2021 (10) TMI 689 - AT - Income Tax

Tribunal upholds profit estimation, remits unexplained capital issue, dismisses interest plea

Asit Dixit Versus Income Tax Officer, Ward-2 (2) Jabalpur

The Tribunal partly allowed the appeal, upholding the profit estimation based on a 2% net profit rate and remitting the issue of unexplained capital back ... Best judgement assessment u/s 144 - estimation of income - assessee had filed ITR declaring loss and the AO has estimated profit by estimating the net profit of 2% on sales turnover - HELD THAT:- First observation in the matter is that the assessee has not, at any stage, including before the Tribunal, disputed the invocation of sec. 144, and for which reference is also made to the assessee's submissions. As regards sec. 145(3), a sale bill is a primary document of any business entity selling goods or services, also having legal implications. It is the sale bill that evidences the sale, raising a charge on the buyer, and on the basis of which the sale consideration can be correlated with the good sold there-against, including the quantity thereof. Yielding thus its sale price, excess of which over the cost thereof is profit by definition. This is irrespective of whether the sale consideration is received/receivable wholly or partly in cash (legal tender) and, further, of whether the buyer demands his copy thereof or not. As regards lease money and sealing & bottling charges, surely one would not normally expect inflation therein, however, there is nothing on record to exhibit the reconciliation of the payments with the amounts claimed, which are in no insubstantial sums. The non-acceptance of the assessee's book results, and completing the assessment as a best judgment assessment, is, under the circumstances, unexceptional. Reasonability of the estimation of profit - The normal profit, i.e., but for the said loss, is thus ₹ 9,79,868, or about 3% of sales, the quantum of which approximates that by the assessee for the relevant year. It is this profit rate that is therefore relevant and comparable. The said case, which is thus comparable, favours the Revenue's estimation rather than being supportive of the assessee's case. Rather, normal market conditions, as against dull, which obtained in that year, would yield a still higher profit rate. Why, the assessee's disclosed profit is at 1.3%, as against 3% in the cited case. The Hon'ble jurisdictional High Court in Badri Prasad Bhagwandas & Co. [1994 (10) TMI 268 - MADRAS HIGH COURT] approved a net profit rate of 5% of sales. The estimation of the net profit of the liquor business at 2% of sales is, thus, reasonable, and upheld. I decide accordingly, and the assessee fails on its' Gd. 1. Addition on account of unexplained capital introduced by the partners - There is nothing to show that the said withdrawal has been in cash and, two, no date-wise breakup of the same has been provided. Also, and equally, in the absence of any break-up of the withdrawal, stated to be in cash, it cannot be linked with the investment in his name in the assessee-firm, the stated avenue of the said withdrawal. SJ has a negative capital in the firm Santosh Jaiswal (Ratlam), which in fact exceeds his investment in the assessee-firm. Rather, the said firm itself has no capital. In view of his negative balance therein, there is no question of his withdrawing his capital therefrom, and which therefore is not a correct description of the source of his investment in the assessee-firm. That, however, would not materially alter the assessee's explanation as to source, which, thus, is to be regarded as a borrowing from SJ (Ratlam), a firm in which he is a 30% partner As already clarified that the immediate source of investment by SJ can only be said to be the cash available with him, on the relevant dates, from any source, accounts of all of which, as it appears, are audited. In fact, that all the relevant accounts stand maintained and, further, audited, is itself a reason for remission inasmuch as it indicates the existence of the relevant evidence with the assessee, while at the same time though it does make it unfathomable that the same were not produced and relied upon in evidence, and despite abundant opportunity provided to do so. Needless to add, the AO, in the event of the assessee being not cooperative, shall be at liberty to draw all permissible inferences in law. He shall adjudicate afresh per a speaking order, in accordance with law, taking into account all the explanations and materials furnished by the assessee before him. Thus decide accordingly. Oral plea for allowance of interest to partners, disallowed in assessment - The same is indefensible in view of the clear, not disputed, application of sec. 144 so that a firm, though assessable as a firm, is yet not entitled to deduction, inter alia, in respect thereof . This is irrespective of the fact that the assessee-firm, despite not holding the licence, may yet be validly carrying on the liquor business, as sought to be canvassed with reference to the provisions of the Akbari Rules as applicable for f.y. 2004-05. Another aspect of the matter, which therefore needs to be clarified, is that to the extent the firm's capital is regarded as unexplained and, thus, as its' income, no claim qua interest on partner's capital would even otherwise survive thereon. Issues Involved:1. Estimation of net profit by the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)).2. Addition of Rs. 37,80,000 on account of unexplained capital introduced by the partners.Detailed Analysis:1. Estimation of Net Profit:The primary issue concerns the estimation of net profit by the AO and CIT(A). The assessee filed an Income Tax Return (ITR) declaring a loss of Rs. 26,130. However, the AO estimated a profit of Rs. 6,44,516 by applying a net profit rate of 2% on the sales turnover of Rs. 3,22,25,835. The CIT(A) upheld this estimation, leading to the assessee's appeal.The assessee argued that the payment of lease money and sealing & bottling charges were made to state agencies, negating any possibility of inflation. The non-maintenance of sale bills was admitted but justified as a trade practice. The AO did not cite any comparable cases to support the profit estimation.The Tribunal observed that the assessee did not dispute the invocation of Section 144 of the Income Tax Act, which allows for best judgment assessment due to non-compliance with notices under Sections 143(2) and 142(1). The Tribunal found the non-acceptance of the assessee’s book results and the completion of the assessment as a best judgment assessment to be justified.Regarding the reasonableness of the profit estimation, the Tribunal noted the absence of past business history and the lack of comparable cases cited by the AO. The Tribunal referred to a comparable case where a net profit rate of 3% was accepted under similar circumstances. The Tribunal upheld the AO's estimation of a 2% net profit rate as reasonable and dismissed the assessee's challenge on this ground.2. Addition of Rs. 37,80,000 on Account of Unexplained Capital:The second issue pertains to the addition of Rs. 37,80,000 credited in the assessee's accounts in the names of its partners, Sh. Santosh Jaiswal (Rs. 37,00,000) and Sh. Asit Dixit (Rs. 80,000). The assessee claimed that Sh. Dixit participated in a lottery system to obtain liquor shops and made Sh. Jaiswal his partner, who provided the necessary capital.The AO did not accept this explanation due to the lack of evidence for the claimed capital introduction. The CIT(A) upheld the AO's findings, noting inconsistencies such as the firm coming into existence only on 01/04/2004, lack of documentary evidence for cash withdrawals, and no linkage between withdrawals and investments.The Tribunal examined the merits of the explanations provided:- For Sh. Asit Dixit’s Rs. 80,000, the Tribunal found the explanation of savings from his employment as a sales manager to be unsubstantiated and thus upheld the addition.- For Sh. Santosh Jaiswal’s Rs. 37,00,000, the Tribunal noted the lack of date-wise details and evidence of cash withdrawals. The Tribunal remitted the matter back to the AO to allow the assessee a final opportunity to substantiate the source of the capital introduced.Interest to Partners:The Tribunal dismissed the assessee's plea for allowance of interest to partners, citing the application of Section 144, which disallows such deductions under Sections 184(5) and 185. Furthermore, the Tribunal clarified that no claim for interest on unexplained capital, deemed as the firm’s income, would survive.Conclusion:The appeal was partly allowed for statistical purposes, with the Tribunal upholding the profit estimation and remitting the issue of unexplained capital back to the AO for further examination. The order was pronounced in the Open Court on October 07, 2021.