2025 (9) TMI 426 - AT - Income Tax

Tax appeal allowed; 10% addition on liquor dealer's gross receipts deleted as unsupported speculation and not comparable

ITAT KOLKATA - AT allowed the appeal, holding that the AO's rejection of books and imposition of a 10% addition on gross receipts for a business dealing ... Rejection of books of accounts - applying 10% on the gross receipt after rejecting the books of accounts u/s 143(3) - assessee is undisputedly carrying the business of purchase and sale of liquor - HELD THAT:- We note that all the information available before the AO and even in order to make the best judgment assessment the AO has to find out the comparable case and as to base his conclusion on the comparable cases and not based on the views and findings of conjuncture and surmises. Therefore, the order passed by the ld. CIT(A) upheld the order of the AO cannot be sustained. We note that even the ld. CIT(A) has overlooked the facts on record, since there is an open and shut case before us. Therefore, we are inclined to set aside the order of the CIT(A) and direct the AO to delete the addition. The appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer lawfully estimated income by applying a flat 10% profit rate on aggregate receipts after rejecting the assessee's books of account under section 143(3) and/or framing assessment under section 144B (best judgment assessment), when audited financial statements and details of purchases and sales were available on record. 2. Whether the appellate authority (National Faceless Appeal Centre) correctly upheld the addition in absence of adequate application of comparable data and in view of the assessee's historical profit margins shown in tax audit report. 3. Whether, on the materials before the revenue authorities (audited P&L, purchase ledger showing purchases from State Beverages Corporation, sales figures and prior years' GP/NP percentages), making an addition by conjecture and applying a standard percentage without identifying or relying on relevant comparables or specific evidentiary deficiencies is sustainable. ISSUE-WISE DETAILED ANALYSIS - 1. Lawfulness of 10% estimation after rejection/assessment Legal framework: The assessment was framed under section 143(3) read with section 144B (best judgment/estimation powers) following alleged rejection/non-cooperation. The issue requires application of the principle that when books are rejected or a best judgment assessment is framed, the AO must base estimation on available material and comparable data and not on arbitrary surmise. Precedent Treatment: The record does not show reliance on any specific judicial precedent by the authorities; the Tribunal treats established principles governing best judgment/estimation (requirement of material basis and comparables) as applicable. Interpretation and reasoning: The Tribunal notes that audited financial statements, detailed purchase and sale figures (including purchase of controlled item-liquor-from a State Beverages Corporation, and audited turnover), and tax-audit schedules were available before the AO. Despite availability of these records, the AO aggregated receipts and applied a blanket 10% net profit to compute income. The Tribunal reasons that where books or audited statements are on record and furnish a basis for profit computation (including preceding years' results), an estimate cannot be founded on conjecture; the AO must identify a rational basis (comparables, abnormal items, undisclosed turnover, stock differences, etc.) to reject declared results and apply an arbitrary percentage. Ratio vs. Obiter: Ratio - The AO's exercise in applying a flat 10% without anchoring the estimate to the available audited accounts or specific comparables is unjustified. Obiter - Observations on the nature of controlled-item trade (liquor) and TCS applicability are explanatory to the reasoning. Conclusions: The addition based on a 10% application is unsustainable where audited statements and specific transactional details were on record and the AO did not demonstrate the inadequacy of such records or identify valid comparables or discrepancies warranting that estimation. The Tribunal directs deletion of the addition. ISSUE-WISE DETAILED ANALYSIS - 2. Appellate authority's confirmation in absence of proper fact-finding Legal framework: Appellate review requires the appellate authority to examine the material on record, give notice and opportunity, and decide whether the AO's estimation is supported by evidence; mere absence of the assessee at appellate hearings does not automatically validate speculative assessments if the record otherwise contradicts the estimation. Precedent Treatment: No specific cases are cited; the Tribunal applies the general principle that appellate authorities must form independent satisfaction based on the record and cannot uphold an estimate founded on conjecture when the record contains countervailing audited particulars. Interpretation and reasoning: The Tribunal finds that the appellate authority upheld the AO's order principally because the assessee failed to appear/respond to dates in appeal proceedings. However, the appellate order overlooked that relevant audited books and schedules were already filed and available on record, which contradicted the basis for a 10% arbitrary addition. The Tribunal emphasizes that appellate confirmation cannot substitute for an independent appraisal of the sufficiency of the material that led to the assessment; absence of the assessee at appeal does not cure the AO's lack of a material foundation for estimation. Ratio vs. Obiter: Ratio - The appellate authority erred in confirming the addition without addressing or reconciling the audited accounts and prior years' profit margins present on record. Obiter - Remarks on procedural conduct (non-cooperation) are explanatory but cannot validate the estimation absent substantive justification. Conclusions: The appellate confirmation is set aside because it failed to consider available audited records and prior-year profitability, and therefore could not sustain an addition founded on conjecture. ISSUE-WISE DETAILED ANALYSIS - 3. Relevance of historical profit margins and comparability Legal framework: In forming a best judgment estimate, the AO must consider previous years' results and other contemporaneous data to determine whether declared profits are aberrant; consistent historical GP/NP percentages are relevant indicia for assessing reasonableness of declared income. Precedent Treatment: The judgment applies the accepted evidentiary role of historical profit/loss percentages; no precedent is expressly cited or overruled. Interpretation and reasoning: The Tribunal examines the tax-audit chart showing net profit percentages over several years (approx. 2.24% to 2.98% across years, with the preceding year at 2.40%), and contrasts these with the AO's application of a 10% net profit for the year under assessment. The Tribunal reasons that such an upward deviation requires justification (e.g., newly discovered facts, suppressed sales, unexplained cash receipts), none of which the AO or the appellate authority identified. Given the presence of audited books corroborating purchases from a State corporation and corresponding sales figures, the Tribunal concludes that the historical profitability materially undermines the reasonableness of the 10% estimate. Ratio vs. Obiter: Ratio - Historical profit percentages on record materially undercut the AO's unexplained adoption of a 10% net profit; absence of valid comparables or identified anomalies renders the estimate arbitrary. Obiter - Comments on the requirement to identify comparables are explanatory guidance for future assessments. Conclusions: The AO's blanket application of 10% is inconsistent with the company's demonstrated historical profit margins and thus unsustainable; the addition must be deleted. OVERALL CONCLUSION AND RELIEF The Tribunal finds that the AO's estimation by applying 10% on aggregated receipts was made without adequate material foundation, ignored available audited accounts and prior-year profit data, and amounted to conjecture. The appellate authority erred in upholding that estimation without independently addressing the record. The addition is therefore deleted and the appeal is allowed.