M/s. Aakar Paints, Ahmedabad V. ACIT, Circle-3(2), Ahmedabad

ITA 395/AHD/2018

AI Insights

The case involves M/s. Aakar Paints, which appealed against the order of the Commissioner of Income-Tax (Appeals)-7, Ahmedabad, confirming the AO's rejection of the assessee's book results and estimation of net profit at 8% of turnover under Section 44AD of the Income Tax Act, 1961, for the assessment year 2013-14. The assessee argued that due to a fire at their factory, all primary records were destroyed, and only reconstructed accounts were available, which the AO rejected. The Tribunal, after considering the net profit rates in the preceding and succeeding years, found the application of 8% net profit rate to be grossly unjustified and directed the application of a 2.28% net profit rate.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 135553 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 29-11-2022
• Assessment Year: 2013-2014
• Appeal Filed On: 18-02-2018
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Rejection of books of accounts; Initiation of penalty proceedings
• Section: 44AD; 143(3)

Judgement Text

आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ ‘C’ अहमदाबाद।अहमदाबाद।अहमदाबाद।अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD ] ] BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER ITA No.395/Ahd/2018 Assessment Year :2013-14 M/s.Aakar Paints 7607, Phase-IV GIdC, Vatva Ahmedabad 382 445 PAN : AANFA 2790 C Vs ACIT, Cir.3(2) Ahmedabad. (Applicant) (Responent) Assesseeby : Shri S.N. Soparkar, Sr.Advocate & Shri Parin Shah, AR Revenue by : Shri Rohit Assudani, Sr.DR सुनवाई क तार ख/D a t e o f H e a r i n g : 3 0 / 1 1 / 2 0 2 2 घोषणा क तार ख /D a t e o f P r o n o u n c e m e n t : 2 4 / 0 2 / 2 0 2 3 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER The present appeal has been filed by the assessee against order passed by the Ld.Commissioner of Income-Tax(Appeals)-7, Ahmedabad (hereinafter referred to as “ld.CIT(A)”) dated 27.12.2017 under section 250(6) of the Income Tax Act, 1961 ("the Act" for short) pertaining to Assessment Year 2013-14. 2. The grounds raised by the assessee read as under: “1 Ld. CIT (A) erred in law and on facts confirming rejection of book results by AO & estimation of Net profit @ 8% of turnover u/s 44 AD of the Act. ITA No.395/Ahd/2018 2 2 Ld. CIT (A) erred in law and on facts confirming adhoc estimation made by AO ignoring audited books of accounts containing no adverse remarks. 3 Ld. CIT erred in law and on facts concurring with AO that raw material shown in kilogram whereas finished goods shown in liters along with Nil shortage/excess & Nil percentage of yield justified rejection of book result. 4 Ld. CIT erred in law and on facts confirming action of AO rejecting book results not appreciating that due to fire all primary records were destroyed & the appellant reconstructed accounts to the extent possible. 5 Ld. CIT (A) erred in law and on facts in holding that appellant failed to submit complete details of commission expense though ignoring evidence placed before AO/ appellate authorities. 6 On the facts & circumstances, Id. CIT (A) ought to have accepted book results & deleted adhoc addition made on estimation by AO. 7 Levy of interest u /s 234A/B & 234C of the Act is not justified. 8 Initiation of penalty proceedings u/s 271 (l)(c) of the Act is not justified.” 3. It was common ground that the solitary issue in the present appeal related to rejection of books of accounts of the assessee and application of net profit rate of 8% to the turnover of the assessee as per Section 44AD of the Act. 4. Brief facts of the case relevant to the issue are that the assessee is in the business of manufacturing paints. During assessment proceedings, the assessee was unable to produce its books of accounts for the reason that due to fire at its factory, books of accounts, computer etc. were destroyed including registers, bills, vouchers etc. As a result, the assessee was able to submit only reconstructed evidence to answer the queries of the AO. The AO accordingly rejected book results of the assessee and estimated net profit by applying 8% net profit to the total turnover of the assessee as per section 44AD of the Act. Before the ld.CIT(A), the assessee challenged both rejection of books of accounts as also application of ITA No.395/Ahd/2018 3 net profit rate of 8%. The ld.CIT(A) rejected both the contentions of the assessee and upheld the order of the AO. Aggrieved by the same, the assessee has come in appeal before us 5. When the appeal came up for hearing before us, the ld.DR filed an adjournment application seeking adjournment on the ground to prepare the case properly. Before us, he contended that he was not regular Departmental Representative and was on rotational duty, and therefore, needed time to prepare the case. 6. The ld.counsel