2025 (12) TMI 1767 - AT - Income Tax

Manufacturing business turnover-based profit estimate after books rejected u/s145(3), 1% rate set aside; 0.50% applied.

Whether income could be estimated at 1% of turnover after rejection of books under s.145(3) turned on the evidentiary basis for the rate adopted. The ... Estimation of income at 1% of the turnover - action of the AO in invoking the provisions of section 145(3) - DR said purchases and sales declared by the assessee are not genuine, the assessee has not established genuineness of the purchases and sales, which are carried out by the assessee within the close group of entities and accordingly, he supported the detailed findings of lower authorities -HELD THAT:- AO has acted on his observation that the profit declared by others in the similar line of business is usually in the rage of 0.8% to 1.25%, which clearly indicates that the AO has not brought any cogent material on record to justify the basis of estimation @ 1%, comparing the similar companies in the same line of business. The adhoc estimation of income @ 1% without there being any corroborative comparison made by him shows that it is only the presumption. In our considered view, since the AO has not carried out the proper comparison and it is only an assumption and conjecture, we are inclined to estimate the income based on past performances of the assessee. It is not the case of the lower authorities that the assessee is not a manufacturer of milk and milk products. We observe that the average net profit declared by the assessee is about 0.4%. Since we are estimating the income, in our considered view and also for the sake of complete justice, it is fair to estimate the income at 0.50% of the total sales declared by the assessee in the year under consideration. AO is directed to estimate the income of assessee adopting the net profit rate of 0.50%. 1. ISSUES PRESENTED AND CONSIDERED 1) Whether rejection of the assessee's books of account under section 145(3) was justified on the basis of alleged non-availability/incompleteness of debtor details and doubts raised from enquiries about certain major buyers and a supplier, despite existence of actual production and electricity consumption. 2) Upon rejection of books, whether estimation of income by applying a net profit rate of 1% of turnover was supported by cogent material and proper comparable analysis, or whether income should instead be estimated with reference to the assessee's own past performance. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Justification for rejection of books of account under section 145(3) Legal framework (as discussed): The assessment was made by rejecting books under section 145(3), leading to estimation of profits. Interpretation and reasoning: The Court noted that the Assessing Officer rejected the books 'merely' because the assessee did not provide full details of certain parties (such as vendor names, addresses and PAN details) and based on doubts arising from enquiries concerning some buyers/supplier. At the same time, material on record showed that the assessee had an operational milk processing plant, incurred substantial expenditure and depreciation, and the Addl. CIT's observations (sought by the Assessing Officer) indicated that it would be inappropriate to treat the entire purchases/sales as mere financial flows, since actual production and electricity consumption corroborated business activity. Conclusions: While the assessment proceeded on rejection of books and estimation, the Court's determinative reasoning emphasized that the business involved actual production corroborated by electricity consumption and that the rejection was not to be treated as a basis for treating the entire activity as non-genuine. The Court therefore addressed the consequence primarily through a corrected estimation approach rather than sustaining the 1% estimate. Issue 2: Validity of estimating net profit at 1% versus estimation based on past performance Legal framework (as discussed): Following rejection of books, income was to be determined by estimation (best judgment-type approach) on a reasonable basis. Interpretation and reasoning: The Court found that the Assessing Officer adopted 1% net profit by stating that other similar market players generally earned 0.8% to 1.25%, but without bringing any cogent material on record or making a proper comparable analysis of similarly placed concerns. The Court held that such ad hoc estimation at 1% without corroborative comparison reflected assumption and conjecture. It then relied on the assessee's own consistent past results over three years, where net profit remained around 0.37%, 0.40% and 0.41% (average about 0.4%). Considering this history and 'for the sake of complete justice,' the Court determined that a slightly higher rate than the historical average would be fair. Conclusions: The Court set aside the 1% net profit estimation and directed the Assessing Officer to estimate income by applying a net profit rate of 0.50% of total sales for the relevant year, treating this as a fair estimate based on the assessee's past performance rather than unsupported industry-range assertions.