2014 (8) TMI 108 - AT - Income Tax

Estimation of net profit at 4.25 of turnover AO estimated the same at 20% - Held that - An estimate, assuming existence of grounds for the exercise of that power by the assessing authority has to be an honest and fair estimate, taking into account all the relevant material, which the AO is in fact obliged to gather, shorn of arbitrariness and capriciousness relying upon Brij Bhushan Lal, Parduman Kumar vs. CIT 1978 (10) TMI 2 - SUPREME Court - AO s estimate suffers from the malice of arbitrariness, and there was no basis in law to support the same thus, the order of the CIT(A) is upheld Decided against Revenue.

Summary

Issues:
1. Maintainability of estimation of net profit at 4.25% of turnover by CIT(A) instead of 20% by AO.

Analysis:
The judgment involves an appeal by the Revenue against the CIT(A)'s order partly allowing the assessee's appeal contesting its assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2007-08. The main issue is the validity of the estimation of net profit at 4.25% of turnover by the CIT(A) as opposed to 20% by the Assessing Officer (AO). The background reveals that the AO assessed the income at 20% of turnover, while the assessee contended for a lower rate based on various arguments including comparative cases and past records. The Revenue raised grounds challenging the reduction in net profit ratio without proper documentary evidence. The Tribunal examined the procedural and merit aspects of the issue.

The Tribunal observed that the assessee did not challenge the assessment under section 144, and thus, the jurisdiction to make an estimate stood assumed upon the assessment being confirmed as a best judgment assessment. The Tribunal highlighted the link between sections 144 and 145(3) regarding the examination of accounts and the necessity for invoking section 145(3) if accounts are not produced. The Tribunal found no merit in the Revenue's case as the AO's estimate lacked a clear basis and failed to consider relevant data provided by the assessee. The Tribunal emphasized the need for an honest and fair estimate based on all relevant material. Referring to established case law, the Tribunal upheld the CIT(A)'s estimate as valid and rejected the AO's arbitrary assessment.

Regarding the assessee's argument of the AO misstating facts and unnecessary assessment under section 144, the Tribunal noted that since the assessee did not challenge the assessment, there was no basis to address this issue. The Tribunal stated that the assessee should have raised this issue before the CIT(A) for proper examination. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s estimate of net profit at 4.25% of turnover. The judgment was pronounced on July 18, 2014, by the Appellate Tribunal ITAT Mumbai.