L.P.R. Construction vs. Deputy Commissioner Of Income Tax - (Income Tax Appellate Tribunal) (15 Jul 2021)

Past history of assessee is a proper and reasonable guideline for estimation of income after rejection of books of account

MANU/IW/0036/2021

Direct Taxation

The only issue arises in this appeal of the assessee is regarding addition made by Assessing Officer by applying net profit rate of 7% as against net profit declared by assessee at 6.5%. The Assessing Officer has rejected the books of account of assessee by invoking the provision of Section 145(3) of the Income Tax Act, 1961 (IT Act) for want of supporting the evidence. After rejection of books of account, the Assessing Officer proceed to estimate the income of assessee and referred the provision of Section 44AD of the IT Act.

When the turnover for the year under consideration is about Rs.7.25 crores then the assessee does not falls in the ambit of provisions of section 44AD of the IT Act. The Assessing Officer is not permitted to invoke the said provisions of Section 44AD of the IT Act. The Assessing Officer has estimated the income of the assessee by applying the net profit at 7% as against the net profit declared by assessee at 6.5% while estimating the income. The Assessing Officer made reference of various cases where the income estimated declared by taking net profit rate 4.5% to 12% as well as well as the provision of Section 44AD and then taken the net profit at 7%. It is pertinent to note that after rejection of books of account under Section 145(3) of the IT Act, 1961 it is incumbent upon the Assessing Officer to pass the best judgment assessment. While estimating the income of the assessee, there should be a proper and reasonable basis and guidelines.

It is settled proposition of law that, past history of the assessee is a proper and reasonable guidelines for estimation of income after rejection of books of account. The comparative details for the A.Y.2011-12 and for the year under consideration are not in dispute. The assessee has declared better N.P. for the year under consideration on a substantial higher turnover in comparison to the A.Y.2011-12. The net profit declared by assessee for A.Y.2011-12 is accepted by revenue though under Section 143(1) of IT Act and the said return of income filed by assessee has not been disturbed till date.

Accordingly, when the Assessing Officer has not carried out any exercise to determine the proper and reasonable rate of net profit by considering the proper criteria/basis in the processed of estimating the income of the assessee after rejection of books of account then the rate of profit at 7% is highly arbitrary and unjustified. The rejection of books of account would not be ipso facto result in an addition to the income declared by assessee, if G.P. /N.P. declared by assessee is better than the past history of G.P. /N.P. or any other reasonable criteria/guidance to be considered as basis for estimation of income. In view of the fact that the assessee has declared net profit at 6.5% on turnover of 7.25 crores is higher than the N.P. declared by assessee in preceding year and in the absence of any reasonable basis, criteria or guidelines applied by Assessing Officer the adoption of net profit at 7% is not justified. Hence, in view of the facts and circumstances, the addition made by Assessing Officer is not sustainable and the same is deleted. Appeal filed by the assessee is partly allowed.

Tags : ASSESSMENT ADDITION LEGALITY