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2025 (6) TMI 409 - AT - Income TaxReopening of assessment - HELD THAT - Reopening was valid and hence ground no. 1 is dismissed. Estimation rate of profit of 9.29% - As submissions in respect of return filed by the assessee in response to notice u/s. 148 as well as the audit report which categorically mentions that gross profit/turnover is coming @ 1.74% and net profit/turnover is coming at 1.10%. These calculations at no point of time were disputed by the Assessing Officer and merely on the ground that turnover as per audit report is Rs. 4, 64, 99, 148/- has been mistakenly taken as sales turnover of Rs. 54, 99, 148/- and treating the same as total turnover over while rejecting the books of accounts is not justified on the part of the Assessing Officer. The calculation of the assessee through its audit report was categorically mentioned the accounting details with calculations/gross profit/turnover is that of 1.74% and therefore the AO should have taken the same into account. Thus the alternative plea of ground no. 3 of the assessee is allowed.
The core legal questions considered in this appeal include:
1. Whether the reopening of the assessment under section 147 of the Income Tax Act was valid and within jurisdiction. 2. Whether the addition of Rs. 43,19,771/- made by estimating profit at the rate of 9.29% was justified and legally sustainable. 3. Whether the estimated rate of profit of 9.29% was excessive and failed to reflect the real income earned by the assessee. 4. Whether the lower authorities erred in ignoring various submissions and explanations of the assessee, thereby breaching principles of natural justice. 5. Whether the levy of interest under sections 234A/B/C/D of the Income Tax Act was justified. Issue 1: Validity of Reopening of Assessment under Section 147 The reopening notice under section 148 was issued after obtaining prior approval under section 151(1), and the assessee was served accordingly. The Assessing Officer (AO) initiated proceedings upon discovering alleged discrepancies in cash payments exceeding Rs. 20,000/-, and inconsistencies in sales turnover reported by the assessee. The Court examined the legal framework governing reopening of assessments, which requires satisfaction of the AO based on tangible material indicating income has escaped assessment. The AO relied on the assessee's admission during the statement recorded under section 131, where the assessee claimed loss of sales and purchase bills due to natural causes, and the cash purchases exceeding the prescribed limit, which contravened section 40A(3). The Court found that the AO had sufficient material and justification for reopening, including the discrepancy between declared turnover and audit report figures, and the cash purchase violations. Hence, the reopening was held valid and within jurisdiction. Issue 2 and 3: Justification and Quantum of Addition by Estimation of Profit The AO disallowed purchases amounting to Rs. 4,58,48,365/- due to contravention of section 40A(3), and estimated net profit at 9.29% on the turnover as per the audit report, resulting in an addition of Rs. 43,19,771/-. The assessee challenged this estimation, contending that the 9.29% profit rate was excessive and did not reflect actual profits. The audit report submitted by the assessee indicated a gross profit/turnover ratio of 1.74% and net profit/turnover ratio of 1.10%, which was not disputed by the AO. The Court scrutinized the AO's approach of rejecting the books of accounts under section 145(3) based on a mistaken assumption that the audited turnover of Rs. 4,64,94,148/- was Rs. 54,99,148/-. The Court observed that the AO failed to reconcile this discrepancy and did not consider the audit report's detailed profit calculations. Applying the principle that estimation must be reasonable and based on reliable data, the Court held that the AO's estimation at 9.29% was arbitrary and excessive. The Court accepted the alternative calculation of 1.74% gross profit rate from the audit report as a more accurate reflection of the assessee's income. Consequently, the Court allowed the alternative plea of the assessee and reduced the addition accordingly. Issue 4: Alleged Breach of Principles of Natural Justice The assessee argued that various submissions and explanations were ignored by the lower authorities, leading to a breach of natural justice. The Court noted that the assessee had ample opportunity to present evidence and explanations, including written submissions, bank statements, audit reports, and statements recorded under section 131. The Court found no material to suggest denial of opportunity or procedural unfairness. The AO and CIT(A) had considered the submissions but reached conclusions based on their evaluation of facts and law. Hence, the claim of breach of natural justice was rejected. Issue 5: Levy of Interest under Sections 234A/B/C/D The issue regarding levy of interest was raised but not adjudicated upon by the Court, as it was not pressed or found necessary for determination in light of other findings. Significant Holdings and Core Principles The Court held that reopening of assessment under section 147 must be supported by tangible material indicating escapement of income, and prior approval under section 151(1) is mandatory. The reopening in this case complied with these requirements. Regarding estimation of income, the Court emphasized that any estimation must be reasonable, based on reliable and undisputed data, and not arbitrary. The Court stated: "Merely on the ground that turnover as per audit report is Rs. 4,64,99,148/- has been mistakenly taken as sales turnover of Rs. 54,99,148/- and treating the same as total turnover over while rejecting the books of accounts is not justified on the part of the Assessing Officer." The Court also reaffirmed that the assessee is entitled to have their submissions and evidences duly considered, and mere disagreement with the conclusions of the revenue authorities does not amount to breach of natural justice. Final determinations:
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