2023 (1) TMI 326 - HC - Income Tax

Rejection of books u/s 145 - NP estimation - AO held estimating the net profit at 0.05 % of the assessee company - HELD THAT - There has been equitable balance struck by the authorities when it found that the Assessing Officer had not given any internal or external comparitive figures of sector of the assessee s business while arriving at the GP/NP ratio of 7%. The business is of trading of steel items. The manufacturing activities had almost stopped. NP ratio of 7% being impractical and completely unacceptable and as most of the trading concerns have been operating at the GP ratio of 0.5% to 1%, when both the authorities have deemed it appropriate to apply 0.5% ratio, no indulgence is necessary. These are all essentially and predominantly the factual aspects analysed based on the material adduced before these authorities and that also by giving cogent and sound reasons, in absence of any question of law, much less any substantial questions of law for the court to admit this matter, this appeal is dismissed.

Summary

Issues:
1. Estimation of net profit for assessment year 2010-11 under the Income Tax Act, 1961.
2. Justification of upholding the order of the Ld.CIT(A) by the Hon'ble Tribunal.
3. Correctness of rejecting the books of accounts under Section 145(3) of the IT Act.

Analysis:

Issue 1 - Estimation of Net Profit:
The appellant, a private limited company engaged in trading iron and steel, filed its return of income for assessment year 2010-11. The Assessing Officer, after scrutinizing the case, found discrepancies in the transactions involving the purchase and sale of goods with related parties. These transactions raised doubts due to significant losses incurred, leading to the rejection of the books of accounts maintained by the appellant. The Assessing Officer estimated the net profit at 7% of the turnover. The CIT (Appeals) later revised this estimation to 0.5% considering the market scenario and lack of comparables in the sector. The Tribunal upheld this decision, emphasizing the impracticality of a 7% net profit ratio in the trading business of steel items. The authorities found the 0.5% ratio more reasonable based on factual analysis, leading to the dismissal of the appeal.

Issue 2 - Justification of Tribunal's Decision:
The Tribunal supported the CIT (Appeals) by rejecting the approach of the Assessing Officer in relying on the same set of books of accounts that were earlier rejected. The Tribunal considered the profitability of the assessee in preceding and succeeding years, along with the industry standards, to arrive at a just estimation of net profit at 0.5% of turnover. By balancing the factual aspects and lack of external comparatives, the Tribunal and CIT (Appeals) deemed the 0.5% ratio appropriate, dismissing the appeal challenging their decision.

Issue 3 - Rejection of Books of Accounts:
The Assessing Officer rejected the books of accounts under Section 145(3) of the IT Act due to intra-group adjustments and mis-matches between purchase and sale prices, indicating artificial transactions. The CIT (Appeals) upheld this rejection, emphasizing the need for a correct method to determine the notional gross profit after such discrepancies were noted. The Tribunal concurred with this decision, highlighting the need to consider the true profitability of the assessee by adopting a realistic net profit ratio of 0.5% given the nature of the business and lack of comparable figures.

In conclusion, the High Court of Gujarat upheld the decisions of the lower authorities, emphasizing the factual analysis and industry standards in estimating the net profit for the appellant, ultimately dismissing the appeal due to the absence of substantial legal questions.