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Income Tax Appellate Tribunal, ‘A’ BENCH, BENGALURU
Before: SHRI SUNIL KUMAR YADAV & SHRI INTURI RAMA RAOShri Anupam Kothari,
O R D E R Per INTURI RAMA RAO, AM : These are cross appeals filed by the revenue as well as the assessee directed against the order of the ld. Commissioner of Income- tax(Appeals)-V, [CIT(A)], Bengaluru, dated 25/04/2012 for the assessment year 2005-06.
Briefly facts of the case are as under: The assessee is an individual and is engaged in the business of trading export of ready-made & 875/Bang/2012 Page 2 of 7 garments and also Managing Director of a company viz. ‘Fibres & Fabrics International Pvt. Ltd.’ The return of income for the assessment year 2005-06 was filed on 28/10/2005 declaring total income of Rs.42,94,86,263/-. Against the said return of income, the assessment was completed vide order dated 12/11/2007 passed u/s 143(3) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] at Rs.44,65,64,478/-. While doing so, the Assessing Officer (AO) estimated the profit at 12% on the total turnover of Rs.12,75,37,442/- by doubting genuineness of commission payment and net profit disclosed for years are very low compared to profits in the immediately preceding year i.e. assessment year 2004-05 and 2003-04 i.e. 13.36% and 10.58% respectively. The AO also disallowed short-term capital loss of Rs.17,55,660/- on the ground that there was no necessity to sell mutual funds within short term and the assessee has failed to furnish details in support of this.
Being aggrieved, an appeal was preferred before the ld.CIT(A), who vide impugned order, while upholding the estimation of profit on turnover, however, had directed the AO to estimate profit at 8% as against 12% adopted by the AO and also directed the AO to allow short term capital loss of Rs.17,54,660/- after considering statements of account issued by the Portfolio Manager.
Being aggrieved, the assessee is in appeal before us in and the revenue is in appeal before us in .
Now, we shall take up the assessee’s appeal in ITA No.837/Bang/2012. The assessee raised the following grounds of appeal:
6. Learned counsel for the assessee vehemently contended that the ld.CIT(A) was not justified in estimating profits without pointing out defects in the accounts maintained by the assessee. It was further contended that low gross profit cannot be a reason to reject books of account and in support of this, he placed reliance on the decision of the Hon’ble Madras High Court in the case of G.V.D.I & Co. vs. Dy.CIT (363 ITR 27) and the decision of Hon’ble Punjab High Court in the case of Pandit Bros. vs. CIT (26 ITR 159) in support of the proposition that the AO can reject books of account only when he finds that there is no method of accounting regularly employed by the assessee or method employed is such that it does not disclose true and correct profits and losses. On the other hand, learned Departmental Representative vehemently contended that the genuineness of commission payment was & 875/Bang/2012 Page 5 of 7 not proved by the assessee during the course of assessment proceedings and purchases were made from the concern in which the assessee was substantially interested and therefore, the AO was justified in estimating profit at 12% of the turnover.
7. We heard rival submissions and perused the material on record. The issue in appeal is whether the AO is justified in rejecting books results and estimating profit at 12% of the turnover. The AO estimated profits by resorting to estimation of profit taking into consideration the following facts: i. Existence of proprietary concerns is not proved as it is found on inspection by the Inspector that all the concerns are housed under same roof and the name board or concerns were not displaced. ii. The purchases were made from concerns in which the assessee had substantial interest. iii. The genuineness of commission payments is not proved. On appeal before the ld.CIT(A) also, the ld.CIT(A) had upheld the estimate of profit. However, the ld.CIT(A) directed the AO to apply profit of 8% as against 12% adopted by the AO. Before us, learned counsel for the assessee had taken us to page No.507 of the paper book wherein cancellation of VAT registration of 5 companies to show that those concerns were actually in existence. In our considered opinion, existence or otherwise of proprietary concern is of no relevance as the AO has considered total turnover of 5 concerns. This issue has no bearing on rejection of books of account. But we find that the assessee has not discharged the onus of proving genuineness of commission payment which can be valid reason to reject book results and resort to estimation of profit. But the AO cannot indulge in wild guess work for adopting the rate of profit. It is now trite law that the rate of profit should be based on past history of the assessee or the profit earned by assessee in similar line of business, whereas in the present case, though the AO referred to profits shown in the immediately preceding year, these figures were disputed by the assessee stating that the AO had not considered net profit rate of assessment year 2004-05, considered only net profit of assessment year 2002-03 and 2003-04. Therefore, we remit this issue & 875/Bang/2012 Page 6 of 7 back to the file of the AO to adopt rate of profit based either on past history or by comparable profits of concerns in the similar line of business.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
The revenue raised the following grounds of appeal in :
9. The only effective grievance of the revenue is that the ld.CIT(A) was not justified in directing the AO to adopt net profit rate of 8%. In the assessee’s appeal, since we remanded the issue back to the file of the AO for adoption of the rate of profit based on the past history of the assessee and comparable profit of the concern in similar line of business. The & 875/Bang/2012 Page 7 of 7 appeal filed by the revenue shall be treated as partly allowed for statistical purposes.
Order pronounced in the open court on 23rd March, 2018.