2023 (11) TMI 732 - AT - Income Tax

Estimation of profit when books of accounts are rejected - determining the total assessable income - HELD THAT - We find it to be most suitable and reasonable to apply the average profits earned by the assessee itself in the comparable years under which the business activities of the assessee firm were identical. We, therefore, are of the considered opinion that average percentage of profit for the FY 2011-12 to 2016-17 (except FY 2012-13) which comes to 0.57% (average of 0.91 0.09 0.37 0.68 0.81) shall be the most reasonable percentage of profit to be applied on the sales turnover of the assessee for AY 2013-14. However, since the assessment u/s 143(3), wherein certain additions were made, resulting the profit of the assessee assessed at Rs. 4.04 crore i.e. 2.21% of total sales turnover of Rs. 183.35 Crores. We find it appropriate to apply the rate of 2.21% on the sales turn over of the assessee firm to estimate its net profit margin from business of assessee for the AY 2013-14. Income from Interest and commission to added separately as directed by the order of Ld CIT(A). No infirmity in the order of Ld CIT(A) apart from rate of profit adopted for estimation of net profit margin while rejecting books of accounts u/s 145(3) of the Act, thus, we modify the order of Ld CIT(A) by scaling down the percentage of net profit margin to 2.21% on sales turnover for estimating the same while determining the total assessable income. Ld AO is directed to work out the estimated income from business accordingly. In the result appeal of the assessee is partly allowed .

Summary

Issues Involved:
1. Assumption of jurisdiction under Section 153A.
2. Rejection of books of accounts and estimation of profit.
3. Disallowance of specific expenses.
4. Validity of seized materials.
5. Nature of discrepancies in accounts.
6. Estimation of profit percentage.

Summary:

Assumption of Jurisdiction under Section 153A:
The assessee contended that the CIT(A) erred in confirming the assumption of jurisdiction under Section 153A of the Act and sustaining the search assessment without proper reasons. The tribunal noted that the search and seizure operation conducted on the assessee led to the discovery of parallel sets of accounts, which justified the assumption of jurisdiction.

Rejection of Books of Accounts and Estimation of Profit:
The CIT(A) rejected the books of accounts maintained by the assessee and estimated the profit at 30% of the total turnover based on the profit margin of the immediately preceding year. The tribunal upheld the rejection of the books of accounts under Section 145(3) due to discrepancies but modified the profit estimation from 30% to 2.21% of the sales turnover, considering the average profit margin of comparable years.

Disallowance of Specific Expenses:
The assessee argued that the CIT(A) failed to adjudicate the disallowance of various expenses such as production and processing expenses, repairs and maintenance, and salary charges. The tribunal noted that the CIT(A) did not address these specific disallowances individually but subsumed them under the estimated business income.

Validity of Seized Materials:
The tribunal considered the validity of the seized materials, which included parallel sets of accounts and unaccounted receipts/payments. The CIT(A) found the reasons given by the assessee for discrepancies in the accounts to be reasonable due to practical difficulties in maintaining accurate records. However, the tribunal upheld the rejection of the books of accounts based on the seized materials.

Nature of Discrepancies in Accounts:
The CIT(A) observed that the discrepancies in the accounts pointed out by the AO could not be wholly attributed to wrong claims of expenditure by the assessee. The tribunal agreed with this observation, noting that the assessed income resulting in a 57.12% profit margin was abnormally high and indicative of errors in the AO's findings.

Estimation of Profit Percentage:
The tribunal modified the CIT(A)'s estimation of profit from 30% to 2.21% of the sales turnover, based on the average profit margin of the assessee in comparable years. The tribunal found this percentage to be more reasonable and reflective of the assessee's actual business performance.

Conclusion:
The tribunal partly allowed the assessee's appeal by modifying the profit estimation and dismissed the revenue's appeal. The tribunal directed the AO to work out the estimated income from the business accordingly.