ITAT instructs AO to estimate net profit at 3% of transport operator gross contract receipts

Facts and issues of the case

The assessee a partnership firm, being a transport operator filed its return of income for the AY 2010-11 on 15/10/2010 admitting a loss of Rs. 1,35,98,701/. Subsequently, the case was selected for scrutiny and the assessment proceedings was completed u/s. 143(3) determining the total income at Rs. 16,89,380/-. While determining the total income by the AO, the Ld. AO has rejected the books of accounts and estimated the income @ 15% of the Gross Receipts and allowed the depreciation of Rs. 1,93,47,466/-.

Subsequently, the Commissioner of Income Tax, Vijayawada (CIT) invoking the provisions of section 263 of the Act, set aside the assessment order and directed the AO to disallow the depreciation of Rs. 1,93,47,466/- since the income is being estimated. Accordingly, notices U/s. 143(2) and 142(1) were issued to the assessee. Further, a show cause notice was issued to the assessee on 28/07/2015 which proposed disallowance of depreciation. The assessee also filed an appeal before the Hon’ble ITAT against the order passed by CIT U/s. 263 of the Act. Hon’ble ITAT vide its order dated 12/09/2018 dismissed the appeal of the assessee and upheld the order passed U/s. 263 of the Act. Subsequently, an order u/s. 250 of the Act, was passed by the Ld. CIT(A) upholding the order of the Ld. AO passed u/s 143(3) r.w.s 263.

Observation by the court

Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. The Ld. AR argued that the AO has originally estimated 15% of the gross receipts by allowing depreciation of Rs. 1,93,47,466/-. However, the Ld. AO while passing the order U/s. 143(3) r.w.s 263 disallowed the depreciation. The Ld. AR further pleaded that in the assessee’s own case in ITA No.35 to 38/Viz/2013 (AYs: 2006-07 to 2009-10) the Hon’ble ITAT vide its order dated 14/2/2017 determined the Net Profit @ 3% on the gross receipts net of all deductions including depreciation. The Ld. AR therefore pleaded that the same 3% be allowed in the instant case.

Per contra, the Ld. DR submitted that the assessee habitually never maintained books of accounts and hence 3% estimated by the Hon’ble ITAT is on lower side. The Ld. DR supported the order of the Ld. Revenue Authorities. Court had heard both the sides and perused the material available on record and the orders of the Authorities below. We find from the order of the Ld. AO, the Ld.AO has followed the directions of the CIT and has estimated the income @ 15% on the gross receipts without allowing the depreciation.

It was also found from the submissions of the Ld. AR that the assessee is not maintaining books of accounts but only maintaining kaccha books of accounts which does not give true and correct profit earned by the assessee. Further, the assessee has not produced any vouchers before the Ld. AO for different items of expenditure for the impugned assessment year. Therefore, we are of the view that the AO was right in rejecting the books of account and the estimation of profit. Having said that, it was contended by the Ld. AR whether the Ld. AO was right in estimating the profit @ 15% net of all expenses including depreciation. The Ld. AR is of the view that the net profit estimated by the Ld. AO is on the higher side. Admittedly the books of accounts are not susceptible for verification.

In these circumstances, the AO has been left with no other option but to estimate the profit @ 15% net of all deductions including depreciation. No doubt, the estimation of net profit is one of the methods of the determination of income from business considering the facts and circumstances of each case. The Ld. AO has failed to bring on record any comparable cases to support the net profit estimated by him. We find that the coordinate bench of this Tribunal in the case of ITO vs. Sri Gundapaneni Nageswara Rao (supra), under similar set of facts, has directed the AO to estimate net profit of 3% of all deductions including depreciation.

Though, there are divergent view from the appellate authorities, the view which is more beneficial to the assessee has to be adopted in view of the Supreme Court decision in the case of CIT vs. Vegetable Products Limited [1993] 88 ITR 192. Therefore, Court is of the considered view that since the assessee has not proved the ownership of assets to claim the depreciation and also that the facts of the present case are similar to the facts of the case considered by the ITAT in ITA No.1799/Hyd/2013 dated 29/04/2014, we deem it appropriate to direct the AO to estimate net profit of 3% on gross receipts net of all deductions including depreciation. Accordingly, Court direct the AO to estimate net profit of 3% on gross contract receipts net of all deductions for the AY 2010-11. It is ordered accordingly.