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Facts
The assessee, an advertising agency, challenged the CIT(A)'s order for AY 2013-14 which upheld the AO's estimation of business income at 8% of contract receipts and an addition of Rs.53,81,384/-. The assessee argued that it operated on a thin-margin model (3-4% net profit) and that the estimation was arbitrary, also contesting a double addition regarding cash deposits.
Held
The Tribunal condoned a 155-day delay in filing the appeal. On merits, it found the 8% estimation to be ad hoc and excessive, noting the assessee's consistent past low profit margins (3-3.7%) and the nature of its business. The Tribunal directed the income to be computed at 5% of the contract receipts and deleted the separate addition for cash deposits, deeming it impermissible double taxation.
Key Issues
Whether the estimation of business income at an arbitrary rate (8%) was justified given the assessee's low profit margins and historical data; and whether a separate addition for cash deposits amounted to impermissible double taxation.
Sections Cited
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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI S.R.RAGHUNATHA
आदेश / O R D E R
PER MANU KUMAR GIRI, JM:
The captioned appeal by the assessee is arising out of the order of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi dated 27.01.2025 for AY 2013-14.
We find that this appeal is filed with a delay of 155 days. The assessee filed an affidavit for condonation of delay stating the reasons.
Upon hearing both the parties and on examination of the said affidavit, we find the reasons stated by the assessee are bonafide, which really (AY 2019-20) Media Adds prevented in filing the appeal in time. Thus, the delay is condoned and admitted the appeal for adjudication.
At the outset, ld.AR for the assessee advanced his arguments only on the merits of the addition. Hence, other legal grounds are not being adjudicated.
In fact, this appeal by the assessee is directed against the order passed by the Commissioner of Income Tax (Appeals), NFAC, for the Assessment Year 2013-14, wherein the Ld. CIT(A) upheld the action of the Assessing Officer (“AO”) in estimating the business income at 8% of certain contract receipts and sustaining an addition of Rs.53,81,384/-. The assessee is engaged in the business of rendering advertisement services through various mediums including newspaper advertisements. It has been submitted by ld.AR that the assessee operates on a thin-margin model, as demonstrated by historical financial results. During the Assessment Year under consideration, the assessee disclosed contract receipts of Rs.8,40,12,821/- and earned net profit of Rs.28,72,757/- resulting in a profit ratio of 3.42%. The assessee filed declaration under the Income Declaration Scheme (IDS), 2016, showing business income of Rs.28,73,000/- consistent with the profits reflected in the audited financials.
Historical profit results from AY 2009-10 to AY 2012-13 show net profit (AY 2019-20) Media Adds ratios ranging from 3.16% to 3.70%, with the average net profit ratio being approx. 3.5%. The AO, however, adopted 8% of certain “undisclosed contract receipts” and made an addition of Rs.53,81,384/- which was partly confirmed by the Ld. CIT(A).
The ld.AR for the assessee disputes that the rejection of books and estimation of profit at an arbitrary rate of 25% or 8%, without any comparable cases or basis. He further submitted that the sustenance of addition despite consistent low-margin results of the assessee over several years is not justified. The ld. AR further pleaded that there is a double addition regarding cash deposits, which the assessee submits is part of business receipts already considered. The ld.AR vehemently submitted that the ld.CIT(A) has failed to appreciate that the assessee’s financials and IDS declaration support a net profit margin in the range of 3%-4%, and estimation beyond that is unjustified.
Per contra, ld. DR, Ms. Gauthami Manivasagam, JCIT vehemently relied upon the impugned order and pleaded for the dismissal of the appeal.
We have heard the rival submissions and carefully considered the assessment order, ld.CIT(A)’s order, and the material on record. We note (AY 2019-20) Media Adds that the assessee’s past profit ratios (AYs 2009-10 to 2012-13) consistently show margins around 3%–3.7%. It is consistent view that past history is an established and reliable basis for estimation of profits when books are rejected. Hon’ble Courts have repeatedly held that estimation should be fair, reasonable and based on the assessee’s own past results.
Advertisement agency services normally operate on thin margins, as they act as intermediaries between clients and media houses. There is nothing on record to disprove the assessee’s claim or to justify an unusually high profit rate such as 25% or even 8%. The profit declared under IDS is consistent with audited financials and further reinforces the assessee’s claim of low margins. We also note that the AO has not brought any comparable market data, industry benchmarks, instances of inflation of expenses, or defects in financials that justify a higher profit rate. Therefore, we find that the estimation appears ad hoc and excessive. Hence, considering the average profit margin of 3.5% over earlier years, the nature of business, thin-margin operation, the absence of material to justify higher rates and the need for a fair estimate we hold that estimating income at 5% of the contract receipts of Rs.8,40,12,821/- would meet the ends of justice.
Thus, income is directed to be computed as 5% of Rs.8,40,12,821 = Rs.42,00,641 (approx.). The AO is directed to adopt the above figure in (AY 2019-20) Media Adds place of the addition sustained by the ld.CIT(A) and recompute assessed income accordingly.
We also find force in the ld.AR’s argument that the cash deposits form part of the business receipts already considered while estimating profit, hence making a separate addition would amount to double taxation, which is impermissible. Therefore, we delete the entire addition relating to cash deposits.
Result The appeal of the assessee is partly allowed.
Order pronounced in the open court on 08th day of December, 2025 at Chennai.