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Facts
The assessee, a partnership firm, failed to file its income tax return for AY 2014-15. The Assessing Officer (AO), based on available information, treated the entire gross receipts of INR 46,50,05,403/- as taxable income, leading to an addition under section 147 r.w.s. 144B of the Act. On appeal, the Ld. CIT(A) estimated the net profit at 12.5% of the gross receipts, restricting the addition to INR 5,81,25,675.37. Both the Revenue and the assessee filed cross-appeals, with the assessee challenging the 12.5% estimation as excessive.
Held
The Tribunal affirmed that taxing gross receipts entirely was legally untenable and that profit estimation was necessary due to the assessee's failure to maintain proper books. Citing Section 44AD of the Income Tax Act, which prescribes an 8% presumptive profit rate for eligible businesses, the Tribunal found it just and expedient to adopt an 8% rate of the gross turnover receipts as the fair estimation of taxable income, modifying the CIT(A)'s 12.5% rate. This decision was also applied to the appeals for Assessment Year 2015-16, noting similar facts.
Key Issues
The key legal issue was determining the appropriate method and presumptive profit rate for estimating the taxable income of an assessee firm that failed to file returns and maintain books of accounts, where the AO had taxed gross receipts and the CIT(A) had estimated profits at 12.5%.
Sections Cited
Income Tax Act, 1961, Section 250, Section 148, Section 147, Section 144B, Section 194H, Section 194I(a), Section 194I(b), Section 194J, Section 4, Section 44AD, Section 44AB, Section 271F, Section 271(1)(b), Section 271(1)(c)
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The captioned cross-appeals have been filed at the instance of the Revenue as well as by the assessee against the first appellate orders passed by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre, Delhi [“Ld.CIT(A)”] u/s 250 of the Income Tax Act, 1961 [“the Act”] pertaining to Assessment Years 2014-15 & 2015-16. 2. As per respective grounds of appeal, both Revenue as well as the assessee have sought to impugn the first appellate order passed by Ld.CIT(A).
[Revenue’s appeal] & ITA No.3236/Del/2023 [Assessee’s appeal] [Assessment Year : 2014-15] 3. We shall first take up the appeal of the Revenue as well by the assessee for the Assessment Year 2014-15 i.e. ITA No.678/Del/2024 and 3236/Del/2023 for adjudication purposes.
Briefly stated, the assessee, a partnership firm, did not file return of income for Assessment Year 2014-15 in question. Based on the information available on the Departmental software ITBA, the Assessing Officer (“AO”) observed that the assessee has earned income by way of commission or brokerage, rent on plant & machinery earned professional or technical fee etc. Consequently, notices u/s 148 of the Act were issued and assessment was framed making an addition of INR 46,50,05,403/- u/s 147 r.w.s. 144B of the Act. Based on TDS deductions and other information received and in the absence of any cogent explanation offered on behalf of the assessee, gross receipts in the hands of the assessee under the various heads were adopted as taxable income and assessed accordingly.
Aggrieved, the assessee preferred appeal before Ld.CIT(A). It was contended before Ld.CIT(A) that while the requisite information is not available at the end of the assessee, the AO, on his part, has also completed the assessment in a mechanical manner without giving due consideration to the provision of law and the facts of the case. The AO has treated the whole of the gross receipts as taxable income without giving any allowance for the incidental expenses. The entire receipts from different services have been treated as income of the assessee in an unjust and arbitrary manner. It was inter-alia submitted Page | 2 before the Ld.CIT(A) that statute provides only for levy of tax on income component and not on gross receipts. It is common knowledge that earning of such income is associated with corresponding expenditure and what is chargeable to tax under the Income Tax Act is income and not the gross receipts. It was also submitted that contract receipts arise after incurring expenditure. The only business of the assessee is of advertisements. The assessee has got no plant & machinery for building, and as such the question of rental receipts on plant & machinery etc. does not arise. The assessee thus broadly pleaded for a fair assessment of income.
The Ld.CIT(A) examined the issues raised and observed that the additions of gross sum of receipts is not justified. The Ld.CIT(A), on analysis of the facts and submissions, observed that a benign approach needs to be adopted in the facts of the present case. The ld. CIT(A) accordingly considered it fit and proper to estimate the profit percentage @ 12.5% considering the average profit margin earned in such business based on market and industry data. The Ld.CIT(A) accordingly, applied estimated net profit of the assessee @ 12.5% on gross receipts assessed by the AO and consequently, restricted the additions to the extent of INR 5,81,25,675/- and accordingly, modified the assessed income of the assessee.
