Tribunal invalidates 7% profit rate addition, stresses on reasonable income estimation post book rejection.

The Tribunal partly allowed the appeal, ruling that the addition made by the Assessing Officer based on a 7% net profit rate was not sustainable and therefore deleted. The Tribunal emphasized the need for a proper and reasonable basis for estimating income after rejecting books of account, citing past history as a valid guideline. The decision was pronounced on 15/07/2021 at Allahabad through Video Conferencing.

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Issues:
The only issue in this appeal is the addition made by the Assessing Officer by applying a net profit rate of 7% instead of the 6.5% declared by the assessee.

Analysis:
The assessee challenged the assessment order dated 30.03.2015 under Section 143(3) of the Income Tax Act for the A.Y. 2013-14. The primary contention was that the net profit rate of 7% applied by the Assessing Officer was unjustified, especially when the books were properly maintained and verified. The assessee argued that if the net profit declared was better than past history, no addition should be made. Reference was made to previous tribunal decisions upheld by the High Court to support this argument.

The Assessing Officer rejected the books of accounts and estimated the income by applying a 7% net profit rate, invoking Section 144AD. The Assessing Officer's decision was based on the substantial increase in turnover compared to the previous year. However, the assessee contended that the rejection of books of account does not automatically warrant an addition if the declared net profit is better than past history. The Tribunal emphasized the need for a proper and reasonable basis for estimating income after rejecting books of account, citing past history as a valid guideline. The Tribunal found the Assessing Officer's 7% net profit rate arbitrary and unjustified, especially since no reasonable criteria were applied in the estimation process.

The Departmental Representative argued that the net profit declared for the previous year was not comparable due to different assessment procedures and a significant increase in turnover. However, the Tribunal held that the rejection of books of account should not lead to an addition if the declared net profit is better than past history. The Tribunal highlighted that the Department's reliance on previous court decisions regarding expense disallowance was not applicable to the current issue of income estimation after rejecting books of account.

In conclusion, the Tribunal partly allowed the appeal, ruling that the addition made by the Assessing Officer was not sustainable and therefore deleted. The decision was pronounced on 15/07/2021 at Allahabad through Video Conferencing.

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