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.

Conclusion

In the result, appeal of the assessee is allowed by the court.

Raghavendra-Lorry-Services-Vs-DCIT-ITAT-Visakhapatnam.

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