Without supporting indexation benefit cannot be denied by AO

IN THE INCOME TAX APPELLATE TRIBUNAL,

MUMBAI BENCH ‘A’ BENCH

BEFORE SHRI B.R.MITTAL (JUDICIAL MEMBER) AND

SHRI B.RAMAKOTAIAH (ACCOUNTANT MEMBER)

ITA No.6753/Mum/2010

Assessment Year: 2007-08

ITO 25(1)(3),

R.No.306, 3rd floor, Building, C-10,

Pratyakakhar Bhavan, Bandra Kurla

Complex, Bandra (E),

Mumbai

(Appellant)

Vs.

Shri Arjun B Bhandari,

Shop No.419, Aunty Chawl, S.V.Road,

Daulat Nagar, Borivali(E),

Mumbai-66

PA No.AADPB 1074 E

 (Respondent)

Appellant by: Shri Neeraj Pradhan

Respondent by: None

Date of hearing: 22.8.2012

Date of pronouncement: 5. 9.2012

ORDER

Per B.R.Mittal, JM:

The department has filed this appeal for assessment year 2007-08 against order dated 15.7.2010 of ld CIT(A) on following grounds:

“1. On the facts and in the circumstances of the case and in law, ld CIT(A0 erred in restricting the addition made on account of estimation of profit to 6% instead of 10% as determined by the AO without appreciating the facts that profit for the earlier years were higher than the profit taken by the CIT(A) while deciding the issue.

2. On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in deleting the addition made on account of rejection of indexed cost without appreciating the facts that the assessee has not produced any evidence for acquisition cost as well as for the cost of improvement.”

2. None appeared on behalf of assessee inspite of notice issued to the assessee through ld D.R. as per copy of the Report of the AO dt.3.8.2012 placed on record. We, therefore, proceed to dispose of the appeal after considering the submissions of ld D.R. and on the basis of material available on record.

3. In respect of Ground No.1 of appeal, relevant facts are that the assessee could not produce books of account with bills, vouchers etc, on the ground that same were destroyed by heavy floods in the month of July, 2007. However, assessee filed tax audit report u/s.44AB dated 31.10.2007. The AO stated that books of account were audited after July, 2007 but assessee did not produce the books of account and, therefore, did not accept the plea of the assessee that the books were damaged by floods. He estimated the income of the assessee @ 10% of the total turnover of Rs.1,01,20,246. Thus, the net profit was determined at Rs.10,12,025 as against net profit of Rs.4,10,126 offered by the assessee. Therefore, the AO added differential amount of Rs.6,10,899 to the total income of the assessee. Being aggrieved, assessee filed appeal before ld CIT(A).

4. On behalf of assessee, it was contended that even if the books of account were rejected, the AO ought to have compared the net profit declared by the assessee in the earlier years. It was submitted that the net profit ratio of earlier years i.e. A.Ys. 2003- 04 to 2007-08 was as under:

Assessment Year Net profit ratio

2003-04 5.748

2004-05 5.832

2005-06 5.893

2006-07 3.933

2007-08 4.20

5. Ld CIT(A) considered the submissions of assessee and vide para 3.3 estimated the income of the assessee at 6% of total turnover in stead of 10% adopted by the AO. The said para reads as under:

“I have considered the submissions of the representative and the stand taken by the AO. Admittedly, the appellant could not produce the books of account, bills and vouchers on the ground that the same were damaged by floods even though the tax audit report was dated 31.10.2007. In the circumstances, the AO was justified in rejecting the books of accounts and estimating the income of the appellant. However, the past records of the appellant reveal that he was admitting profit around 6% for A.Y. 2003-04 to 2005-06 and the same was reduced to around 4% in the subsequent years. Considering the past history of the appellant, it would be justified to estimate the income of the appellant at 6% of the total turnover instead of 10% adopted by the AO. The AO is accordingly directed to recompute the income of the appellant.”

Hence, department is in appeal before the Tribunal.

