Estimation of Net Profit of 10% by CIT(A) is wrong and 2.5% rate was more appropriate : ITAT

Summary in Key Points:

Issue 1 (Net Profit Estimation): Whether the Commissioner (Appeals) was justified in estimating the net profit rate at 10% when the assessee had consistently declared lower rates in previous and subsequent years, and the Assessing Officer (AO) had accepted those lower rates.
Issue 2 (Disallowance of Receipts): Whether it was permissible to make a further addition for contract receipts after those receipts were already included in the total turnover for estimating net profit.
Facts: The assessee, engaged in contract work, had their books of account rejected. The AO made an addition for alleged suppressed receipts. The Commissioner (Appeals) estimated the net profit rate at 10% for making further additions. However, the assessee had consistently declared and the AO had accepted much lower net profit rates in other years.
Decision: The ITAT held that the Commissioner (Appeals) erred in applying a 10% net profit rate and that a 2.5% rate was more appropriate. The ITAT also held that further additions for contract receipts were not permissible after those receipts were already included in the turnover for net profit estimation.

Decision:

Net Profit Estimation: The ITAT ruled in favor of the assessee, stating that since the books of account were rejected, the net profit rate should be estimated based on well-accepted norms and fundamental rules. Considering the consistent lower rates declared by the assessee and accepted by the AO in other years, a 2.5% net profit rate was deemed just and proper.
Disallowance of Receipts: The ITAT also ruled in favor of the assessee on this issue, stating that once the impugned contract receipts were included in the total turnover for estimating net profit, further additions for the same amount were not permissible.

Important Note: This case highlights the importance of consistency and fairness in estimating net profit rates when books of account are rejected. The ITAT emphasized that the estimation should be based on well-accepted norms and consider the assessee’s past and subsequent declarations and the AO’s acceptance of those declarations. Furthermore, it clarified that double additions for the same income are not permissible, ensuring that the assessment process remains fair and reasonable.

IN THE ITAT RAIPUR BENCH

Mohan Sukumaran

Deputy Commissioner of Income-tax

Shamim Yahya, Accountant member
and C.M. Garg, Judicial member

IT Appeal No. 62 (RPR) of 2013
[Assessment Year 2008-09]

DECEMBER 29, 2016

Ms. Richa Khatri for the Appellant. P.K. Mishra for the Respondent.

JUDGMENT

C.M. Garg, Judicial Member. – The present appeal by the assessee is directed against the order or learned Commissioner of Income-tax (Appeals), Bilaspur (C.G.), dt. 28th March, 2013 for the Asst. yr. 2008-09.

Assessee’s application for admission of additional grounds along with revised grounds.

2. We have heard the argument of both sides and carefully perused the application under consideration. The learned counsel submitted that the additional ground of appeal along with revised grounds of appeal may kindly be admitted for hearing. as these go to the root of the matter and these can be disposed of on the basis of material available on the record. The learned counsel submitted that these additional and revised grounds filed with revised Form No. 36 are merely an elaboration of earlier grounds. Thus, the same may kindly be admitted for consideration in view of the ratio laid down by the Hon’ble Supreme Court in the case of NTPC Ltd. reported in

2.1 The learned Departmental Representative objected to the admission of the additional and revised grounds. However, the learned Departmental Representative fairly accepted that the grounds are merely elaboration of earlier grounds and the additional grounds can be decided on the basis of material already on record.

2.2 On careful consideration of above rival submissions, at the outset, we note that the assessee has originally raised grounds of appeal before the Tribunal at the time of filing appeal. Now, he is praying to admit revised grounds as well as additional grounds by way of present application. On careful comparison of earlier and revised grounds, we find that the revised grounds No. 1 to 4 are mere elaboration of earlier grounds and additional ground No. 5 is urging for wrong application of ratio of decisions by the CIT(A) which can be decided on the basis of the record. In view of above, we have no hesitation to hold the revised and additional grounds are admitted for hearing. Accordingly, application of the appellant is allowed.

