INCOME TAX OFFICER , INCOME TAX DEPARTMENT V. TRUE VALUE HOMES (INDIA) PRIVATE LIMITED, CHENNAI

ITA 1213/CHNY/2025

AI Insights

The case involves an appeal by the Revenue against the order of the Ld.CIT(A) which modified the Assessing Officer's (AO) estimation of net profit for True Value Homes (India) Private Limited for the assessment year 2018-19. The AO had initially estimated the net profit at 8% of total revenue, leading to a significant addition to the assessee's income. The Ld.CIT(A), however, reduced this addition significantly after considering the assessee's historical profit margins and financial statements. The Revenue challenged this moderation, arguing that the reduction was arbitrary and unsupported by adequate evidence. The tribunal, after reviewing the submissions and evidence, upheld the Ld.CIT(A)'s decision, emphasizing the use of historical data for profit estimation and rejecting the arbitrary high profit rate initially applied by the AO.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 785352 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2018-2019
• Appeal Filed On: 28-04-2025
• Other Referred Cases: Zuberi Engineering Company V.DCIT [2019] 103 taxmann.com 196, ITO V. Girish M.Mehta [2007] 105 ITD 585, ACIT V. Intermedia Cable Communication Pvt. Ltd [2012] 19 taxmann.com 190, ld.CIT(A) V. Om Overseas [2008] 173 taxman 185 (P & H)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C.N. BIPIN; C.I.T
• Assessee Lawyers: B. RAMAKRISHNAN; F
• Keywords: Set aside; Unexplained investment; Rejection of books of accounts
• Section: 142(1)