6. During the course of hearing, ld D.R. relied on order of AO.

7. We have considered submissions of ld D.R. and orders of authorities below. We observe that the maximum profit rate from assessment year 2003-04 to the assessment year under consideration varies from 3.933% to maximum of 5.893%. The apex Court has held in the case of Brij Bhushan Lal Parduman Kumar v. Commissioner of Income-tax, 115 ITR 524 that even in the case of best judgment assessment, the same has to be done on reasonable basis and it should not be vindictively or capriciously. The Third Member of ITAT Ahmedabad has held in the case of Assistant Commissioner of Income-tax v. R. Tahilram, 62 ITD 138™ that rejection of books of account does not give unfettered power to estimate the income. There must be something to support the estimate. Considering the above decisions and the net profit of the assessee in the preceding four years, we hold that ld CIT(A) is justified to estimate the net profit at 6% of the assessee for the assessment year under consideration. Hence, we uphold his order and reject ground No.1 of appeal taken by the department.

8. In respect of Ground No.2 of appeal, relevant facts are that AO noticed that assessee sold his chawl at Rs.2,18,000 on which long term capital gain has been determined at Rs.Nil after indexing the cost of acquisition in 1985 of Rs.75,000. Assessee stated that he purchased the chawl in the year 1982 for Rs.11,000 and further incurred Rs.64,000 towards construction. It was contended that the said room was occupied from 1984 and is being reflected in the books of account from 1996. The AO did not accept the contention of assessee. He stated that the said room is not authorized structure and it is in the nature of encroachment only. The assessee has not been able to give any proof regarding spending of Rs.75,000 on the said encroachment.

Therefore, the cost of acquisition was not allowed to the assessee and consequently, no indexation benefit was given and the entire receipt of Rs.2,75,000 was assessed to tax under the head long term capital gain. Being aggrieved, assessee filed appeal before the first appellate authority.

9. On behalf of assessee, it was contended that the cost of chawl at Rs.75,000 is reflected in the balance sheet filed by the assessee for A.Y. 2006-07. It was contended that as per consolidated balance sheet as on 31.3.2006, Rs.75,000 was admitted as investment in Nehru Nagar Galli No.5, Borivalfi(E), Mumbai-66 which was sold during the year. Therefore, the cost of acquisition is proved by balance sheet as on 31.3.2006. Ld CIT(A) also considered above submission of assessee and directed the AO to allow the benefit of indexed cost of acquisition vide para 4.2 of the impugned order which reads as under:

“I have considered the submissions of the representative and the stand taken by the AO. As contended by the representative, a sum of Rs.75,000 appears as investment in respect of the property sold and the same contention was raised before the AO. When the cost of acquisition is reflected in the balance sheet of the earlier year, the benefit of indexed cost of acquisition cannot be denied. The AO is therefore, directed to allow the same.”

Hence, department is in appeal before the Tribunal.

10. During the course of hearing, ld D.R. relied on order of AO.

11. Since ld D.R. has not been able to controvert the fact that assessee has shown cost of acquisition of the said chawl in the balance sheet as on 31.3.2006, we are of the considered view that ld CIT(A) has rightly held that AO was not justified to deny the benefit of indexed cost of acquisition to the assessee on the facts of the case. Hence, we uphold his order and reject Ground No.2 of appeal taken by department.

12. In the result, appeal filed by department is dismissed.

Pronounced in the open court on 5th September, 2012

                                                      Sd/-                    Sd/-

                                      (B.RAMAKOTAIAH) (B.R. MITTAL)

                                       Accountant Member      Judicial Member

Mumbai, Dated 5th September, 2012

Parida

Copy to:

1. The appellant

2. The respondent

3. Commissioner of Income Tax (Appeals),35, Mumbai

4. Commissioner of Income Tax, 25 , Mumbai

5. Departmental Representative, Bench ‘A’ Mumbai

//TRUE COPY//

BY ORDER

ASSTT. REGISTRAR, ITAT, MUMBAI