Estimation of gross profit rate in absence of rejection of books is arbitrary and unreasonable- ITAT Raipur
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Case Details: |
Sanjay Agarwal vs. DCIT |
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Appeal No.: |
ITA No. 339/RPR/2016 |
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Order pronounced by: |
ITAT Raipur |
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Date of Order: |
24-09-2021 |
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In favour of: |
Assessee |
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Assessment Year: |
2012-13 |
Source: www.itat.gov.in
Brief Facts:
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The assessee is a partnership firm whose accounts are audited under section 44AB of the Act. The A.O. applied net profit @ 8% on the receipts of the assessee without rebuttal of the submissions of the assessee and without citing any reasons whatsoever in its very brief and cryptic order. The assessee preferred the appeal before the CIT (A) but no relief granted to the assessee. The assessee preferred further appeal before the Tribunal. |
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The learned counsel for the assessee submitted that there is no justification for estimation of income by applying @ 8% as net profit arbitrarily and without any logical basis disregarding actual book results. The learned counsel for the assessee pointed out that the books of accounts of the assessee are audited and produced before the A.O. The A.O. himself averred that the books produced were also test checked. However, there is no reference of any defect in the books whatsoever. In the absence of any defects in the books despite its production before the A.O., the books results could not have been discarded by the A.O. The onus cast upon the Revenue in this regard is not discharged. The action of the A.O. in adopting the net profit @ 8% merely on account of declarations made in search assessments in some earlier years is wholly unjustifiable and arbitrary. It was contended that every assessment year is independent and self-contained and hence book results of one year cannot be applied to the other year without showing specific defects. |
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The learned counsel referred the following judicial precedents in support: (A) The principles of res judicata do not apply to the income tax proceedings and each assessment is a separate assessment:
(B) Even where the best judgement assessment is framed, the same is to be done on some reasonable basis and cannot be done in a vindictive manner:
(C) The net profit rate does not remain static with mathematical precession and findings reached and conclusions drawn in any preceding assessment cannot be the sole basis for subsequent assessment:
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Observations of the Tribunal:
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In the assessment order, the A.O. has categorically made an averment to the effect that books of accounts have been produced by the assessee and test checked. The A.O. has not made mention of any material which could question the correctness and bonafide of the book results declared. The A.O. is stoically silent on any kind of deficiency in books or excessive claim of any expenses etc. which could substantiate his action. It is incumbent upon the A.O. to record the inconsistency or incorrectness in the books which prevents the A.O. to ascertain true income chargeable to tax. |
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The pre-condition for estimating business income where the assessee maintains books of accounts is that the books of the assessee should be found to be unreliable or otherwise not realistically capable for demonstrating the income of the assessee. Without this first step, the fact that the gross profit/ net profit is low cannot by itself be a ground for taking a view that it is open to the A.O. to make good alleged deficiency in profits declared. However, in the instant case, the A.O. has neither rejected the books nor a single voucher was alleged to be unverifiable.
Cases Relied upon:
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We find force in the other line of argument that gross profit rate/ net profit rate cannot be estimated cursorily and in a routine manner without showing as to how the book results are superfluous. The A.O. has not brought any material which has any reasonable nexus to the estimation. As rightly stated on behalf of the assessee, even the best judgement assessment cannot be done in a vindictive manner and should be based on reasonable and fair estimations. Needless to say, low profit is neither the circumstance nor the reason to justify the estimation at some higher percentage. An adoption of the net profit rate of some other years is only for the purposes of fair estimate for which objective reasons must be available with the A.O. The estimation is permissible only on showing that the books of accounts are so defective that it is not possible to ascertain the truthfulness of the profits arising therefrom. |
“There is no rule that the gross profit ratio should follow a constant ratio with mathematical precision.”
“The graph of the business profit is always not straight but it fluctuates year to year.” |
Ruling by Tribunal:
There are large number of decisions which say in unison that the A.O. cannot estimate gross profit rate without rejection of books and without showing defects. Referring CIT vs. Paradise Holidays [2010] 325 ITR 13 (Delhi HC) where it was held that if accounts are regularly maintained in the course of business and are duly audited, free from any qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the Revenue to show that either the books of accounts maintained by the assessee were incorrect or incomplete or that the method of accounting adopted by him was such that true profits of the assessee cannot be deduced therefrom. For rejection of books of accounts, the A.O. is required to demonstrate specific defects in the books of accounts produced by the assessee and also as to how the books of accounts produced by the assessee is not giving clear picture of the profit earned from the business activity. In the absence of such finding, the books of accounts cannot be rejected, the discretion must be used by the A.O. judiciously. In view of the above discussion, we find substantial merit in the grounds of appeal raised by the assessee. The additions made in the assessment order under challenge are thus quashed.
Read Complete Order: Sanjay Agarwal vs. DCIT- ITAT Raipur
Disclaimer: The above article is based upon the ruling of ITAT Raipur and is meant for informative purposes only. Readers are requested to act diligently and under consultation with a professional before applying the information contained in this article.