The relevant operative para of the order of Ld.CIT(A) dealing with the issue is reproduced as under:- 5.3. “The appellant during the course of appeal proceedings has submitted that the AO has added the gross receipts, which is not only illegal and arbitrary, but also against various judicial pronouncements by Hon'ble Courts, wherein it has been held that the Statute provides only for levy of tax on income and not on gross receipts. The appellant submitted that contract receipts always arise after spending expenditure. The appellant submitted that the only business of the appellant is of advertisements and it has got no plant and machinery or buildings, as such, the question of rental receipts on plant and machinery etc. does not arise. The appellant submitted that in form No. 26AS, the sections under which TDS has been made, i.e. 194H, 194 1 (a), 194 I (b) and 194 J have been wrongly quoted and the nature of entire receipts is one and the same, i.e. contractual receipts. The appellant submitted that the form No. 26AS itself discloses that the deductors are also engaged in the business of advertising and they have wrongly quoted different section while making deduction at source as under:- S.No. Name of the deductor Remarks Quoting of wrong section 1. Soni India P.Ltd. 194I(1) Receipts are of contractual nature 2. 194I(b) Shree Vardhman Infra Receipts are of Heights P.Ltd. contractual nature 3. 194J Shree Vardhman Infra Receipts are of Heights P.Ltd. contractual nature 4. Metro Shoes Ltd. 194(1)(b) Receipts are of contractual nature 5. 194 I(b) Max Publicity & Receipts are of Communication P.Ltd. contractual nature 6. M/s. M3M India Pvt.Ltd. 194 I (b) Receipts are of contractual nature 5.4. The appellant submitted that when the partners were inimical to each other and were not on reconciliatory terms, the firm was not in a position to furnish the return of income, the only way to determine the income was application of NP rate and submitted that in place of income of Rs. Rs.46,50,05,403, what is required is to determine the same @ 8%, which comes to Rs.3,72,00,432. Thus, the appellant submitted that the income of the appellant is required to be determined at Rs.3,72,00,432 as an alternate submission of the appellant. The appellant has also relied on a number of judicial decisions in support. 5.5. I have carefully considered the facts of the case, the submission of the appellant and evidences on record. I find that the AO added the entire gross receipts as the appellant failed to declare the income received. The appellant submitted that the only business of the appellant is of advertisements and it has got no plant and machinery or buildings, as such, the question of rental receipts on plant and machinery etc. does Page | 4 not arise. The appellant submitted that in form No. 26AS, the sections under which TDS has been made, i.e. 194H, 194 I (a), 194 1 (b) and 194 J have been wrongly quoted and the nature of entire receipts is one and the same, i.e. contractual receipts. 5.6. In the case of Commissioner of Income Tax Vs. Williamson Financial Services & Ors (SLP(C) 2275/2007, the Hon'ble Supreme Court has held as under :- "It is important to bear in mind that under section 4 the levy is on "total income" of the assessee computed in accordance with and subject to the provisions of the Income Tax Act. What is chargeable to tax under the Income Tax Act is the profit and gains of a year. What is chargeable to tax under the Income Tax Act is not the gross receipts, but income. Under the Income Tax Act, the tax is on income and not on gross receipts," 5.7. Through various decisions of Hon'ble High Courts and Tribunals, it is settled law that entire receipt cannot be treated as income. I find that Hon'ble Delhi High Court in the case of Commissioner of Income-tax- XII vs. Subodh Gupta [2015] 54 taxmann.com 343 (Del) held that in absence of material to show net profit rate, presumptive net profit rate of 8% as stipulated in section 44AD could be taken for estimation of income. In the case of Commissioner of Income Tax Vs. Balchand Ajitkumar 263 ITR 610 (2003), the Hon'ble MP High Court held that total sale cannot be regarded as the profit of the assessee. In the case of Commissioner of Income Tax Vs. President Industries (2002) 258 ITR 0654, the Hon'ble Gujarat High Court held that it cannot be a matter of an argument that the amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales. The sales only represented the price received by the seller of the goods for the acquisition of which it has already incurred the cost. 5.8. The question that arise is then, what will be the profit margin of the appellant. I find from the assessment order, that the AO has not doubted that the income of the appellant is from its legal business income. The addition was made of the gross amount because the appellant did not file return of income not claimed any expenses, deduction or exemption. However, it is also clear from the submission of the appellant that it has not maintained proper books of accounts as the partners were inimical to each other and were not on reconciliatory terms and the firm was also not in a position to furnish the return of income. No other supporting evidences or documents have also been submitted by the appellant during the appeal proceedings. As it is clear that the whole gross receipts cannot be taxed, the only way to determine the income is application of NP rate and the appellant had submitted that in place of income of Rs. Rs.46,50,05,403, a net profit @ 8%, which comes to Rs.3,72,00,432 may be applied. I find that the only business of the appellant is of advertisements and it has got no plant and machinery or buildings. Therefore, its net profit cannot be estimated @ 8% only as its expenses would also be minimum compared to other business which has maintain buildings, plant and machineries etc. I find that the average profit margin from advertisement business can vary depending on a number of factors, such as the size of the agency, the services it offers, and the industry it operates in. However, based on market and industry data, normally the average profit margin for such business was around 10-15%. Therefore, in the absence of any records and evidences in support of its claims, the submission of the appellant for estimating the net profit @ 8% is not acceptable. I find that to meet the ends of justice, it will be reasonable to estimate the profit percentage @ 12.5% considering the average profit margin for such business based on market and industry data available. Therefore, the net profit of the appellant is worked out to 12.5% on the gross receipts of Rs. 46,50,05,403, which comes to Rs. 5,81,25,675.37. the AO is directed to restrict the addition to Rs. 5,81,25,675.37. The appeal on Ground No.3, 4, 5, 6 & 7 are treated as partly allowed.
