2018 (2) TMI 1362 - AT - Income Tax

Tribunal Upholds Income Estimation at 8% & Net Profit at 1.25% Rejects Revenue's Challenge

The Tribunal upheld the Ld. CIT(A)'s decision to estimate profit at 8% of undisclosed contractual receipts, rejecting the Revenue's appeal for a 40% ... Estimation of income on undisclosed receipts - presumptive taxation under section 44AD - addition on estimate of profit - treatment of bogus purchases - profit element assessment - reliance on quantitative tally to substantiate purchases and sales - acceptance of sales and corresponding purchasesEstimation of income on undisclosed receipts - presumptive taxation under section 44AD - addition on estimate of profit - Ld. CIT(A)'s reduction of the AO's ad hoc estimation of profit on undisclosed contractual receipts from 40% to 8% of gross receipts. - HELD THAT: - The assessee failed to report contractual receipts of Rs. 9,16,500/-, which had TDS recorded. The AO made an ad hoc addition by estimating profit at 40% of those receipts. The CIT(A) observed absence of any comparable profit percentages, the contract activity being undertaken for the first time in the year under appeal, and that the assessee had declared net profit at 16.41% in the return. In these circumstances, the Tribunal agreed with the CIT(A) that the AO's 40% estimate was unsustainable and that the revenue's only appropriate recourse was to apply the statutory presumptive basis available under section 44AD to estimate net profit at 8% of gross receipts. The Tribunal held that the CIT(A)'s application of the 8% presumptive rate was justified on the facts and declined to interfere with that conclusion. [Paras 5]CIT(A)'s estimation of profit at 8% of the undisclosed contractual receipts is sustained; Revenue's ground is dismissed.Treatment of bogus purchases - profit element assessment - reliance on quantitative tally to substantiate purchases and sales - acceptance of sales and corresponding purchases - Ld. CIT(A)'s estimation of net profit at 1.25% of disputed purchases of Rs. 9,08,82,128/- instead of treating entire purchases as bogus and disallowing the full amount. - HELD THAT: - The AO treated purchases from M/s Rameswar Enterprises as bogus based on the supplier's denial. The assessee produced bills, challans showing the supplier's VAT registration number, quantitative records of receipt and subsequent sale of the goods, and the sales figure was accepted by the revenue. The Tribunal found no opening or closing stock and noted the AO himself observed that purchases were sold during the year, so there was no reason to disbelieve purchases when corresponding sales were accepted. Applying a circumspect approach and following relevant precedents, the CIT(A) estimated the profit element at 1.25% of the disputed purchases as the taxable profit embedded in those transactions. The Tribunal agreed that only the profit element should be brought to tax and upheld the CIT(A)'s estimation. [Paras 9, 11]CIT(A)'s estimation of net profit at 1.25% of the disputed purchases is sustained; Revenue's grounds are dismissed.Final Conclusion: The appeal filed by the Revenue is dismissed; the Tribunal sustains the CIT(A)'s estimation of profit at 8% on the undisclosed contractual receipts and at 1.25% as the profit element in the disputed purchases for Assessment Year 2011-12. Issues:1. Estimation of profit on undisclosed contractual receipts.2. Estimation of net profit on disputed purchases.Estimation of profit on undisclosed contractual receipts:The appeal by the Revenue challenges the estimation of profit at 8% of undisclosed contractual receipts by the Ld. CIT(A), instead of the 40% estimated by the Ld. AO. The Ld. CIT(A) relied on Section 44AD of the Income Tax Act, 1961, even though not explicitly mentioned in the order, due to lack of past history of such receipts. The Revenue contended that profit should be estimated on total gross receipts, not just the service rendered. The Tribunal held that the Ld. CIT(A) rightly estimated profit at 8% of gross receipts, dismissing the Revenue's appeal.Estimation of net profit on disputed purchases:The dispute involved the estimation of net profit at 1.25% of disputed purchases amounting to a significant sum. The Ld. AO treated the purchases as bogus based on a statement by the supplier, which the assessee contested with supporting documents. The Ld. CIT(A) upheld the estimation of net profit at 1.25% of the disputed purchases, considering the nature of the business and the lack of evidence to deem the entire purchase as bogus. The Tribunal found the Ld. CIT(A)'s decision reasonable, citing previous judicial precedents and upheld the estimation, dismissing the Revenue's grounds of appeal.In conclusion, the Tribunal upheld the decisions of the Ld. CIT(A) in both issues, regarding the estimation of profit on undisclosed contractual receipts and net profit on disputed purchases, dismissing the Revenue's appeal in its entirety.