Judgement Text

" आयकर अपील य अ धकरण, ‘सी’ \u000eयायपीठ, चे\u000eनई IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI \u0015ी एबी ट वक\u001a, \u000eया\u001bयक सद य एवं \u0015ी एस. आर. रघुनाथा, लेखा सद य क े सम$ BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI S.R.RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.: 1213/Chny/2025 \u001bनधा%रण वष% / Assessment Year: 2018-19 ITO, Corporate Ward - 6(1), Chennai. vs. True Value Homes (India) Private Limited, No. 21, C V Raman Road, TVH Triveni, Teynampet, Chennai – 600 018. Tamil Nadu. (अपीलाथ'/Appellant) [PAN: AAACT-7955-Q] (()यथ'/Respondent) \u001bनधा%*रती क, ओर से/Assessee by : Shri. B.Ramakrishnan, F.C.A. राज व क, ओर से /Revenue by : Shri. C.N. Bipin, C.I.T. सुनवाई क, तार ख/Date of Hearing : 11.08.2025 घोषणा क, तार ख/Date of Pronouncement : 28.10.2025 आदेश /O R D E R PER S. R. RAGHUNATHA, AM: The present appeal is preferred by the Revenue against the order dated 16.02.2025 passed by the National Faceless Appeal Centre (hereinafter referred to as Ld.CIT-A), in respect of the assessment order dated 31.01.2022 passed by the National Faceless Assessment Centre (hereinafter referred to as Ld.AO) for the assessment year 2018-19 (hereinafter referred to as the impugned assessment Printed from counselvise.com :-2-: ITA. No.:1213 /Chny/2025 year) u/s.143(3) read with section 144B of the Income Tax Act, 1961 (hereinafter referred to as the Act). 2. The grounds raised by the assessee are as follows: 1. The order of the Ld.CIT(A) is contrary to the facts and circumstances of the case. 2. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in estimating the net profit at 1.54% of total revenue from operations when the assessee did not get its books of account audited and furnished no documentary evidence in support of the expenses claimed by it in its P& L account? 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld.CIT(A) be set aside and that of the Assessing Officer be restored. 3. The assessee is a private limited company incorporated on 19.03.1997, is engaged in constructing and selling residential apartments. The assessee filed its Income Tax Return for AY 2018-19 on 31.10.2018 declaring income of Rs.10,26,30,130/-. 4. The case was selected for scrutiny assessment under the e-Assessment Scheme, 2019. Accordingly, a notice under section 143(2) of the Act was issued on 23.09.2019, followed by a notice under section 142(1) of the Act, along with a detailed questionnaire on 20.11.2020. 5. In response to the notices issued by the AO, the assessee furnished financial statements, auditor’s report dated 30.05.2018 (but not audited u/s.44AB of the Act – Form 3CB and 3CD was not filed) and other details. 6. During the course of assessment, the case was referred to the Departmental Valuation Officer (DVO) under section 142A of the Act, with a direction to submit Printed from counselvise.com :-3-: ITA. No.:1213 /Chny/2025 the report by 30.06.2021. Subsequently, the AO proceeded to complete the assessment, before the receipt of the DVO’s report. In doing so, the AO made the following additions: A) Rs.15.72 crores by estimating net profit at 8% of total revenue, and B) Rs.20.00 crores towards unexplained investment in inventory under section 69. 7. Consequently, the total income was assessed at Rs.48.54 crores and a demand of Rs.35.95 crores was raised. 8. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A). Upon examining the DVO’s report and after considering detailed submissions, the Ld.CIT(A) deleted the addition of Rs.20.00 crores made u/s.69 of the Act and as regards the estimation of income, restricted the addition to Rs.1.57 crores as against the original addition of Rs.15.72 crores. 9. The Revenue has come in appeal before us, challenging the restriction of profit estimation to Rs.1.57 crores (1.54% of turnover) as against Rs.15.72 crores applied by the Assessing Officer. It is, however, noted that the deletion of Rs.20.00 crores u/s.69 has not been contested by the Revenue, and hence that part of the Ld.CIT(A)’s order has attained finality. 10. The Ld.DR supported the order of the AO with respect to the issue on profit estimation and relied on the grounds of appeal before us and argued that the order of the Ld.CIT(A) warrants interference to the extent of the issue on profit estimation. Further, the ld.DR submitted that the books of accounts of the assessee has not Printed from counselvise.com :-4-: ITA. No.:1213 /Chny/2025 been audited u/s.44AB of the Act and reducing the addition of profit to Rs.1.57 crores i.e. 1.54% of the Turnover against the estimation of 8% is arbitrary decision of the ld.CIT(A) and hence prayed that the appeal of the revenue be allowed. 11. Per contra, the Ld.AR supported the order of the Ld.CIT(A) and argued that the order is a well-reasoned one and needs no interference and prayed that the appeal may be dismissed. The Ld.AR, apart from filing written submissions, also filed a paper book and took us through the various pages of it, while supporting the order of the Ld.CIT(A). 12. We have heard the arguments of both the parties and have carefully considered the findings of the AO and the reasoning adopted by the Ld.CIT(A) in their respective orders. The AO had estimated the assessee’s net profit at 8% of the total turnover, resulting in an addition of Rs.15.72 crores. On a perusal of the assessment order, it is evident that such estimation was made without any cogent or rational basis and no comparable cases or industry data were cited in support of such a high profit rate. 13. Before the Ld.CIT(A), the assessee placed reliance upon audited financial statements and tax audit reports for Assessment Years 2014-15, 2015-16, 2016- 17 and 2017-18, which revealed a variation in the net profit ratio from 0.57% to 2.62%. However, the gross profit margin are declined from 27.40% to 16.15% during the above said years. The assessee explained that the fall in net profit was primarily due to a significant decline in business turnover, whereas the establishment and operating expenses did not reduce proportionately. Printed from counselvise.com :-5-: ITA. No.:1213 /Chny/2025 14. However, the Assessing Officer noted that the books of account for the relevant assessment year were not audited as per the provisions of section 44AB of the Act and hence he concluded that the assessee has failed to conduct the business and maintain the books of accounts in transparent manner. Hence the Assessing Officer rejected the books of accounts and estimated the net profit at 8% of the turnover. Nevertheless, the assessee supported its submissions with audited financial statements and assessment orders for AYs 2015-16 to 2017-18, copies of which have been placed before us in Paperbook–1. 