2025 (12) TMI 29 - AT - Income Tax

Tax profit estimate reduced from 4% to 3.5% of turnover, partial relief granted to assessee

ITAT Rajkot partly allowed the assessee's appeal against the AO's estimation of profit at 4% of gross turnover. ITAT noted that the AO had not identified ... Estimating profit @4% on gross sales turnover - relevancy of nature of business, past history and comparative cases - HELD THAT:- AO had not specifically identified any specific defects in the purported evidences and also taking note of the fact that the assessing officer, has not held that these evidence filed by the assessee are bogus. Therefore, find some merit in the contention of the ld. Counsel for the assessee. While the case of the assessee merits some relief, at the same time entire relief cannot be permitted to the assessee. Ends of justice would be met, if a net profit rate of 3.50% ( instead of 4% made by AO) is adopted on the gross turnover, since the same would take care of the inconsistencies, if any, in the various documents and evidences submitted by the assessee, before the lower authorities. Therefore, in order to plug the leakage of revenue, direct the assessing officer to make addition at the rate of 3.50% of the gross turnover. Appeal filed by the assessee is partially allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether delay of 70 days in filing the appeal before the Tribunal was liable to be condoned on the grounds stated by the appellant. 1.2 Whether, in the facts of understatement of turnover and non-compliance with section 44AB, the estimation of profit by the Assessing Officer on the basis of a percentage of gross turnover was justified in law. 1.3 Whether the specific profit rate of 4% adopted by the Assessing Officer (and confirmed by the appellate authority) on the admitted gross turnover required interference and modification by the Tribunal, and to what extent. 1.4 Whether the reliance placed by the assessee on judicial precedent regarding estimation without rejection of books of account, specifically the decision in PCIT v. Forum Sales (P.) Ltd., was applicable to the facts of the present case. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Condonation of delay in filing the appeal Interpretation and reasoning 2.1 The Tribunal examined the assessee's petition explaining delay of 70 days, which attributed the delay to a mistake on the part of the tax consultant. The supporting affidavit and condonation application were considered. 2.2 The Tribunal recorded a finding that the reasons stated were 'convincing in nature' and constituted 'reasonable and sufficient cause' for delay. Conclusions 2.3 In the interest of justice, the delay was held to deserve condonation and was accordingly condoned; the appeal was admitted and decided on merits. Issue 2: Legality of estimation of profit on gross turnover in light of section 44AD / 44AB non-compliance Legal framework (as discussed) 2.4 The Tribunal noted that the assessee had originally declared income under the 'no account case' scheme u/s 44AD on a disclosed turnover of Rs. 1,03,43,628/-, declaring net profit of Rs. 7,91,012/- (7.65%). 2.5 During scrutiny, the assessee admitted that actual turnover was Rs. 11,93,30,453/-. The Assessing Officer pointed out that such turnover attracted 'compulsory audit' u/s 44AB, which the assessee had not complied with, and that presumptive income at 8% of such turnover would work out substantially higher than the income declared. Interpretation and reasoning 2.6 The Tribunal took into account: (i) admitted understatement of turnover in the return, (ii) declaration of income under section 44AD despite turnover falling under compulsory audit, (iii) non-compliance with section 44AB, and (iv) the fact that the assessee itself suggested estimation of income based on profit percentages. 2.7 The Assessing Officer, after issuing show-cause notices and considering replies, rejected the very low profit rate claimed on the full turnover and, instead of applying 8% under section 44AD on the admitted higher turnover, resorted to estimation by applying 4% of gross turnover as a fair and reasonable basis. 2.8 The Tribunal accepted that, in the background of serious discrepancies such as understatement of turnover, incomplete details, non-production of audit, and non-compliance with statutory audit provisions, an estimation of income on a percentage of gross turnover was justified to plug possible leakage of revenue. Conclusions 2.9 Estimation of income by applying a profit percentage to the gross turnover was held to be legally sustainable in the given facts, and the principle of estimation was upheld. Issue 3: Appropriateness of 4% profit rate and modification to 3.5% Interpretation and reasoning 2.10 The Tribunal noted that the Assessing Officer and the first appellate authority had relied, inter alia, on the following factors: (i) understatement of turnover from Rs. 1,03,43,628/- to actual Rs. 11,93,30,453/-; (ii) discrepancy between profit rate declared in return (7.65% on lower turnover) and very low profit claimed on the higher actual turnover; (iii) non-furnishing of complete books, balance sheet, capital account, and full ledger accounts; and (iv) certain inconsistencies in purchases and non-collection of TCS on scrap sales. 2.11 At the same time, the Tribunal recorded that the Assessing Officer had not specifically identified any particular purchase or sales bill as bogus, had not held any of the documentary evidences (sales/purchase registers, stock details, GST returns, P&L account) to be false or fabricated, and had not pointed out concrete defects in the quantitative details produced. 2.12 The Tribunal accepted the assessee's contention to a limited extent that, in the absence of specific adverse findings on the genuineness of the documents, the rate of 4% required moderation. However, it also found that the very low profit percentage pleaded by the assessee (0.54% for the year and 1.26% in the following year) could not be fully accepted considering the inconsistencies and the pattern of disclosure. 2.13 Balancing both considerations, the Tribunal held that the ends of justice would be met by adopting a slightly reduced net profit rate of 3.5% on the gross turnover instead of 4%, as this would reasonably account for possible deficiencies while avoiding excessive estimation. Conclusions 2.14 The Tribunal partly allowed the appeal and directed the Assessing Officer to recompute income by applying a net profit rate of 3.5% on the gross turnover of Rs. 11,93,30,453/-, thereby reducing the addition made at 4% but not deleting it in entirety. Issue 4: Applicability of precedent relating to estimation without rejection of books (PCIT v. Forum Sales (P.) Ltd.) Interpretation and reasoning 2.15 The assessee argued that estimated addition could not be sustained without rejection of books of account, placing reliance on the decision in PCIT v. Forum Sales (P.) Ltd. 2.16 The Tribunal examined the cited decision and observed that it concerned issues of inflated and bogus expenses, whereas in the present case the core controversy arose from understatement of turnover, non-compliance with statutory audit provisions, and the overall need for estimation on gross receipts. 2.17 The Tribunal, therefore, held that the cited precedent did not assist the assessee on the specific facts of the case. Conclusions 2.18 The contention that the estimation was invalid for want of formal rejection of books, based on the cited precedent, was rejected; the precedent was held to be inapplicable to the facts under consideration.