for the assessee at this juncture pointed out that the issue involved is simple relating to rejection of books of accounts and application of net profit rate for determining income of the assessee. He pointed out that the application of 8% net profit rate to the turnover of the assessee was grossly incorrect and unjust since 44AD had no application to the facts of the case and on rejection of the books of accounts, it was duty of the department to fairly estimate net profit earned in the business carried out by the assessee through external or internal comparable cases. He pointed out that the assessee had given details of net profit earned by the assessee in its business in the preceding and succeeding years, placed at PB Page No.320 as under: ITA No.395/Ahd/2018 4 7. Referring to the same, he pointed out that in the impugned year the assessee had shown net profit at 1.74% of turnover while in the immediately preceding assessment year, the assessee had net profit @ 2.28% which had been assessed under section 143(3) of the Act. Copy of the order passed for Asst.Year 2012-13,the immediately preceding assessment year, dated 23.2.2015 was placedbefore us, pointing out that against the returned income of Rs.25,04,756/- the AO had made minor addition of Rs.62,690/- only, thus accepting net profit of 2.28% returned by the assessee after scrutiny and assessment. He stated, even on considering net profit result of the assessee in the preceding and succeeding year on an average, the assessee’s net profit would fall within the bracket of 2.30% approximately earned during the impugned year. He stated that the case was simple and straight-forward and could be adjudicated on this basis alone. He contended that without going into the issue of rejection of book results, the issue could be adjudicated on the applicability of net profit alone. The ld.DR at this juncture was asked to respond to this and point out how the net profit of 8%, applied by the AO and confirmed by the CIT(A) as per section44AD of the Act, was justified as opposed to net profit results assessed in the immediately preceding year in the case of the assessee itself of 2.28%. Theld.DR was unable to justify the application of 8% net profit rate as per section 44AD of the Act who admitted thatthe said section pertains to scheme of presumptive taxation for small specified businesses who are not required to maintain any books of accounts, their profits being estimated by applying a rate of 8% to turnover.He however relied on the order of the authorities below. 8. On consideration of the above contentions itself, we are convinced with the arguments of the ld.counsel for the assessee that ITA No.395/Ahd/2018 5 8% net profit applied in the present case ,as per section 44AD of the Act, for determining the taxable income of the assessee, was grossly unjustified. It is the settled law that after rejection of the books of accounts of the assessee, the net profit of the assessee is to be estimated in fair and just manner and for the purpose the Revenue may rely on external or internal comparables whichever is best suited, but the objectiveshould be to arrive at the best estimate of profit, which the assessee could have earned reasonably. In the present case, the AO has applied 8% net profit relying on section 44AD of the Act, while the assessee has demonstrated to us that in the immediately preceding year, the assessee had returned net profit at 2.28% which was assessed under scrutiny assessment and found to be correct. Further, he has also pointed outthat in the preceding and succeeding assessment year also the assessee has never adopted 8% net profit and has in fact remained in the average bracket of 2.3% only. In view of the same, application of 8% net profit rate by the Department, we hold, is highly unjustified. At the same time, we find that the net profit rate of 2.28% which the department has found to be correctly returned by the assessee in the preceding assessment is the appropriate rate to be applied for determining the net profit earned by the assessee in the impugned year. Accordingly, we direct that net profit rate of 2.28% be applied to the turnover of the assessee for the impugned year for determining the profits liable to tax. Ground No.1 raised by the assessee is accordingly allowed. 9. Further, in view of the estimate made by us, the ld.counsel for the assessee submitted that he would not press the remaining grounds of appeal challenging rejection of books of accounts raised in ground no.2 and 6, if the net profit of the preceding is found ITA No.395/Ahd/2018 6 acceptable. The remaining grounds are accordingly dismissed as not pressed. 10. In the result, the appeal of the assessee is allowed in the above terms. Order pronounced in the Court on 24th February, 2023 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad, dated 24/02/2023