Rajiv Gupta v. Ito

Chandra Poojari, A.M:— This appeal by the assessee is directed against the order of the CIT(A)-III, Hyderabad dated 11 December, 2012 for A.Y 2009-2010.

2. The grievance of the assessee is with regard to estimation of income on the reason of low gross profit declared by the assessee without rejecting books of account. The assessee also raised one more ground that the assessee is entitled for deduction u/s. 80C and 80D of Income-tax Act, 1961.

3. Brief facts of the case are that the assessee is an individual who derives income from manufacture of packing material and film lamination. He filed his return of income for the A.Y 2009-2010 on 22.9.2009 declaring total income of Rs. 4,23,490. The AO completed assessment order u/s. 143(3) of the Act by making the following additions:

i) Disallowance of gross profit - Rs. 31,91,548 ii) Disallowance of unvouched Expenditure - Rs. 2,67,203 iii) Disallowance u/s. 80C Rs. 27,878 & 80D Rs. 14,370 totalling to - Rs. 1,02,248 And determined total income at - Rs. 39,84,248

4. On appeal, the CIT(A) observed that it is an admitted fact that expenditure on salaries, repairs, fuel etc., were not properly vouched. The assessee could not even provide details of salaries and other major expenses. Some vouchers were also defective. In other words, the books of account of the assessee did not provide proper details of the financial affairs of the assessee. It is a settled law that when appropriate details are not coming out of the books of the assessee, the Assessing Officer is within his rights to reject the books and estimate the net profit. Accordingly, the CIT(A) upheld the rejection of books in view of the reasons discussed.

5. Regarding the estimation of the gross profit the CIT(A) observed that the assessee has provided various arguments but not a single one is substantiated with evidence. For example, the assessee stated that the cost of raw materials had gone up. But the assessee did not even provide any details of raw materials. Even the price comparison of raw materials for the current year with the earlier years was not provided. The assessee did not even provide details of vouchers of various large expenses. In short, very general and generic arguments were put forth without any evidence to support them. However, the facts on record present a different picture. It is clear that the assessee artificially tried to reduce his taxable income as the turnover had more than doubled in the last two years. The CIT(A) observed that the AO has applied his mind and estimated the gross profit from the assessee's own GPs of earlier years through the process of average income. Accordingly, he found no infirmity in the calculation and the estimation made by the AO and sustained the order of the Assessing Officer.

6. We have heard both the parties and perused the material on record. In this case, as observed by the lower authorities, the assessee's GP rate for the, Assessment year under consideration is very low at 5.47% as compared to 12.04% in A.Y 2007-2008 and 8.38% in A.Y 2008-2009. Consequently, net profit rate also is very low which is as follows:

2007-2008 - 1.36% 2008-2009 - 1.08% 2009-2010 - 0.54%

7. The contention of the assessee's counsel is that the rate of net profit is very low on the reason that earlier year job work charges were included in the trading account and for this, Assessment year it was accounted in Profit and Loss A/c. However, it is noticed that even if we uphold the argument of assessee's counsel on this count, the net profit rate cannot go so less at 0.54%. It is also brought on record by the AO that the expenditure is not properly vouched and also assessee has not given proper explanation for low gross profit. Considering this, the AO adopted the gross profit at 8.63% on an average. In our opinion, estimation of income on the basis of gross profit in this case is not proper. The AO should have compared the net profit rate of previous years for the discrepancies noticed in the books of account of the assessee. Considering the discrepancies in the books of account rejection of books of account is proper. However, estimating the income of the assessee on the basis of the gross profit is not proper. Accordingly, we modify the order of the lower authorities and direct the AO to estimate the income of the assessee on the basis of average net profit rate for A.Ys 2007-2008 and 2008-2009 (1.36 + 1.08 = 1.22%) as the past records could be the basis for estimation of income of the assessee. Accordingly, we direct the AO to estimate income of the assessee at 1.22% of gross receipts. Further, there cannot be any addition after estimating the income of the assessee. The assessee shall produce necessary details before the AO regarding the claim for deduction u/s. 80C and 80D of the Act.

8. In the result, appeal of the assessee is partly allowed.