2005 (8) TMI 312 - AT - Income Tax

Estimate Of Income - scrutiny assessment - Non-maintenance/irregular maintenance of vouchers in support of expenses - HELD THAT - In the instant case the AO has allowed deduction of direct expenses at 75 per cent of the gross receipts without any cogent material. His ad hoc estimate of expenses divorced from the relevant facts cannot be upheld. We have also gone through the detail of income furnished by the assessee which shows net profit at 8.05 per cent. In this calculation the assessee had determined net profit at Rs. 3, 40, 350 before depreciation interest and remuneration to partners. If the amount of depreciation of Rs. 49, 234 is reduced this net profit comes at Rs. 2, 91, 116. Its ratio of gross receipts comes at 6.88 per cent. It is the same manner in which the assessee had shown working of net profits in the earlier three years as well. It is no doubt true that the assessee had gross receipts of Rs. 42, 27, 946 in this year and the case did not strictly fall within the parameters laid down under s. 44AD. However in order to determine the correct rate of profit we are regularly. seeking guidance from this section and applying 8 per cent net profit rate. This net profit rate is further subject to interest and remuneration to partners as provided in proviso to s. 44AD(2). In our consideration opinion it would be fair and reasonable if the total income of the assessee is computed in this manner. By translating it into the actual calculation the amount of net profit after depreciation but before remuneration and interest to partners comes at Rs. 3, 38, 236. The amount of salary and interest to partners has been shown at Rs. 2, 52, 249. If this amount is deducted the taxable income comes at Rs. 85, 987. We hold this amount to be taxable income liable for taxation. In the result the appeal is partly allowed.

Summary

Issues:
1. Unlawful picking of the case for scrutiny assessment
2. Rejection of book results and estimation of expenses
3. Computation of correct income and net profit rate
4. Addition of work-in-progress in the assessment

Issue 1: Unlawful picking of the case for scrutiny assessment
The appellant challenged the scrutiny assessment, citing a Supreme Court ruling regarding the jurisdiction of Central Excise Officers. The Tribunal dismissed this contention, stating that administrative directions cannot override the jurisdiction vested in an officer under the Act. The Tribunal upheld the validity of the assessment based on this legal principle.

Issue 2: Rejection of book results and estimation of expenses
The Assessing Officer (AO) rejected the book results due to lack of proper documentation. The AO estimated expenses at 75% of gross receipts, leading to a significant addition to the declared income. The Tribunal found the AO's estimation arbitrary and lacking a basis, emphasizing that assessments should be guided by previous results or comparable cases. The Tribunal disagreed with the AO's approach and determined the correct income by considering net profit rates from previous years.

Issue 3: Computation of correct income and net profit rate
The Tribunal analyzed the appellant's income declaration and calculated the net profit rate, considering deductions for depreciation, interest, and remuneration to partners. Despite gross receipts exceeding the specified amount under the relevant section, the Tribunal applied an 8% net profit rate, resulting in a fair and reasonable computation of taxable income. The Tribunal adjusted the calculations to arrive at the taxable income liable for taxation.

Issue 4: Addition of work-in-progress in the assessment
In the assessment for the preceding year, the AO estimated work-in-progress at 75% of receipts, leading to an addition. The Tribunal found the facts similar to the current year and disagreed with the AO's rationale for adding work-in-progress at 30% of receipts. The Tribunal held that the income declared by the appellant in the return should be accepted, overturning the AO's decision to make additional adjustments based on work-in-progress estimations.

In conclusion, the Tribunal partially allowed the appeal for the relevant assessment years, addressing issues related to unlawful scrutiny assessment, estimation of expenses, computation of correct income and net profit rate, and addition of work-in-progress in the assessments.