2016 (4) TMI 422 - AT - Income Tax

Tribunal directs use of 8% profit rate under section 44AD for computing net profit

The Tribunal partially allowed the appeal, directing the Assessing Officer to use the 8% net profit rate under section 44AD for computing the assessee's ... Presumptive taxation under section 44AD - net profit rate under section 44AD - treatment of bank deposits as business receipts - onus of proof for withdrawals and redeposits - rejection of estimated sales declared in returnTreatment of bank deposits as business receipts - onus of proof for withdrawals and redeposits - rejection of estimated sales declared in return - Entire cash deposits of Rs. 36,05,497/- in the assessee's bank accounts were correctly treated as business receipts. - HELD THAT: - The Assessing Officer found total cash deposits of Rs. 36,05,497/-, of which the assessee admitted only Rs. 19,93,152/- as business sales and claimed the balance represented withdrawals that were redeposited. The assessee failed to produce evidence substantiating that withdrawals were redeposited or that the withdrawn sums were not used for other purposes. Purchases shown in the re-casted accounts were largely unverifiable. In these circumstances the Tribunal accepted the view of the AO and CIT(A) that, absent satisfactory proof, the deposits could reasonably be treated as business receipts. The Tribunal rejected the cited authorities relied on by the assessee as inapplicable where the assessee did not substantiate his claim of redeposit and where unverified purchases and cash transactions gave rise to doubt. [Paras 5]Findings of the lower authorities treating entire cash deposits as business receipts are sustained and the related grounds of appeal are dismissed.Presumptive taxation under section 44AD - net profit rate under section 44AD - rejection of estimated sales declared in return - Application of net profit rate of 8% under section 44AD is appropriate instead of adopting 20% as applied by the AO and upheld by the CIT(A). - HELD THAT: - Although the AO and CIT(A) applied a 20% net profit rate, that rate was based on figures the assessee himself had earlier furnished on an estimate basis which the AO had rejected as unsubstantiated. The assessee had filed the return under the presumptive scheme of section 44AD and, absent any comparable material to justify a 20% rate for the retail business carried on by the assessee, the statutory presumptive rate of 8% for such business turnover not exceeding the prescribed limit is appropriate. The Tribunal therefore directed the AO to compute profit by applying 8% on the accepted business receipts (the bank deposits treated as sales). [Paras 6]Adopt net profit rate of 8% under section 44AD and compute taxable profit on the business receipts accordingly; grounds challenging rate are allowed partly.Final Conclusion: The Tribunal affirms treatment of entire bank deposits as business receipts for want of satisfactory evidence of redeposit or alternative use, but directs computation of profit under the presumptive scheme at the statutory net profit rate of 8% (section 44AD) on those receipts; appeal allowed partly and otherwise dismissed. Issues:1. Application of profit rate of 20% in contravention of section 44AD.2. Treatment of total estimated turnover based on bank deposits.3. Adoption of total deposit in the bank as turnover.4. Application of profit rate as per section 44AD.5. Treatment of the amount of turnover in profit and loss account.6. Passing the appellate order based on suspicion and doubt.7. Application of section 44AD provisions.Analysis:Issue 1:The Assessing Officer (AO) applied a net profit rate of 20% on sales, contrary to the 8% rate under section 44AD. The appellant argued for the 8% rate, citing lack of verification in the original return and the absence of comparable cases with a 20% rate. The Tribunal agreed, directing the AO to use the 8% rate for computing net profit.Issue 2, 3, 5-7:The AO treated the entire cash deposits in the bank account as business receipts, disregarding the explanation that part of the deposits came from withdrawals. The appellant failed to provide evidence of redeposits, leading to the confirmation by the CIT(A) and the Tribunal that the entire cash deposits constituted sales receipts. The grounds related to this issue were dismissed.Issue 4:The AO's arbitrary application of a 20% profit rate was deemed unjustified by the Tribunal. The lack of comparable cases and the legislative 8% rate under section 44AD led to a partial allowance of the appeal, directing the AO to use the 8% rate for computing net profit.Issue 8:The Tribunal held that the 8% net profit rate under section 44AD was appropriate for the appellant's turnover below Rs. 60 lakhs. The AO was directed to apply the 8% rate on the business receipts and compute the net profit accordingly. This issue was partially allowed in favor of the assessee.General Issue:The general ground in the appeal was dismissed as infructuous.In conclusion, the Tribunal partially allowed the appeal, directing the AO to use the 8% net profit rate under section 44AD for computing the assessee's net profit. The decision was pronounced on 9th March 2016.