2023 (2) TMI 762 - AT - Income Tax

Estimation of net profit rate - Rejection of books of accounts - HELD THAT - Merely holding the comparable company in similar line of business is only the first step in undertaking a benchmarking analysis. The analysis also needs to consider various other factors and take into consideration functions, risks, and assets employed which apparently has not been undertaken in the instant case and the assessee has also not been confronted with the same. In view of the same, we find that comparing the results of the assessee with an external comparable is not justifiable in the instant case. Results which are on declining scale are declared on reduced turnover over the past and subsequent years which have been accepted by the Revenue and thus lend credence to the assessee's submission that its profitability has been effected due to reduced turnover without commensurate reduction in fixed costs. No justifiable basis has been stated by the ld. CIT(A) while estimating the net profit rate at the rate of 15% which is again arbitrary and no linkage with any material or past history of the assessee. No justifiable basis to disturb the declared results by the assessee even where the books of accounts have been rejected and the addition so made by estimating the net profit rate at the rate of 40% and sustenance thereof by the ld. CIT(A) at 15% is hereby directed to be deleted. Ground of the assessee's appeal is allowed.

Summary

Issues:
1. Appeal against order of CIT(A) under section 250(6) of the Income Tax Act, 1961.
2. Rejection of books of accounts by AO and application of net profit rate.
3. Modification of net profit rate by CIT(A) from 40% to 15%.
4. Disallowance of depreciation, interest, and other deductions by AO.
5. Allegation of completing assessment hastily without providing a reasonable opportunity for hearing.

Analysis:
1. The appeal was filed against the CIT(A)'s order under section 250(6) of the Income Tax Act, 1961. The Assessee challenged various aspects of the CIT(A)'s decision.
2. The AO rejected the Assessee's books of accounts and applied a net profit rate of 40%, resulting in a significant addition to the declared loss. The Assessee contended that the reduction in turnover without a corresponding decrease in fixed expenses led to the loss, and the 40% profitability rate was harsh.
3. The CIT(A) modified the net profit rate to 15% from 40%, but the Assessee argued that the loss should have been accepted. The Assessee also highlighted the acceptance of a lower profit rate in a subsequent assessment year for the same business.
4. The AO disallowed deductions of depreciation, interest, and other statutory expenses, which the Assessee claimed were mandatory. This issue was raised in the appeal.
5. The Assessee alleged that the assessment was completed hastily without affording a proper opportunity to be heard, raising concerns about procedural fairness.

Judgment:
The Tribunal found that the AO's estimation of the net profit rate at 40% was arbitrary and not based on the Assessee's past history or comparable cases. The Tribunal noted the declining profitability trend of the Assessee over the years, with accepted results in previous and subsequent assessments. The Tribunal held that the CIT(A)'s reduction of the net profit rate to 15% was also arbitrary and lacked justification. Consequently, the Tribunal directed the deletion of the addition made based on the 40% net profit rate. Other grounds of appeal were dismissed as infructuous, and the Assessee's appeal was allowed.