In case of rejection of books of account profit ratio applied for earlier year should be considered

Brief Facts of the Case

During assessment the the books of accounts were not presented to the AO and therefore the AO rejected books of accounts u/s 145(3) of I.T. Act. And proceeded to apply the net profit rate at 8% which was excessive and arbitrary and does not have linkage with the net profit being shown in earlier years when the books of accounts were not rejected.

Moreover in the appellant’s own case the A.O. has applied N.P. rate 5% which has been reduced by the CIT (Appeals) 4% in prior year’s assessment, on contract receipts. The A.O. did not advance any reason for adopting the rate of 8% for estimation of profit on contract receipts. No comparison has been made which similar cases of other assessee, in application of N.P. rate @ 8%. Even the A.O. has overlooked the immediately preceding assessment year’s history of estimation of income.

Question of Law

Whether profit % can be applied on estimate basis if books of accounts are rejected, without reference to earlier year’s profit % where books were accounts were not rejected or whether the Assessing Officer is justified in Assessing the profit at a rate higher than earlier year in which profit was assessed by Assessing officer without specifying the reason for the same?

Contention of the Assesse

The assessee submitted that in earlier year, the profit of the assessee was in the range of 2.06% to 3.02% and in assessment year 2009-10, the Assessing Officer adopted net profit rate of 5%, which was reduced by learned CIT(A) to 4% and therefore, in the present year also the order of CIT(A) should be confirmed.

The comparative chart of contract receipts, expenditure, net profit and percentage of net profit of three years is as under:-

The above chart transpires that the appellant has shown the net profit slightly higher than assessment year 2009-10. The CIT(Appeals)-II, Lucknow in appeal No.25/ 113/DCIT / Gonda/Lko11-12 has confirmed the application of N.P. @4% on the gross contract receipts.

Case Law relied on:

• Hon’ble Rajasthan High Court rendered in the case of CIT vs. Inani Marbles P. Ltd. [2009] 316 ITR 125 (Raj).
  

Contention of the Revenue

The estimation of net profit cannot be made based on the net profit in the immediately proceedings years because facts of the case in the year under consideration are totally different from facts in immediately proceedings assessment years.

The business results disclosed by the assessee in the year under appeal cannot be considered for deciding the estimation of net profit as after rejection of books of a/c, any business results prepared on the basis of these books have no legs to stand.

Held by the ITAT

In assessment year 2009-10, the Assessing Officer estimated the income at 5%, which was reduced by learned CIT(A) to 4% and nothing has been brought on record showing that this finding of CIT(A) is challenged by Revenue before the Tribunal and the same was disturbed by the Tribunal. As per the judgment of Hon’ble Rajasthan High Court cited by Learned A.R. of the assessee, it was held that Tribunal is justified in applying profit rate of prior year. In the present case, the CIT(A) has adopted the same rate as has been adopted by CIT(A) in assessment year 2009-10 and nothing has been brought on record to show that the finding of CIT(A) in assessment year 2009-10 has been challenged by the Revenue and the same was disturbed by any higher authority. Considering these facts, we do not find any infirmity in the order of CIT(A) and decline to interfere in the same.