2.3 The revised and additional grounds of assessee read as follows:

“1. The learned CIT(A) has erred in law as well as on facts, in applying NP

rate at 10% of the ‘gross contract receipts’ shown at Rs. 7,95,56,190 as per the books of account produced before the learned AO on 30th Dec., 2010, without giving any basis for such arbitrary estimation and without considering the past history of the assessee’s own. case, more so. The learned CIT(A) has himself admitted that “there is no dispute in total turnover at Rs. 7,95,56,190”.

2. The learned CIT(A) has erred in law as well as on facts, in confirming the action of the learned AO for the alleged ‘suppressed receipts’ of Rs. 52,91,361 as income of the assessee, while, on the other side, he has duly approved the gross contract receipts’ at Rs. 7,95,56,190, which is shown in the books of account produced before the learned AO on 30th Dec., 2010.

3. The learned CIT(A) has erred in law as well as on facts, in confirming the action of the learned AO for the alleged ‘direct and indirect expenses, shown in the ROI filed on 31st March, 2009, as fully correct, while it was mistakenly filled up by the staff of the then counsel of the assessee, and thus, the books of account produced before the learned AO on 30th Dec., 2010, deserves to be considered for estimation of income/ adjudication on the matter.

4. The learned CIT(A) has erred in law as well as on facts, in not applying the rule of “profit embedded in undisclosed business receipts” and thereby, certain reasonable and fair NP rate is to be applied on such ‘undisclosed business receipts’ of Rs. 52,91,361 when he was of the considered opinion that the ROI filed on 31st March, 2009 was the correct figures, and thus, in place of Rs. 52,91,361, the reasonable NP amount deserves to be added to the income of the assessee.

5. The learned CIT(A) has erred in law as well as on facts, in applying the decision of Pest-O-Kill v. CIT (2009) 30 DTR (Chhattisgarh) 285, Smt J. Rama v. CIT (2010) 46 DTR (Kar) 248 : (2010) 236 CTR (Kar) 105 which are distinguishable on facts and not applicable to the facts of the assessee’s case.

These above grounds are raised by the assessee for the first time before your honor’s bench and in view of the decision of National Thermal Power Co. Ltd. (1999) 157 CTR (SC) 249 the Hon’ble Supreme Court has held.that the assessee is entitled to urge question of law on the basis of facts already available on record and Tribunal had jurisdiction to examine a question of law which though not arose before lower authorities but arose before it from facts as found by lower authorities and having a bearing on tax liability of assessee, Considering the above, it is kindly requested to your Honor’s Bench to admit the revised/rescheduled grounds along with ‘additional grounds’ of appeal.”

Ground Nos. 1 to 3

3. Apropos ground Nos. 1 to 3, the learned counsel for the assessee submitted that the AO and CIT(A) have accepted that the total business receipts/turnover of the assessee during financial year 2007-08 pertaining to assessment year 2008-09 was of Rs. 7,95,56,190 from the contract work. The learned Departmental Representative pointed out that the AO has checked and verified the books of account produced by the assessee and made only two additions. The Authorized Representative further pointed out that the first addition of Rs. 52,91,361 cannot be held as sustainable as the entire receipt cannot be treated as income only percentage of OP or NP can be considered for addition. The learned Authorized Representative again pointed out that the second addition has been made under over precaution and on estimate basis by stating that this addition is being made to cover up possible leakage of Revenue which is also not sustainable without bringing any material on record to show that the claim of expense made by the assessee is either incorrect or bogus or partly not sustainable or acceptable.

