2015 (9) TMI 447 - AT - Income Tax

ITAT partially allows assessee's appeal, rejects additions based on profit rate estimation, and upholds CIT(A)'s decision on section 153C

The ITAT partly allowed the appeals of the assessee, deleting additions made by the AO based on the estimation of deemed profit rate and absence of ... Unexplained drastic variation in net profit rate - AO mentioned that considering the fact that the sales are not verifiable, it will not be unreasonable to compute the profits at the rate of 5% of the disclosed sales - Held that:- We are of the considered opinion that neither the AO nor the CIT(A) examined the books of accounts. Both of them did not pin point any defects in the books of account. Further selling its products in cash is not against the law. A different percentage of profit cannot be adopted only because the assessee makes cash sale. We, therefore, delete the addition made by the AO - Decided in favour of assessee. Addition in the hands of the other person u/s. 153A /153C - Held that:- It appears that in the case of appellant no assessment was completed either u/s.143 (3) or u/s.147 or under any other provisions of the Act except processing of the return of income u/s.139 (1) of the Act. Since no assessment was made in this case for the assessment years 2005-06 to 2010-11 prior to the assessment u/s.153C of the Act which is the first assessment for the years under consideration, the scope of assessment expands to the original jurisdiction as well as jurisdiction conferred u/s.153A and in other words, the A.O may conclude the assessment based on the findings of the search and also on the basis of any material existing or brought on record of the A.O. In view of the above, the ground raised in this regard is not entertained. - Decided against assessee. Approval of the Joint Commissioner as mandated u/s. 153D is absent and hence the assessment is bad in law as per assessee - Held that:- It is not clear whether the appellant literally means that under the provisions of section 153D prior approval of the Jt. Commissioner is required, whereas in this case prior approval of the Addl. Commissioner of Income Tax is obtained. It is relevant to mention that Section 2(28C) of the Act defines the Jt. Commissioner as a person appointed to be Joint Commissioner of Income-tax or an Addl. Commissioner of Income-tax under sub section 1 of section 117 of the Act. In view of the above, the ground of appellant is hereby dismissed. - Decided against assessee. Issues Involved:1. Arbitrary and capricious order by CIT(A).2. Estimation of deemed profit rate of 5% on turnover under section 44AF.3. Invocation of section 153C in the absence of incriminating material.4. Absence of approval from the Joint Commissioner of Income Tax under section 153C.5. Addition to net profit based on conjecture and surmises.6. Books of Accounts not rejected.Detailed Analysis:1. Arbitrary and Capricious Order by CIT(A):The assessee contended that the CIT(A) passed the order arbitrarily, capriciously, and without appreciating the explanation and documentary evidence provided during the appellate proceedings. This issue was raised as a general ground and did not require specific adjudication.2. Estimation of Deemed Profit Rate of 5% on Turnover under Section 44AF:The assessee argued that the CIT(A) erred in estimating a deemed profit rate of 5% on turnover under section 44AF, despite maintaining and auditing the books of accounts as per sections 44AA and 44AB. The AO mentioned that the assessee's sales were in cash and disclosed an additional income of Rs. 75,00,000 during the search. The AO computed the net profit at 5% of disclosed sales, resulting in additions for various assessment years. The CIT(A) upheld this estimation, considering it reasonable compared to the net profit rate of 32.23% disclosed for AY 2011-12.The ITAT found that neither the AO nor the CIT(A) examined the books of accounts or pinpointed any defects. Selling products in cash is not against the law, and a different profit percentage cannot be adopted solely because of cash sales. Thus, the ITAT deleted the additions made by the AO, allowing the assessee's grounds.3. Invocation of Section 153C in the Absence of Incriminating Material:The assessee contended that the addition made by the AO was bad in law as no incriminating material was found during the search. The CIT(A) observed that since no assessment was completed earlier, the scope of assessment under section 153C expands to include original jurisdiction and findings from the search. The ITAT upheld the CIT(A)'s view, dismissing this ground of the assessee.4. Absence of Approval from the Joint Commissioner of Income Tax under Section 153C:The assessee argued that the assessment was bad in law due to the absence of approval from the Joint Commissioner of Income Tax, as mandated under section 153C. The CIT(A) found this contention factually incorrect, noting that prior approval from the Additional Commissioner of Income Tax was obtained. The ITAT agreed with the CIT(A) and dismissed this ground of the assessee.5. Addition to Net Profit Based on Conjecture and Surmises:The assessee argued that the addition to net profit was made purely on conjecture and surmises without any supporting material. The CIT(A) mentioned that the AO's action of estimating income at a reasonable net profit rate implied rejection of the books of account, even though the AO did not explicitly state it. The ITAT found that both the AO and CIT(A) failed to examine the books of accounts or identify specific defects. Consequently, the ITAT deleted the addition made by the AO, allowing the assessee's grounds.6. Books of Accounts Not Rejected:The assessee contended that the books of accounts were not rejected, and the income should be computed in accordance with the books maintained under section 145. The CIT(A) mentioned that the AO's estimation of income indicated rejection of the books of account. The ITAT found that neither the AO nor the CIT(A) examined the books or identified defects, and thus, the addition based on a different profit percentage was unjustified. The ITAT deleted the addition, allowing the assessee's grounds.Conclusion:In conclusion, the ITAT partly allowed the appeals of the assessee, deleting the additions made by the AO based on the estimation of deemed profit rate and the absence of examination and rejection of the books of accounts. The ITAT upheld the CIT(A)'s findings regarding the invocation of section 153C and the approval from the Additional Commissioner of Income Tax. The decision applied mutatis mutandis to all the assessment years involved.