Ground No 8 is directed against the AO initiating the penalty proceedings u/s 271F and 271(1)(b) and 271(1)(c) of the Act. The appellant has not pressed this ground. Since an appeal lies against on order levying penalty and not against initiation of penalty, the appeal on this ground is treated as dismissed.
Ground No 9 is general in nature and needs no adjudication.” 8. Aggrieved by the aforesaid action, both Revenue and the assessee are in appeal before us. 9. As per its grounds of appeal
, the assessee has challenged excessive estimations of profits.
10. The ground of appeal raised by the Revenue reads as under:- 1. “Whether the Ld.CIT(A)’s has erred in calculating the assessee’s profit Margin @ 12.5% of Gross Receipt of Rs.46,50,05,403/- for the A.Y.2014-15, without considering the fact that increases by way of the Commission/brokerage receipt, Rent on plant & machinery receipt, Profit/technical fees receipt u/s 194J and Rental income receipt cannot be taxed on the basis of Profit margin @ 12.5%. Appellate is prays to add/delete grounds.”
11. At the time of hearing, the Ld. Counsel supported the action of the AO and contended that the burden was on the assessee to explain and corroborate the expenditure incurred and in the absence of any corroboration, the AO was having no option but to assess the whole of receipts attributable to the assessee. It was thus contended that the Ld.CIT(A) was not justified in modifying the assessment and estimate income at 12.50% as chargeable income in the hands of the assessee instead of gross receipts assessed by the AO as taxable income.
12. The assessee, on the other hand, appearing through online platform for hearing, defended the estimated income theory applied by Ld.CIT(A) but however, assailed the first appellate order on the ground that the estimations made are highly excessive. The Ld. Counsel for the assessee pointed out that the advertisement business in which the assessee was engaged, operates on a wafer- thin margins and estimations @12.50% of gross receipts do not accord with ground realities. The assessee firm could not continue with the advertisement business in the ensuing years due to highly competitive environment and lackluster margins. The Ld. Counsel contended that such business, most of the time, incurs losses or some marginal profits. To reinforce such plea, the Ld. Counsel for the assessee referred to the Tax Audit Report u/s 44AB of the Act of a peer firm engaged in the same business of advertising namely, M/s. Shakun Advertising Pvt. Ltd. [PAN-BBACS9742H] wherein, in the comparing turnover of INR 79.61 crores, the net profit derived by that assessee in Assessment Year 2015-16 was declared at INR 1.34 crores as per Row No.40 of the Tax Audit Report of that assessee. The Ld. Counsel for the assessee pointed out that the M/s. Shakun Advertising Pvt. Ltd. has earned net profit rate @ 1.69% in the current Assessment Year 2015-16 whereas reported net profit ratio stood at 1.05% in Assessment Year 2014-15 as noted in the Tax Audit Report. The Ld. Counsel for the assessee thus, submitted that applying 12.5% net profit ratio on the gross receipts as estimated income, is highly improbable and defies the grounds realties of advertising business. The Ld. Counsel for the assessee thus, urged for suitable relief and modification in the first appellate order by scaling down the estimations made by L.CIT(A) in the range of 2-3% of the turnover/ receipts.