3.1 The learned counsel placing reliance on plethora of decisions, including decisions of the Hon’ble Rajasthan High court in the case of CIT v. Jaimal Ram Kasturi 33 (Rajasthan) and Ashok Bhai Bharat Sethi & Party [2013] (Rajasthan) submitted that if the GP rate declared by the assessee is better than the previous year then even after rejection of books of account under section 145(3) of the Act addition is not automatic, unless there is some valid reason for doing so. The learned Authorized Representative also pointed out that in the present case the authorities below ignored this very point that the NP rate declared by the assessee is 1.91% of turnover which is better than previous assessment years 2006-07 and 2007-08. Thus, no addition could have been made even after rejection of books of account. The learned Authorized Representative vehemently pointed out that after rejection of books of account the estimation of GP/NP has to be made on the basis and keeping in view the earlier and subsequent financial year results of the assessee or on the basis of comparable cases similar to the assessee. But the CIT(A) has enhanced the assessment ignoring these fundamental and well accepted principles. Thus, enhancement of addition may be dismissed and the estimation of NP which is higher than earlier years may kindly be accepted.

3.2 Replying to the above, the learned Departmental Representative submitted that the assessee has not disputed rejection of books of account by the CIT(A) under section 145(3) of the Act and estimation of NP made by the CIT(A) is quite correct and justified. Thus, the enhancement made by the first appellate authority may kindly be accepted. However, he could not controvert this fact that the NP rate in earlier and subsequent assessment years was not 10 per cent but it was below 2 per cent. The learned Departmental Representative strongly supported the order of the CIT(A) and contended that no interference is required in the said order. Hence, appeal may kindly be dismissed.

3.3 The learned Authorized Representative also placed rejoinder to the above submissions of the assessee (sic-Revenue) and contended that the CIT(A) took a hyper approach in estimating the NP rate @ 8.46 per cent as he added the disputed amount Which could not be included in the trading receipts due to inadvertent error of the accountant but if books of account have been rejected then these infirmities become academic and have no relevance for estimating NP rate for the period under consideration. However, the learned Authorized Representative fairly accepts that the assessee has not challenged the rejection of books of account by the CIT(A) and thus only issue which remains for adjudication is the estimation of NP rate.

3.4 On careful consideration of above rival submissions, at the outset, we may observe that the assessee has not raised any ground challenging the rejection of books of account. Thus, we safely presume that the assessee has accepted the rejection of books of account under s. 145(3) of the Act. It is well accepted proposition of tax jurisprudence that after rejection of books of account the authorities have two options, viz., (i) estimation of NP rate on the basis of earlier and subsequent years financial results of the assessee, and (ii) estimation of NP rate on the basis of some comparable cases having similar nature of business but in the present case, after rejection of books of account, the CIT(A) picked up returned profit as declared by the assessee plus of amount of addition made by the AO and, thereafter, he calculated the NP rate @ 8.46 per cent of turnover and further enhanced the same to 10 per cent. For enhancing the assessment, which is not a proper and justified approach, The CIT(A) ignored this fact that the assessee declared NP @ 1.42 per cent and 1.37 per cent in asst. yrs. 2006-07 and 2007-08, respectively which was not disputed by the AO. The CIT(A) also ignored that in the subsequent asst. yr. 2009-10 and 2010-11 the AO in the order passed under s. 143(3) of the Act accepted the NP rate of 1.66 per cent and 1.90 per cent respectively. The CIT(A) also did not consider any comparable case for making estimation of 10 per cent thus, we are inclined to hold that the CIT(A) was not correct and justified in taking 10 per cent of NP rate for making inherent and further addition to the income assessed by the AO. Consequently, we are of the view that the first appellate order on this count is not sustainable and thus we dismiss the same.

