ITAT Mumbai Adjusts Net Profit Estimate to 6% Due to Recurring Losses and Insufficient Verification.

The ITAT Mumbai partially allowed the appeal, directing the Assessing Officer to restrict the net profit estimation to 6% of the gross receipt, instead of the previously assessed 20%, due to recurring losses and insufficient verification by the assessee. The decision was pronounced on 20.06.2023.

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Issues:
1. Estimation of income under section 145(3) of the Income Tax Act, 1961.
2. Rejection of books of account and bills/vouchers by the Assessing Officer.
3. Treatment of income received from G.D. Foods Mfg. (India) Pvt Ltd.
4. Dismissal of appeal by CIT(A) and confirmation of estimated income.
5. Failure to file return of income and audit report.
6. Reasonableness of estimating net profit at 20% of gross receipt.
7. Consideration of recurring losses incurred by the assessee company.

Analysis:
1. The appeal was filed against the CIT(A)'s order confirming the income estimation of Rs. 50,09,956, 20% of Gross Receipt, under section 145(3) for A.Y. 2011-12. The company had suffered a loss before depreciation, challenging the estimation.

2. The Assessing Officer invoked section 145(3) and rejected the Books of Account and Bills/Vouchers, despite being audited by a Statutory Auditor. The non-filing of the Audit Report under section 44AB by the Auditor was highlighted.

3. The CIT(A) confirmed the estimation of income at Rs. 85,000, being 20% of Rs. 4,25,000, received from G.D. Foods Mfg. (India) Pvt Ltd. The appellant reconciled the income as per 26AS statement with the gross receipt.

4. The CIT(A) partially dismissed the appeal by confirming the estimated income of Rs. 50,94,956, leading to the appeal before the ITAT Mumbai.

5. The company failed to file its return of income under section 139, resulting in the case being reopened under section 147. The Assessing Officer estimated the business income at 20% of the gross receipt and added it to the total income.

6. The ITAT Mumbai considered the substantial receipt without a filed return and the failure to produce bills/vouchers. The Tribunal noted the appointment of a new Chartered Accountant and the deletion of penalty under section 271B by the coordinate bench.

7. The audited accounts showed recurring losses since the formation of the company in F.Y. 2009-10, with the second year under consideration. The ITAT found it unreasonable to estimate net profit at 20% of gross receipt and restricted it to 6% due to the recurring losses.

8. Considering the circumstances and recurring losses, the ITAT allowed the appeal partly, directing the Assessing Officer to restrict the net profit at 6% of the gross receipt due to the lack of verification from the assessee.

9. Consequently, the appeal of the assessee was partly allowed by the ITAT Mumbai, with the order pronounced on 20.06.2023.

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