Profit rate for clandestine textile supplies cut to 5 percent as estimation replaces unreliable declared accounts

ITAT Chennai partly allowed the assessee's appeal by reducing the estimated profit rate adopted in the remand block assessment from 8% to 5%. It held that the assessee's activities constituted a clandestine, almost unlawful, textile supply business under a Government scheme, with unreliable accounts and established bogus purchases and sales, justifying estimation rather than acceptance of the declared 2.5% profit. However, ITAT accepted that profit margins in uniform cloth under Government schemes are typically lower than in general textiles. Considering the earlier excessive 120% estimate already reduced by the Assessing Officer, ITAT concluded that 8% remained slightly excessive and that a 5% profit rate would constitute a fair and reasonable estimate of undisclosed income.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the profit rate of 8% adopted by the Assessing Officer in the remand block assessment, in respect of the assessee's clandestine textile supply business under a Government scheme, was excessive or reasonable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Reasonableness of profit rate of 8% adopted in remand block assessment

Interpretation and reasoning

2.1 The block assessment had been remanded with an open direction to reframe the assessment, and in the remand order the Assessing Officer reduced the originally determined undisclosed income of Rs. 9,25,51,290/- by allowing one-third as expenditure, determining undisclosed income at Rs. 6,17,00,860/-, which mathematically reflected a profit rate of about 8%.

2.2 The assessee did not dispute the existence of bogus purchases, sales, or the fact of undisclosed income; the assessee accepted the charges "in general sense" and confined its challenge to the rate of profit, contending that: (i) it had declared only 2.5% profit; (ii) the business was carried out under the rigours of a Special Government Scheme; and (iii) substantial expenses were incurred to operate within that scheme, so that application of a profit rate suitable for a normal business was erroneous.

2.3 The Revenue argued that: (i) the assessee's transactions were part of a larger scam involving bogus purchases, malpractices, corruption and suppression; (ii) the business was not conducted in the normal course, nor in compliance with applicable statutes or by paying sales tax; and (iii) the charges were proved on the basis of search materials. On this footing, it was contended that a profit rate of about 8%, after substantial reduction from an earlier much higher estimate (120%), was reasonable.

2.4 The Court accepted that the assessee's transactions were clandestine, almost in the nature of an "unlawful business", lacking credibility in accounts and working results, and therefore not comparable to a normal lawful wholesale textile business. The Court noted that even the 2.5% rate disclosed by the assessee, though possibly acceptable for a lawful wholesale dealer in some circumstances, could not be accepted as a finding of fact here due to want of credibility in the accounts.

2.5 The Court observed that the Assessing Officer himself had recognized the earlier estimated profit rate of 120% in the original assessment as "definitely excessive", particularly for uniform cloth sales, and had already granted considerable relief by allowing one-third deduction as expenditure in the remand assessment. On a general comparison, an 8% rate would not be unreasonable for a dealer in general textiles.

2.6 However, the Court emphasized a specific distinguishing factor: the assessee was mainly engaged in supplying uniform clothes under a Government scheme and the profit margin on uniform cloth is usually lower than on general textile items. Keeping this commercial reality in view, the Court considered 8% as "a little excessive" for this particular line of business, even in the backdrop of clandestine operations and lack of reliable accounts.

Conclusions

2.7 The Court held that while an 8% profit rate is generally not unreasonable for a lawful general textile business, in the particular facts of a clandestine business primarily dealing in uniform cloth under a Government scheme, that rate is somewhat excessive.

2.8 The Court modified the profit rate to 5% as a fair estimate in the circumstances and granted relief to that extent, resulting in the appeal being partly allowed.

---