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Issues: Whether the assessing officer's rejection of books of account and addition of Rs. 19,09,44,000 by estimating net profit at 8% of turnover can be sustained in view of vendor confirmations, ledger and bank records, remand proceedings and independent verification.
Analysis: The assessing officer applied an 8% ad hoc net profit rate after noting partial non-availability of confirmations and nil/non-business returns by certain major vendors. Substantial documentary evidence was placed on record including 26 vendor confirmations, party-wise ledgers and bank statements. The three principal vendors were non-resident shipping lines operating under the statutory framework applicable to international shipping, and two of them responded to verification notices issued in appellate remand proceedings. The appellate authority obtained a remand report, conducted independent verification through notices to third parties, and considered prior deletion of a similar ad hoc addition for an earlier year. The available evidence showed consistent low net profit ratios for the business and absence of cogent material to justify the arbitrary 8% estimation. Objections under the rule permitting or excluding additional evidence were addressed by the remand and verification process.
Conclusion: The ad hoc estimation of income at 8% of turnover and the rejection of books of account are not justified; the addition of Rs. 19,09,44,000 is deleted and the assessing officer's order is set aside (decision in favour of the assessee).
Ratio Decidendi: An ad hoc estimation of income cannot be sustained where substantial documentary evidence and third party confirmations, verified through remand proceedings and independent third party responses, rebut the basis for rejecting books of account and applying a presumptive profit rate.
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