R. N. Misra, C.J. - At assessees instance, this court on an application u/s 256(2) of the IT Act of 1961 (hereinafter referred to as the Act) directed the Cuttack Bench of the IT Appl. Tribunal to state a case and refer the following question for the court opinion.
'Whether on the facts and in the circumstances of the case, the claim of deduction of Rs. 17,843 was admissible as a deduction ?'
2. Assessee is an individual and derives income from fabrication and supply of iron goods to Government. He carries on repair work. The relevant assessment year is 1974-75 corresponding to the previous year ending on 31-3-1974. During the year, assessee supplied goods worth Rs. 4,65,578 to Governments departments. Complete accounts were not maintained and assessee returned estimated profit of 15% on the total sale. From the gross profits, a deduction of Rs. 48,00 was claimed by way of expenses and the balance was offered as net income for taxation. The ITO recomputed the income by deducting sales-tax of Rs. 17,842 from the gross turnover of Rs. 4,65,578 and to the remainder applied profit of 15%. He thus recomputed the profits at Rs. 67,168 and out of it, allowed Rs. 35,168 as expenses and estimated the net income at Rs. 52,000.
3. Upon assessees appeal, the AAC adopted a different method for estimating the profits. According to the first appellate authority, the estimated net profit adopted by the ITO amounted to about 11% of the gross receipts. He, therefore, was of the opinion that it was a fair estimate.
4. Assessee appealed to the Appl, Tribunal and contended that in the earlier years, net profit within the range of 5% to 6 1/2% was being accepted and computation of it at 11% for the year under consideration was high. It was also maintained that sales-tax of Rs. 17,843 should have been allowed as a deductible expenditure from the gross profits and there was no justification to deduct it initially from the turnover and then proceed to apply 15% basis for determining the gross profits. The Tribunal dealt with the matter at length and disposed of the appeal against the assessee by saying :
'.................. The question involved in this appeal is neither the admissibility of the sales-tax after determining the gross profit not whether it should be deducted from the turnover before applying the rate to determine the gross profit. The ground taken in this appeal challenges the estimate of income made by the ITO. We have therefore, to see whether the estimate made is reasonable or on the high side. Though the ITO has applied a rate of 15% to determine the gross profit and has allowed some expenses thereafter, we consider that a better method in such cases is to determine the net profit. The ITO stated in his order that the assessee did not maintain any account books. We also find that the assessee himself has estimated both the income as well as the expenses. It was only at a later stage that he filed some details of expenses which were accepted by the ITO without indicating as to whether these expenses were provided before him. The assessment orders of the earlier years were not produced before us and so we are not in a position to know the circumstances; under which the expenses returned by the assessee on estimate were accepted as correct and complete. Besides, during the year under consideration, the turnover increased four fold which showed that the assessee got some bulk contract which was not present in the earlier years. The ITO further states in his order that in the absence of account books, he was not able to verify the amount sales-tax claimed while he has accepted the sum of Rs. 17,843 as sales-tax paid by deducting the same from the turnover. As stated earlier, the proper method in such cases of no accounts is to apply a rate to the gross receipt in order to arrive at the net profit instead of just accepting or arbitrarily rejecting the expenses claimed by the assessee without any supporting evidence. The AAC in our opinion, has rightly applied the test of net profit to determine whether the profit estimated was reasonable. He found such rate at 11% which he held to be reasonable. We have come across cases of order suppliers where net profit of 12 1/2% is being applied for determining net profit. The assessee before us admitted that he was running a workshop. He is also an order supplier so that his profit would normally be higher than that of an ordinary manufacturer or an order supplier. Thus we find that the method of determining the gross profit and allowing expenses therefore as adopted by the ITO has resulted in the estimate of the profit of the assessee at a figure lower than what could be reasonably expected in this line of business. As the ITO himself has determined the income on the lower side, we see no reason to reduce it further ..........'
The Tribunal was impressed by the special features relating to assessees business. The question that has been formulated by the assessee, does not strictly arise out of the appellate order in view of what has been extracted from the Tribunals decision. The Tribunal essentially went by the position that the estimated rate of net profit on the total turnover was reasonable and was supported by the comparative material as also the special advantages assessee had in his business. In that view of the matter we are satisfied that the question of law as mooted does not arise out of the appellate order and we decline to answer it. We must say that the dispute raised by the assessee has been resolved at the stage of the Tribunal on a finding of fact.
5. There would be no order for costs.
J. K. Mohanty, J. - I agree.