it fair and justifiable given the circumstances.

2. Reduction of Gross Profit from 3% to 1% by CIT(A) in Revenue's Appeals:

In the five appeals filed by the Revenue, the issue was that the CIT(A) erred in reducing the gross profit from 3% (as estimated by the AO) to 1%. The Revenue argued that the addition made by the AO at 3% of gross profit should be sustained.

The Tribunal noted that the AO had rejected the books of accounts due to the assessee's failure to produce them for verification. The AO's estimation of 3% gross profit was based on the nature of the business and the usual gross profit ratio in the textile trading industry. However, the CIT(A) found that the transactions were made through book entries without physical transfer of goods and that the expenses recorded were abnormally low. Therefore, the CIT(A) considered a 1% gross profit rate to be more appropriate and fair.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to estimate the gross profit at 1% of the total turnover, finding it reasonable and based on sound reasoning. The Tribunal dismissed the appeals filed by both the assessee and the Revenue, affirming the CIT(A)'s order. The Tribunal emphasized the importance of honest and fair estimation in best judgment assessments and noted that the assessee's failure to produce books of accounts justified the rejection of the book results.

Order Pronouncement:

The order was pronounced in the open court on 25/10/2021 by placing the result on the Notice Board as per Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963.