15. The profitability trend for the three preceding financial years, as noted by the Ld.CIT(A) and submitted before us along with written submission, is reproduced below: Profitability of preceding financial years Particulars FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 Revenue from Operation as per P&L Account 2,64,54,09,169 2,57,34,29,420 3,80,83,35,829 1,96,58,27,415 Gross Profit 72,48,36,898 70,86,69,532 58,05,57,868 31,75,89,659 Net Profit 1,49,99,663 6,74,49,357 5,56,62,446 1,45,69,214 Gross Profit Ratio 27.40% 27.54% 15.24% 16.15% Net Profit Ratio 0.57% 2.62% 1.46% 0.74% 16. The Ld.CIT-A, after analyzing the above data, noted that the average net profit rate for the preceding three years worked out to approximately 1.54%. The Ld.CIT(A) applied this average rate to the turnover of Rs.196.58 crores for the assessment year under consideration, resulting in an estimated net profit of Rs.3.02 crores. Printed from counselvise.com :-6-: ITA. No.:1213 /Chny/2025 17. Since the assessee had already disclosed Rs.1.46 crores as net profit in the return of income, the addition was restricted to Rs.1.57 crores, while the balance addition of Rs.14.15 crores was directed to be deleted. 18. We find that the approach adopted by the Ld.CIT(A) is reasonable and judicious, being based on historical audited results of the assessee itself rather than on arbitrary presumptions. The reliance on past performance as a benchmark for estimation is a well-accepted principle in income tax jurisprudence, particularly where books have been rejected but comparable records of earlier years are available. 19. We also note that the Ld.CIT(A) has upheld the rejection of books of account in view of the assessee’s non-compliance and inadequate cooperation during the assessment proceedings. However, the quantum of addition has been rationally moderated based on the available data, ensuring that the estimation reflects a fair and equitable determination of the assessee’s true income. 20. Further, we note that the assessee has maintained the books of accounts which have been audited by the statutory auditors as per the statutory requirement under the Companies Act and filed the same before the authorities both during the assessment as well as appellate proceedings. Therefore, we do not concur with the authorities for rejection of books of accounts of the assessee, merely for the reason that the tax audit report u/s.44AB of the Act has not been filed without assigning any defects or flaws in the books of accounts. On perusal of the written submission made by the assessee before the ld.CIT(A), we note that the assessee has been following the one of the methods prescribed under Accounting Standard Printed from counselvise.com :-7-: ITA. No.:1213 /Chny/2025 – 7 - Construction contracts i.e. Percentage completion method for recognizing the revenue on year on year basis ( Page No.36 Revenue recognition of Notes on accounts for the year ending 31.03.2018 in Paper book 1). Further, we also find that the assessee while filing the return of income has disallowed the a sum of Rs.35.13 lakhs u/s.36 of the Act, Rs.1.07 crores u/s.37 of the Act and also Rs.9.73 crores u/s.43B of the Act in its computation of total income ( Page No.288 of the Paper book 1). Therefore, we agree with the ld.CIT(A) in accepting the average net profit percentage based on the assessee’s own financial statements for the previous 3 financial years i.e. from A.Y. 2014-15 to 2016-17 and arriving the net profit percentage at 1.54%. 21. We agree with the reliance placed by the assessee on the following judicial precedents in support of their arguments for unjustified rejection of books of accounts: - Zuberi Engineering Compnay V.DCIT [2019] 103 taxmann.com 196 - ITO V. Girish M.Mehta [2007] 105 ITD 585 - ACIT V. Intermedia Cable Communication Pvt. Ltd [2012] 19 taxmann.com 190 - ld.CIT(A) V. Om Overseas [2008] 173 taxman 185 ( P & H ) 22. Further, on perusal of the paper book 2 filed by the ld.AR, we find that the assessee’s case for the previous A.Yrs. 2015-16, 2016-17 and 2016-17 (Page No.4-5, 8-15 & 18-26 of paper book) have been selected for scrutiny assessment and concluded the assessment by accepting the return of income by making only a disallowance on account of delay in paying the ESI/PF contribution u/s.36(1)(va) of the Act. 23. In the present facts and circumstances of the case and based on our above discussion, we find no infirmity in the reasoning or computation adopted by the Printed from counselvise.com :-8-: ITA. No.:1213 /Chny/2025 Ld.CIT(A) in arriving the net profit @ 1.54%. Accordingly, the order of the Ld.CIT(A) on this issue is affirmed by dismissing the grounds of appeal of the revenue. 24. In the result, the appeal of the Revenue is dismissed. Order pronounced in the open court on 28th October, 2025 at Chennai. Sd/- Sd/- (एबी टी वक\u0007 ) (ABY T VARKEY) \bाियक सद\u000e/JUDICIAL MEMBER (एस. आर. रघुनाथा) (S. R. RAGHUNATHA) लेखा सद\u000e/ACCOUNTANT MEMBER चे\u000eनई/Chennai, 0दनांक/Dated, the 28th October, 2025 SP आदेश क, (\u001bत2ल3प अ4े3षत/Copy to: 1. अपीलाथ'/Appellant 2. ()यथ'/Respondent 3.आयकर आयु5त/CIT – Coimbatore 4. 3वभागीय (\u001bत\u001bन ध/DR 5. गाड% फाईल/GF Printed from counselvise.com "