SANTOSH GEMS N JEWELLS,MORADABAD vs. DCIT CENTRAL CIRCLE, MORADABAD

This appeal is filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-3, Lucknow [hereinafter referred to CIT (Appeals)] dated 14.03.2023 for assessment year 1 2019-20 in sustaining the net profit rate estimated at 5% of the turnover of the assessee.

The ld. Counsel for the assessee, at the outset, submitted that assessee is engaged in the business of sale and purchase of jewellery. The assessment was completed under section 143(3) of the Income Tax Act, 1961 (the Act) estimating the net profit at 5% on the turnover by the Assessing Officer which was sustained by the ld. CIT (Appeals). The ld. Counsel referring to the statement showing net profit rate for the assessment years 2017-18 to 2020-21 submits that the returns for these assessment years were accepted wherein the assessee has shown net profit of 2.35%, 1.76%, 0.32% and 1.11% for the assessment years 2017-18 to 2020-21. Ld. Counsel submits that in fact for the assessment year 2017-18 the assessment was completed under section 143(3) of the Act wherein the Assessing Officer has accepted the turnover of net profit of 2.35% shown by the assessee. Ld. Counsel submits that the average net profit of all these four years comes to 1.38% and the same may be adopted for the assessment year under consideration which is 2019-20.

The Ld. DR strongly placed reliance on the orders of the authorities below. The Ld. DR in the course of hearing submitted that the assessee has raised ground on rejection of books of accounts to which the Ld. AR submits that the assessee is agitating only the estimate of net profit estimated by the Assessing Officer and not agitating on rejection of books of accounts by the Assessing Officer.

Heard rival submissions and perused the orders of the authorities below. The assessee filed its return of income declaring income of Rs.77,450/-. The case was selected for compulsory scrutiny on the basis of survey proceedings under section 133A of the Act conducted on 28.02.2019 at the business premises. In the course of assessment proceedings the assessee was required to produce books of accounts along with bills, vouchers which the assessee initially did not produce before the Assessing Officer. However, it is noticed that at the fag end of the assessment proceedings the assessee submitted certain details of sales and purchases and produced partial books of accounts. It is the finding of the Assessing Officer that the assessee failed to produce complete books of accounts along with bills and vouchers and, therefore, the Assessing Officer came to the conclusion that the trading results are not satisfactorily verifiable and thus the books of accounts were rejected and the net profit was estimated at 5% of the turnover of Rs.2,40,55,468/- thereby making an addition of Rs.12,02,773/-. However, since the assessee has already declared income of Rs.77,450/- the Assessing Officer added the balance income of Rs.11,25,323/- and completed assessment which was sustained by the ld. CIT (Appeals).

It is the contention of the Ld. Counsel that the percentage adopted by the Assessing Officer is ad-hoc and there is no basis for arriving at 5% and in the absence of any comparable cases the percentage adopted by the Assessing Officer is not justified. According to the Ld. Counsel the average of the net profit rate shown for the assessment years 2017-18 to 2020-21 which comes to 1.38% should be adopted. The statement furnished by the assessee showing the net profit rate of various assessment years is as under:-

It is noticed that except for the assessment year 2017-18 there was no scrutiny assessment made by the Department in assessee’s case. The paper book 8 page Nos. 1 to 3 furnished before me which is the assessment order for the assessment year 2017-18 dated 19.12.2019 shows that the net profit declared by the assessee was not disturbed and accepted. In none of the other assessment years there was any scrutiny of the assessment under section 143(3) of the Act. The net profit shown by the assessee in the other three assessment years even though accepted by the Revenue under section 143(1) of the Act which was not subject matter of scrutiny and at the same time the percentage of net profit adopted by the Assessing Officer on ad-hoc basis to 5% cannot be adopted. Therefore, in the circumstances and to meet the ends of justice it would be appropriate to adopt the percentage of net profit as shown by the assessee for the assessment year 2017-18 i.e. 2.35% even for the assessment 4 year under consideration i.e. 2019-20. Thus the Assessing Officer is directed to apply the net profit rate at 2.35% as against 5% adopted on the turnover shown by the assessee for assessment year under consideration and re-compute the income accordingly.

In the result, the appeal of the assessee is partly allowed as indicated above. Order pronounced in the open court on : 11/08/2023.