2021 (5) TMI 657 - AT - Income Tax

ITAT affirms AO's profit estimation, allows section 80IB(11A) deduction, and partially favors assessee in AY appeals.

The ITAT upheld the AO's estimation of net profit at 10% of the gross receipts, set aside the CIT(A)'s enhancement of income, and allowed the deduction ... Rejection of books of account - estimation of profit - AO, before estimating the profits @ 10% on the total turnover, observed that as per the provisions of Sec. 44AD, the profit and gains of eligible business have to be computed at 8% of total turnover or gross receipts, where the. total turnover or gross receipts in the previous year does not exceed ₹ 1 Cr. - HELD THAT:- In the instant case, since the turnover of the business was R$,13.91 Cr., the provisions of Sec.44AD cannot be applied. The assessee has shown a meager profit of 4.52% on a total turnover of ₹ 13.91Cr. Since the Act has envisaged a profit of 8% for small businesses, considering the facts and circumstances of the case and since the books of account have been rejected for the reasons discussed above, a profit @ 10% on total turnover is felt to be reasonable. The CIT(A) upheld the action of the AO. The assessee has earned more Gross Profit i.e. 56% as evident from the order of the CIT (A) at para No. 04. It was the primary duty of the assessee to produce the bills/vouchers as and when required for verification in support of the claim of expenses debited into the P&L A/c during the course of assessment proceedings, but, the assessee has failed to do so. After considering the totality of the facts of the case and statements recorded of Sri A. Srinagaveer, we do not find any reason to interfere with the orders of revenue authorities and, therefore, approve the 10% estimation on total turnover of the assessee. According, this grounds raised on this issue are dismissed. Enhancement of the income of the assessee by CIT u/s 251(2) - HELD THAT:- CIT(A) rejecting the submissions of the assessee, enhanced the income of the assessee by using powers u/s 251(2) of the Act. As contended by the ld. AR of the assessee that once the books of account are rejected, it is trite law that no further additions can be made from the same books of account. We find substance in the submissions of the ld. AR and case law relied on by him. Therefore, we set aside the decision of the CIT(A) in enhancing the income of the assessee and uphold the order of the AO in estimating the income of the assessee @ 10% on the total turnover. CIT(A) has treated it as other income. The CIT(A) has co- terminus powers but once a pragmatic view has been formed by the AO, it should be changed as per the case law cited supra. Further, on perusal of the details of other income shown in the financial statement, this income is related to the primary business activity of the assessee. Accordingly, this ground of the assessee is allowed. Deduction u/s 80IB (11A) - assessee strongly submitted that the business of the assessee is eligible for deduction u/s 80IB(11A) because assessee is engaged in the business of corn processing & packaging - HELD THAT:- The assessee is entitled for claim of deduction u/s 80IB(11A) on the profit estimated by the AO @ 10% on the revenue from operations as per Note No. “O” of the financial statements. Hence, we set aside the order of the CIT(A) in this regard and direct the AO to allow the assessee’s claim of deduction u/s 80IB(11A). In the result, the ground raised by the assessee on this issue is allowed. The items mentioned in the table extracted by the CIT(A) in his order are not covered part of the turnover of the assessee. In this regard, the assessee has shown separately under two heads, one is from revenue from operations and from other income. The other income shown by the assessee are arising during the course of principal business activity of the assessee. Therefore, profit derived under these heads is also forms part of the main business of the assessee and therefore, the entire profit enhanced by the CIT(A) is not justified. In this regard, the AO has rejected the books of account of the assessee and applied 10% of the net profit on entire receipts of the assessee. In the result, the appeal of the assessee is allowed. We make it clear that the assessee will not get benefit of deduction u/s 80IB(11A) on the profits estimated @ 10% on the other income vide Note No. “P” of the financial statements. Issues Involved:1. Rejection of books of account and estimation of net profit at 10% of turnover.2. Enhancement of income by the CIT(A) by bifurcating gross receipts.3. Eligibility for deduction under section 80IB(11A) of the Income Tax Act.4. Treatment of other income as part of the business income.Detailed Analysis:Rejection of Books of Account and Estimation of Net Profit:The primary issue was the rejection of the assessee's books of account by the Assessing Officer (AO) due to the absence of supporting evidence for purchases and expenditures. The AO estimated the net profit at 10% of the gross receipts, which was upheld by the CIT(A). The AO's rationale was based on the provisions of Sec. 44AD, which suggests an 8% profit for small businesses, but given the turnover exceeded Rs. 1 crore, a 10% estimation was deemed reasonable. The ITAT found no reason to interfere with this estimation, emphasizing the assessee's failure to produce necessary bills and vouchers.Enhancement of Income by the CIT(A):The CIT(A) enhanced the income by bifurcating the gross receipts into revenue from operations and other income, treating the latter as taxable without allowing any related expenses. The assessee argued that once the books are rejected, no further additions should be made from the same books. The ITAT agreed with the assessee, citing relevant case laws, and set aside the CIT(A)'s enhancement, upholding the AO's original estimation of 10% on the total turnover.Eligibility for Deduction under Section 80IB(11A):The assessee claimed deduction under section 80IB(11A) for AYs 2014-15 and 2015-16, asserting that their business involved the processing, preservation, and packaging of sweet corn, which qualifies as a vegetable. The AO and CIT(A) denied this claim due to the lack of proper books of account. The ITAT, however, found that sweet corn qualifies as a vegetable and that the assessee had the necessary plant and machinery for processing and packaging. Thus, the ITAT directed the AO to allow the deduction under section 80IB(11A) on the profit estimated at 10% from revenue operations.Treatment of Other Income:The CIT(A) treated other income separately from the business income, which was disputed by the assessee. The ITAT concluded that other income, arising during the course of the principal business activity, should be considered part of the main business income. However, the ITAT clarified that the deduction under section 80IB(11A) would not apply to the profits estimated on other income.Conclusion:The ITAT upheld the AO's estimation of net profit at 10% of the gross receipts, set aside the CIT(A)'s enhancement of income, and allowed the deduction under section 80IB(11A) on the estimated business profit. The appeals for AYs 2014-15 and 2015-16 were decided similarly, with the ITAT partly allowing the appeals in favor of the assessee.