Merchandise arrangement and fixed licence receipts: trading profit cannot be presumed on liquor purchases without evidence of actual business income.

A liquor licence holder's receipts were confined to a fixed monthly licence consideration under merchandise agreements, while liquor purchased in his name was transferred to merchandisers on a cost-to-cost basis. On the facts, no material showed that he carried on the retail business, controlled day-to-day operations, or earned trading margins. With no specific defects in the accounts and one identical arrangement accepted by the Revenue in the same year, profit could not be estimated at 5% on purchases. The addition based on presumed business income was deleted, reflecting that trading profit cannot be assumed where genuine merchandise arrangements limit the assessee's income to fixed licence receipts.

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Issues: Whether profit could be estimated at 5% on liquor purchases made in the assessee's name and added as business income, despite the existence of merchandise agreements under which the assessee received only a fixed monthly licence consideration.

Analysis: The assessee was a liquor licence holder and had entered into merchandise agreements under which the liquor purchased in his name was transferred to the merchandisers on a cost-to-cost basis, while he earned only fixed monthly receipts. Identical arrangements in respect of the second merchandiser were accepted by the Revenue in the same year, but the addition was sustained only for the first merchandiser. No material was brought on record to show that the assessee actually conducted the retail business, controlled day-to-day operations, or earned trading margins. In the absence of specific defects in the accounts and without evidence that the income was assessed in the hands of any other person, estimation on purchases was not justified.

Conclusion: The addition made by estimating 5% profit on the purchases was deleted, and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded and the impugned addition was set aside on the ground that the assessee's income was confined to the fixed licence consideration under the merchandise arrangement.

Ratio Decidendi: Where the assessee, as a licence holder, proves that liquor purchases were transferred on a cost-to-cost basis under a genuine merchandise arrangement and the Revenue accepts the same transactional pattern in identical circumstances, trading profit cannot be presumed and estimated merely because the merchandiser did not independently offer income to tax.

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