3.5 At this juncture, we may point out that since the assessee has accepted rejection of books of account and, therefore, estimation of NP rate has to be made as per well accepted norms and fundamental rules. Since in the present case, the NP rate is available before us, thus it is not required to take or consider any comparable case. Further, as we have cancelled the estimate of NP rate @ 10 per cent as made by the CIT(A), therefore, we find it appropriate to proceed to estimate NP rate on the oasis of earlier or subsequent year financial results of the assessee. Admittedly, the AO accepted NP rate @ 1.66 per cent and 1.90 per cent in asst. yrs. 2009-10 and 2010-11 respectively in the assessment orders passed under s. 143(3) of the Act, thus, in our considered opinion, if we consider all possible leakage of Revenue. We reach to a logical conclusion that the NP rate @ 2.5 per cent of turnover of Rs. 7,95,56,190 would be just and proper which would also meet ends of justice. Our above noted view also get strong support from the ratio of the decisions of Hon’ble Rajasthan High Court in the case of Jaimal Ram Kasturi (supra) and Ashok Bhai Bharat Sethi & Party (supra) and the decision of Hon’ble Punjab & Haryana High Court in the case of Arvind Baloni v. ITAT(Punjab & Haryana) as relied by the learned Authorized Representative. Accordingly, ground Nos. 1 to 3 of the appeal is allowed in the manner as indicated above and thus, the AO is directed to recompute the income accordingly.

Grounds No. 4 and 5

4. Apropos ground Nos. 4 and 5 of appeal, the learned Authorized Representative contended that when the CIT(A) after rejecting books of account proceeded to estimate the NP in ratio of the turnover/trading gross receipts of the assessee then other additions on the same’ dispute cannot be made. The learned Departmental Representative strongly supported the action of the AO and wanted that when the assessee claimed and debited the entire expenditure pertains to the contract under which he received the amount of contract receipt which was not included in the return has to be added to the return of income of the assessee.

4.1 On careful consideration of above, first of all, we may point out that when the books of accounts has been rejected and the CIT(A) proceeded to estimate the NP rate in the ratio of turnover/trading receipts which also include impugned contract receipt of Rs. 52,91,361 then the addition of the same amount cannot be allowed as it would amount to double addition. This addition made by the AO, and included by the CIT(A) in the enhanced income of the assessee cannot be held as validly sustainable So far as ratio of the decision of Hon’ble Jurisdictional High Court in the case of Pest-O-Kill (supra) is concerned in that case no explanation was given by the assessee regarding difference between gross contract receipts as per TDS certificated and as per books of accounts and thus it was treated as income of the assessee but in the present case the CIT(A) has rejected books of account and had proceeded to estimate NP rate on the total amount of turnover of Rs. 7,95,56,190 which includes amount of Rs. 52,91,361 received from M/s. Dudia lndustrial (P) Ltd., Kolkata then no further addition on the same amount cannot be made Thus, in our humble understanding, benefit of the ratio of this decision is not available for the Revenue in the instant case having dissimilar facts and circumstances.

4.2 ln the case of Smt. J. Rama v. CIT (supra) the Hon’ble Karnataka High Court noted that when the assessee was confronted to the facts of difference in gross contract receipts as per TDS certificate as per entries in the books of account then it was explained that the difference was received in the next year so it was not disclosed in the income and expenditure/profit and loss account in the current year but it was rejected as the Hon’ble High Court noted that since the assessee was following mercantile system of accounting then disclosure on receipt basis is not proper and justified and addition was upheld. In the light of these facts, when we analyse the factual matrix of the present case then we note that in the extant case after adjustment books of account by the CIT(A), the difference has been included in the total turnover which was taken for estimation of NP and in this situation further addition of same amount cannot be allowed specially when the financial results of the assessee has been rejected and net profit is being estimated on the basis of earlier and subsequent results on the turnover including the imputed amount of difference which was picked up by the AO during scrutiny assessment proceedings. Hence, in our humble understanding, benefit of the ratio of this decision is also not available in favour of the Revenue in the extant case having quite dissimilar facts and circumstances.

4.3 On the basis of foregoing discussion, we reach to a logical conclusion that after rejection of books of accounts when the impugned contracts receipt has been included in the total turnover/trading receipts for estimation of NP then further addition of the same amount is not permissible and allowable for making further addition. Thus, ground Nos. 4 and 5 of the assessee are allowed and the AO is directed to delete the addition of Rs. 52,91,361.

5. In the result, the appeal of the assessee is allowed in the manner as indicated above.