13. We have carefully considered the submissions of rival parties and also perused first appellate order and assessment order. The material referred to and relied upon in the course of hearing has also been looked into. While it is the case of the Revenue that estimations made by Ld. CIT(A) towards plausible chargeable income derived by the assessee on receipts earned in advertisement and other activities, is not justified in the wake of absence of any corroborations, the assessee, on the other hand, contends that while some estimations may be justified in the facts of the case, the estimations made by the First Appellate Authority at 12.5% is highly excessive and calls for downward revision in sync with the book results of other assessee engaged in the similar business and have earned similar receipts.
14. Needless to say, the AO does not possess absolute arbitrary authority to assessee any figure he likes. It is beyond spellbound logic to treat entire receipt of a business as taxable income. It goes without saying indeed that gross receipts derived in the business cannot be taxed in its entirety and the Revenue is entitled to make suitable estimations of the profits in a given business where the documentary evidences are not available to support the correctness of the profits derived from the business to the satisfaction of the AO. The action of the AO is ostensibly beyond any comprehension and rather capricious exercise of his judgement. In the instant case, having regard to the facts and circumstances of the present case, the Ld.CIT(A) rightly displaced the additions of gross amount made by the AO and correctly resorted to estimations. The CIT(A) determined the estimated profits @ 12.5% of the gross business receipts. However, the assessee seeks to controvert the estimations to be highly elevated and excessive in view of the very ordinary profits ranging from 1.69% to 1.05% earned by other assessee, engaged in the same business.
15. We straightaway agree with the pragmatic & judicious approach adopted by the CIT(A) on first principles in determining the chargeable income by way of estimations. The approach adopted by the AO to tax entire gross receipts is wholly untenable and cannot be countenanced in law. The Hon’ble Supreme Court in the case of CIT vs. Simon Carves Ltd. 105 ITR 212 (SC) inter alia observed that “… Although it is part of their duty to ensure that no tax which is legitimately due from an assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that scales are weighted against the assessee. One is wholly unable to subscribe to the view that unless those authorities exercise the power in a manner most beneficial to the Revenue and consequently most adverse to the assessee, they should be deemed not to have exercised it in a proper and judicious manner”. 16. For determination of taxable income, involvement of some guesswork would be indispensable in the absence of requisite financial data. The Ld.CIT(A) however, while resorting to estimations, has applied 12.5% to be estimated profits from receipts derived in advertisement and other activities carried out by the assessee. The CIT(A) has not provided reference to any material to weigh 12.50% to be a fair estimate. The assessee on the other hand has given reference to profits derived by the other party in the same business. The profits declared in the range of 1.5% to 2% is thus claimed by the assessee to be a fair estimate. However, it is the duty of the assessee to support the claim of profits in such narrow and low range. The assessee itself is to blame for not doing so. The estimation in the vicinity of such profits of 2 % or thereabout proposed on behalf of the assessee thus cannot be accepted.
At this stage, in the balance of things, we resort to special provisions for computing the profits and gains of business on presumptive basis as codified in section 44AD of the Act. Section 44AD of the Act provides for statutory presumptions whereby the sum equal to 8% of the total turnover or gross receipts of the assessee in a previous year on account of the business by the eligible assessee is deemed as profit and gains of such business chargeable to tax. Impliedly such statutory estimations at 8% of the total turnover are based on empirical studies and data gathered with the Legislature. Such statutory estimations of profits thus may serve as useful guide for the purposes of estimations. Guided by the rules of justice, equity and good conscience, we thus consider it just and expedient to adopt the rate of 8% of the gross turnover receipts as fair estimation of taxable income and more so in the light of comparable data placed for lower profit margin earned by other assessee in same business. We thus, modify the first appellate order towards estimation of profits from 12.5% to 8%.
The assessee thus, gets partial relief.
In the result, appeal of the Revenue is dismissed whereas the appeal of the assessee is partly allowed. [Revenue’s appeal] & Year : 2015-16] 20. Now, we take up the cross-appeal of the Revenue and appeal of the assessee for the Assessment Year 2015-16.
Facts in these appeals are identical and similar as in and ITA No.3236/Del/2023 [Assessment Year 2014-15] with some variations in figures. The respective sides have canvassed similar plea. In view of the similarity of facts, our decision in ITA No.678/Del/2024 and ITA No.3236/Del/2023 [Assessment Year 2014-15] would apply Mutatis Mutandis in these appeals filed by the Revenue as well by the assessee. The estimation of profits by the CIT(A) would thus be modified at 8% as against 12.5% adopted by the CIT(A).
In the result, appeal of the Revenue is dismissed whereas the appeal of the assessee is partly allowed.
In the final result, both appeals of the Revenue are dismissed and both appeals of the assessee are partly allowed. Order pronounced in the open Court on 12th November, 2024.