2019 (11) TMI 261 - AT - Income Tax

Tribunal decision on income additions: detailed analysis shifts calculation method, grants partial relief to assessee.

The Tribunal upheld the rejection of book results and additions to income due to various infirmities and lack of substantiation by the assessee. It ... Rejection of books of accounts - profit estimation - HELD THAT:- It is an admitted fact that the assessee, in the instant case, has not maintained any stock register so as to give the details of datewise purchase and sales of items traded and the closing stock balance position on a particular day. Similarly, notices u/s 133(6) were issued to various sundry creditors which were returned unserved on the ground that either they have left or the premises are locked or the addresses were insufficient. It is also an admitted fact that the commission paid to various parties remained unsubstantiated in absence of nature of services rendered by them. Similarly, the assessee also could not substantiate the advertisement expenses incurred by it and could not substantiate that no element of personal use is there in respect of the telephone expenses and the motor car running expenses. We hold that the ld.CIT(A) was fully justified in upholding the action of the Assessing Officer in rejecting the book results and going for estimation of the profits. Rate of profit - HELD THAT:- As books of account of the assessee are audited and the auditors have not pointed out any defects and the turnover of the assessee has gone up substantially during the year as against the immediately preceding assessment years, therefore, we deem it proper to adopt the net profit ratio of 1.88% which is the average of the current year as well as the two immediately preceding assessment years. The Assessing Officer is directed to recompute the addition to be made on the basis of the net profit ratio as against the GP ratio adopted by him and upheld by the CIT(A). Since we are going for net profit addition, the various other additions made by the Assessing Officer and sustained by the CIT(A), in our opinion, do not require any separate addition and the same are liable to be deleted. Issues:Assessment of income based on rejected book results, addition of unexplained expenses, disallowance of business promotion expenses, disallowance of motor car expenses, disallowance of telephone expenses.Analysis:1. Rejected Book Results and Addition of Unexplained Expenses:The Assessing Officer rejected the book results due to the absence of day-to-day stock register and certain infirmities in the accounts. The officer made additions to the income based on past GP rates and unexplained expenses like commission, business promotion, TDS non-deduction, motor car expenses, and telephone expenses. The CIT(A) upheld these additions, citing lack of evidence from the assessee. The Tribunal agreed with the rejection of book results and upheld the estimation of profits due to various infirmities and lack of substantiation by the assessee.2. Estimation of Profit and Net Profit Ratio:The Tribunal noted a substantial increase in turnover for the year under consideration. Given the fluctuating net profit ratios over the years, the Tribunal found the declared net profit ratio of 1.79% unreasonable. Considering the audited books without defects and the substantial turnover increase, the Tribunal adopted a net profit ratio of 1.88%, averagely calculated from the current and two preceding years. Consequently, the Tribunal directed the Assessing Officer to recompute the addition based on the net profit ratio instead of the GP ratio, leading to the deletion of other additions.3. Disallowance of Business Promotion, Motor Car, and Telephone Expenses:The Tribunal partially allowed the appeal, emphasizing the deletion of various additions due to the adoption of the net profit ratio. The disallowance of business promotion expenses, motor car expenses, and telephone expenses was deemed unnecessary after recalculating the addition based on the net profit ratio. Therefore, the Tribunal granted partial relief to the assessee, allowing the appeal for statistical purposes.In conclusion, the Tribunal's decision on the rejected book results, estimation of profits, and subsequent additions showcases a meticulous analysis of the financial aspects and substantiation requirements, leading to a recalculated addition based on the net profit ratio for a fair assessment of income.