Facts of the Case

The assessee was engaged in the wholesale business of supplying livestock (buffaloes) to export houses. He reported sales of ₹17,10,18,753 with a declared net profit of ₹8,23,712, representing approximately 0.48%.

The Assessing Officer questioned the low profit margin. The assessee explained that he functioned primarily as a collector or intermediary, arranging livestock for exporters and receiving only a small commission per kilogram, typically resulting in margins between 0.25% and 0.5%.

However, the assessee failed to produce books of account and supporting vouchers, stating that they had been misplaced. Consequently, the Assessing Officer rejected the books under section 145(3) and applied a net profit rate of 2% based on a comparable case (Babu Islam), resulting in an addition of ₹25,96,663. The CIT(A) confirmed the addition.

 Issues Involved

  1. Whether rejection of books of account under section 145(3) was justified.
  2. Whether application of a 2% net profit rate was reasonable in the circumstances.
  3. Whether profit estimation should consider comparable cases and industry practices.

 Petitioner’s Arguments

The assessee argued that the 2% rate was arbitrary and ignored relevant comparable cases. It was submitted that in similar cases within the same trade, the Settlement Commission had accepted much lower profit rates, including approximately 0.41%.

Reference was made to cases of similarly placed traders where profits were determined between about 0.11% and 0.57%. The assessee contended that his declared profit was consistent with trade realities of high turnover and low margins and that the addition should be deleted or substantially reduced.

 Respondent’s Arguments

The Revenue contended that in the absence of books of account and supporting evidence, the audit report alone could not be relied upon. Therefore, rejection of books and estimation of income were justified.

It was further argued that profit rates applied in other cases were based on their specific facts and could not automatically govern the present case.

 Court Order / Findings (ITAT Allahabad)

The Tribunal upheld the rejection of books due to non-production of supporting records. However, it found that the application of a 2% net profit rate was excessive and not aligned with comparable cases in the same line of business.

The Tribunal observed that cases of Babu Islam and Ishtyaq Ahmad involved similar trade conditions, where the Settlement Commission had adopted an average rate around 0.41% due to lack of proper records. Considering these precedents and the assessee’s own statement that profit margins ranged between 0.5% and 1%, the Tribunal held that a fair estimate would be 0.7%.

Accordingly, the income was recomputed at ₹11,91,131 on the total receipts, granting substantial relief to the assessee.

 Important Clarification

The Tribunal emphasized that once books are rejected, income must be estimated on a reasonable basis considering trade practices, comparable cases, and available material. Arbitrary or excessive profit rates cannot be sustained merely due to non-production of records.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771061502_ATAULMUSTAFANANBAISHAHZADPURKAUSHAMBIVS.DCITCIRCLE2ALLAHABADALLAHABAD.pdf

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