INCOME TAX OFFICER , INCOME TAX DEPARTMENT vs. TRUE VALUE HOMES (INDIA) PRIVATE LIMITED, CHENNAI

The case was selected for scrutiny assessment under the e-Assessment Scheme, 2019. Accordingly, a notice under section 143(2) of the Act was issued on 23.09.2019, followed by a notice under section 142(1) of the Act, along with a detailed questionnaire on 20.11.2020.

In response to the notices issued by the AO, the assessee furnished financial statements, auditor’s report dated 30.05.2018 (but not audited u/s.44AB of the Act – Form 3CB and 3CD was not filed) and other details.

During the course of assessment, the case was referred to the Departmental Valuation Officer (DVO) under section 142A of the Act, with a direction to submit

Consequently, the total income was assessed at Rs.48.54 crores and a demand of Rs.35.95 crores was raised.

Aggrieved, the assessee preferred an appeal before the Ld.CIT(A). Upon examining the DVO’s report and after considering detailed submissions, the Ld.CIT(A) deleted the addition of Rs.20.00 crores made u/s.69 of the Act and as regards the estimation of income, restricted the addition to Rs.1.57 crores as against the original addition of Rs.15.72 crores.

The Revenue has come in appeal before us, challenging the restriction of profit estimation to Rs.1.57 crores (1.54% of turnover) as against Rs.15.72 crores applied by the Assessing Officer. It is, however, noted that the deletion of Rs.20.00 crores u/s.69 has not been contested by the Revenue, and hence that part of the Ld.CIT(A)’s order has attained finality.

The Ld.DR supported the order of the AO with respect to the issue on profit estimation and relied on the grounds of appeal before us and argued that the order of the Ld.CIT(A) warrants interference to the extent of the issue on profit estimation. Further, the ld.DR submitted that the books of accounts of the assessee has not :-4-: ITA. No.:1213 /Chny/2025 been audited u/s.44AB of the Act and reducing the addition of profit to Rs.1.57 crores i.e. 1.54% of the Turnover against the estimation of 8% is arbitrary decision of the ld.CIT(A) and hence prayed that the appeal of the revenue be allowed.

We have heard the arguments of both the parties and have carefully considered the findings of the AO and the reasoning adopted by the Ld.CIT(A) in their respective orders. The AO had estimated the assessee’s net profit at 8% of the total turnover, resulting in an addition of Rs.15.72 crores. On a perusal of the assessment order, it is evident that such estimation was made without any cogent or rational basis and no comparable cases or industry data were cited in support of such a high profit rate.

Before the Ld.CIT(A), the assessee placed reliance upon audited financial statements and tax audit reports for Assessment Years 2014-15, 2015-16, 2016- 17 and 2017-18, which revealed a variation in the net profit ratio from 0.57% to 2.62%. However, the gross profit margin are declined from 27.40% to 16.15% during the above said years. The assessee explained that the fall in net profit was primarily due to a significant decline in business turnover, whereas the establishment and operating expenses did not reduce proportionately.

However, the Assessing Officer noted that the books of account for the relevant assessment year were not audited as per the provisions of section 44AB of the Act and hence he concluded that the assessee has failed to conduct the business and maintain the books of accounts in transparent manner. Hence the Assessing Officer rejected the books of accounts and estimated the net profit at 8% of the turnover. Nevertheless, the assessee supported its submissions with audited financial statements and assessment orders for AYs 2015-16 to 2017-18, copies of which have been placed before us in Paperbook–1.

The profitability trend for the three preceding financial years, as noted by the Ld.CIT(A) and submitted before us along with written submission, is reproduced below:

The Ld.CIT-A, after analyzing the above data, noted that the average net profit rate for the preceding three years worked out to approximately 1.54%. The Ld.CIT(A) applied this average rate to the turnover of Rs.196.58 crores for the assessment year under consideration, resulting in an estimated net profit of Rs.3.02 crores.

We find that the approach adopted by the Ld.CIT(A) is reasonable and judicious, being based on historical audited results of the assessee itself rather than on arbitrary presumptions. The reliance on past performance as a benchmark for estimation is a well-accepted principle in income tax jurisprudence, particularly where books have been rejected but comparable records of earlier years are available.

We also note that the Ld.CIT(A) has upheld the rejection of books of account in view of the assessee’s non-compliance and inadequate cooperation during the assessment proceedings. However, the quantum of addition has been rationally moderated based on the available data, ensuring that the estimation reflects a fair and equitable determination of the assessee’s true income.

Further, we note that the assessee has maintained the books of accounts which have been audited by the statutory auditors as per the statutory requirement under the Companies Act and filed the same before the authorities both during the assessment as well as appellate proceedings. Therefore, we do not concur with the authorities for rejection of books of accounts of the assessee, merely for the reason that the tax audit report u/s.44AB of the Act has not been filed without assigning any defects or flaws in the books of accounts. On perusal of the written submission made by the assessee before the ld.CIT(A), we note that the assessee has been following the one of the methods prescribed under Accounting Standard

We agree with the reliance placed by the assessee on the following judicial precedents in support of their arguments for unjustified rejection of books of accounts: - Zuberi Engineering Compnay V.DCIT [2019] 103 taxmann.com 196 - ITO V. Girish M.Mehta [2007] 105 ITD 585 - ACIT V. Intermedia Cable Communication Pvt. Ltd [2012] 19 taxmann.com 190 - ld.CIT(A) V. Om Overseas [2008] 173 taxman 185 ( P & H )

Further, on perusal of the paper book 2 filed by the ld.AR, we find that the assessee’s case for the previous A.Yrs. 2015-16, 2016-17 and 2016-17 (Page No.4-5, 8-15 & 18-26 of paper book) have been selected for scrutiny assessment and concluded the assessment by accepting the return of income by making only a disallowance on account of delay in paying the ESI/PF contribution u/s.36(1)(va) of the Act.

In the present facts and circumstances of the case and based on our above discussion, we find no infirmity in the reasoning or computation adopted by the :-8-: ITA. No.:1213 /Chny/2025 Ld.CIT(A) in arriving the net profit @ 1.54%. Accordingly, the order of the Ld.CIT(A) on this issue is affirmed by dismissing the grounds of appeal of the revenue.

In the result, the appeal of the Revenue is dismissed.