2022 (7) TMI 270 - AT - Income Tax

GP estimation - incorrectness of books of accounts maintained by the assessee - whether CIT-A erred confirming Gross profit margin at a high rate calculated on the basis of subsequent year's figures - HELD THAT - We are of the considered view that under these facts and circumstances, a reasonable estimation towards gross profit taking into account, the nature of business carried out by the assessee and risk involved in the said business is only a solution. Hence, the profit margin estimated by the AO is higher side and thus, direct the AO to estimate gross profit of 8% on total sales declared by the assessee for both the assessment years. Estimation of administrative expenses - AO has rejected books of accounts and estimated administrative expenses for whole year at Rs.30 lakhs which includes, remuneration, salaries and wages, depreciation, etc . - As taking into account, the nature of business of the assessee and also the reasons given by the AO to estimate administrative expenses, we are of the considered view that both have failed to justify their case with necessary reasons and thus, we direct the AO to allow 90% of total expenses claimed by the assessee in their financial statement filed for the relevant assessment year and recompute profit from the business taking into account gross profit @8% on total sales and allow 90% of expenses as claimed by the assessee.

Summary

Issues:
- Dispute over gross profit margin calculation based on subsequent year's figures
- Disagreement on estimating general expenditures without basis

Analysis:
1. The appeals were filed against orders of the Commissioner of Income Tax (Appeals) for assessment years 2015-16 & 2016-17. The appellant, a partnership firm supplying chicken, faced assessment due to a search operation at a related company. The Assessing Officer (AO) estimated gross profit based on purchase and sale rates, concluding a profit of Rs.11 per KG. Expenses were estimated at Rs.30 lakhs. The Commissioner affirmed the AO's findings, leading to the appeal.

2. The appellant argued against extrapolating the profit margin for the entire year, citing fluctuating chicken prices due to various factors. The appellant also contested the estimated administrative expenses of Rs.35 lakhs, claiming necessary expenses were ignored. The Department supported the lower estimates, citing lack of evidence from the appellant.

3. The Tribunal noted the fluctuating nature of chicken prices and the perishable product's risks. It found the AO's extrapolation method incorrect and directed a gross profit margin of 8% on total sales for both years. Regarding expenses, the Tribunal found the AO and Commissioner's estimates unjustified, directing to allow 90% of claimed expenses and recompute profits accordingly.

4. In conclusion, the Tribunal partly allowed the appeals, emphasizing the need for reasonable estimations considering the nature of the business and risks involved. The judgment aimed to strike a balance between accurate assessments and fair considerations, ultimately providing relief to the appellant in part.