Case Law Details
Brief of the Case
ITAT Delhi held in the case of Mohd Tehseen vs. ITO that the rate of profit @15% on estimated unaccounted sale is an arbitrary rate without any comparable cases. The best comparison is also available of the business of the assessee himself wherein he has shown net profit at the rate of 6%. This 6% rate has not been disturbed by AO. This rate is also higher against the rates provided by provisions of section 44AF, which is 5%. Also departmental representative could not show any reason that why profit should be estimated at the rate of 15% instead of 6%. Therefore, we are of the view that in absence of any comparable cases for adoption at such a high rate, which is almost 2.5 times of the net profit rate of the assessee, is not justified. As assessee has disclosed 6% net profit which is accepted by assessing officer, we do not see any reason to adopt any other rate.
Facts of the Case
The assessee is an individual earning income from trading of clothes. He filed his return of income on 04/12/2009 showing income of Rs.15,99,72. It was found that assessee has deposited Rs. 92,93,900/-in his 3 bank accounts. Assessee was asked to explain the reasons and source of this deposit as assessee has disclosed sales of Rs.30,66,200/- only and against this cash deposit in the bank account is Rs.92,93,900/-. Assessee explained before assessing officer that assessee was required to show turnover to the banker because a cash credit limit of Rs.15 Lacs was sanctioned and, therefore, to justify the bank limit the turnover was shown. Assessee also stated that on the same day he has deposits and withdrawals in this bank account and therefore credit of that transaction of withdrawal should be given to the assessee.
The assessing officer noted that assessee has filed his return of income showing net profit at the rate of 6% of the turnover and assessee himself had admitted that he has filed his return of income as per provisions of section 44AF. The Assessee further stated before the assessing officer that he is maintaining proper books of accounts. Therefore, as the amount deposited in cash in about 3 bank accounts was not reflected in the books of the assessee, he rejected the books of accounts of the assessee. The difference of Rs. 62,27,700/– is treated as unexplained sales of the assessee and on which AO applied a net profit rate of 15% and made an addition of Rs.9,34,155/-.
Contention of the Assessee
The ld counsel of the assessee submitted that amount deposited in the bank account of the assessee is because of the reason that he was to show turnover as he has taken cash credit limit with the bank. He further submitted that that the assessing officer has not rejected the books of accounts of the assessee.
He further submitted that the total amount deposited in the bank has been taken as sales without granting credit for withdrawals. He stated that there is no justification given by the assessing officer for adopting the net profit rate of 15% applied on estimation of unaccounted sales where the assessee’s net profit rate shown is 6%. He further submitted that according to section 44AF of the act prescribed rate is 5 %. Therefore, his argument that firstly the addition is wrongly made and secondly the adoption of higher profit rate compared to his own rate is not justified.
Contention of the Revenue
The ld counsel of the revenue relied upon the order of the ld CIT (A) and assessing officer. He submitted that when the amount is deposited in cash in various bank accounts which are not reflected in the books of accounts of the assessee, books of accounts does not show the correct picture and it is incorrect to say that that the books of accounts have not been rejected by the assessing officer. He referred to the order of the assessing officer and submitted that that the cash deposited in the bank account was not at all reflected and similarly, the withdrawals also were not reflected in the books of the assessee. Therefore credit for withdrawal cannot be granted.
He further submitted that higher rate of profit is justified because of the reason that assessee himself had adopted net profit rate of 6% and all the expenditures have already been debited by the assessee in his books of accounts while calculating the 6% and for the unaccounted sales there cannot be any further expenditure. Therefore, he stated that the rate of 15% adopted by the AO is correct and the CIT (A) has upheld it. Therefore, he submitted that the addition may be confirmed.
Held by CIT (A)
The CIT (A) confirmed the addition and rejected the appeal of the assessee.
Held by ITAT
ITAT held that it is undisputed that assessee has shown income at the rate of 6% of net profit on the turnover of Rs.30,66,200/- only whereas an amount of Rs.92,93,900/- is found deposited in various bank accounts. The assessee could not offer any satisfactory explanation about excess deposit of Rs.62,27,700/- compared to its sales. Therefore, we do not find any infirmity in the order of the assessing officer or appellate authority because of the reason that there is a huge difference in sales accounted in the books of the assessee as well as amount deposited in cash in various bank accounts. Therefore, we confirm the action of assessing officer of determining unaccounted sales of Rs.62,27,700/-.
Whether AO has rightly adopted @15% of the net profit on unaccounted sale against 6% shown by assessee
ITAT held that from the order of the assessing officer as well as CIT (A), we could not find any reason or any comparable case where the rate of profit is adopted at the rate of 15%. Therefore, according to us, this is an arbitrary rate without any comparable cases. The best comparison is also available of the business of the assessee himself wherein he has shown net profit at the rate of 6%. This 6% rate has not been disturbed by AO. This rate is also higher against the rates provided by provisions of section 44AF of the Income Tax Act, which is 5%. Before us learned departmental representative could not show any reason that why profit should be estimated at the rate of 15% instead of 6%. Therefore, we are of the view that in absence of any comparable cases for adoption at such a high rate, which is almost 2.5 times of the net profit rate shown by the assessee, is not justified. Therefore, we are of the view that best estimate available is the trading result of the assessee himself. As assessee has disclosed 6 % net profit which is which is accepted by assessing officer, we do not see any reason to adopt any other rate. In the result, we direct the assessing officer to adopt net profit rate of 6% on unaccounted sales and restrict the addition to that extent only.
Accordingly appeal of the assessee partly allowed.
