2016 (7) TMI 163 - AT - Income Tax

Tribunal rejects AO's profit rate estimate, favors assessee in appeal

Shri Hem Raj Versus The A.C.I.T., Circle 3 (1), Chandigarh

The Tribunal allowed both appeals, rejecting the AO's application of Section 145(3) and the estimation of an 8% net profit rate. The Tribunal directed the ... Estimation of GP rate - Assessee was running liquor, wine and beer shop - AO rejected the books of account by invoking section 145(3). - Held that:- Purchases made by the assessee are duly supported by proper vouchers and are regulated by the Excise Authorities and payment of liquor is made through Government on the basis of the auction conducted by the Government. In the case of Laxmi Narain Ramswaroop Shivhare [2008 (12) TMI 290 - ITAT AGRA], the majority view was that as regards the sale, the nature of the assessee's business was such that it cannot maintain proper sale bills. In this case also, the nature of assessee's business is such that it cannot maintain proper sale bills. In the case of Laxmi Narain Ramswaroop Shivhare (supra), the majority view was that the profit varies from area to area and the bid money and small variation of the profit cannot be ruled out. Thus, we do not see any ground for rejecting the book results. Therefore, the declared audited results are to be accepted and estimation of income by applying the net profit rate of 8% was not proper. Accordingly, we delete the addition - Decided in favour of assessee Issues Involved:1. Denial of proper opportunity of hearing.2. Rejection of books of account and application of provisions of Section 145(3) of the Income Tax Act.3. Non-granting of set-off of business loss against total income.4. Application of net profit rate at 8% on gross sales and dispute over the quantum of net profit rate.Detailed Analysis:1. Denial of Proper Opportunity of Hearing:The appellant contended that the CIT(A) did not provide a proper opportunity of hearing, which was against the principles of natural justice.2. Rejection of Books of Account and Application of Section 145(3):The Assessing Officer (AO) invoked Section 145(3) of the Income Tax Act, 1961, rejecting the books of account due to discrepancies such as non-maintenance of stock register, sales records, and supporting bills/vouchers for expenses. The AO noted that the books appeared to be prepared by reverse calculations to justify bank deposits and showed deflated sales. The CIT(A) upheld the AO's decision, but the Tribunal found that the books were duly audited, and purchases were vouched and verified. The Tribunal observed that the AO accepted the sales figures but failed to justify the rejection of books solely based on the absence of sale bills, which is a common practice in the liquor trade. The Tribunal referenced the case of Laxmi Narain Ramswaroop Shivhare, where the rejection of books under similar circumstances was deemed unjustified.3. Non-Granting of Set-off of Business Loss:The appellant claimed a business loss of Rs. 1,07,746, which was not set off against the salary income in the return. The Tribunal noted that the AO accepted the declared sales and the cost of goods but did not allow the set-off of the business loss. The Tribunal found no basis for disallowing the set-off, given that the books of account were maintained properly and audited.4. Application of Net Profit Rate at 8% on Gross Sales:The AO applied an 8% net profit rate on the declared sales, leading to an addition of Rs. 12,81,872 for the assessment year 2008-09 and Rs. 24,70,797 for the assessment year 2009-10. The AO justified this rate by comparing it with other liquor contractors in Gwalior, where higher profit rates were applied. The Tribunal, however, found that the AO did not provide sufficient justification for applying a higher profit rate and referenced the I.T.A.T. Agra Bench decision in Laxmi Narain Ramswaroop Shivhare, which accepted a lower profit rate under similar circumstances. The Tribunal concluded that the AO's estimation was not proper and directed the deletion of the additions made.Separate Judgments:The Tribunal delivered a common order for both appeals, addressing the issues collectively due to their similarity across the assessment years 2008-09 and 2009-10. The findings and conclusions applied equally to both appeals.Conclusion:The Tribunal allowed both appeals, rejecting the AO's application of Section 145(3) and the estimation of an 8% net profit rate. The Tribunal directed the deletion of the additions made by the AO and accepted the declared results of the assessee. The appeals were pronounced in favor of the assessee on November 26, 2015.