2015 (3) TMI 1319 - AT - Income Tax

Non maintaining books of accounts - AO estimating the income of the assessee by applying net profit rate in the assessment order passed u/s 143(3) without invoking the provisions of s. 145(3)- best judgment assessment under s. 143(3) without invoking the provisions of s. 145(3) of the Act instead of making assessment under s. 144 - Held that - The assessee has not complied with the two situations mentioned in s. 144 the assessee has not complied with the provisions of s. 142(1) where the assessee has failed to produce accounts, documents, information and statement of assets and liabilities. Secondly, having made a return filed and fails to comply with all the terms of a notice issued under s. 143(2) and moreover, as per proviso to s. 144, no show-cause notice for making ex parte assessment under s. 144 has been issued to the assessee. AO was required to make best judgment assessment under s. 144 of the Act, which in fact, has not been made. AO proceeded to make assessment under s. 143(3) of the Act on the premise that the assessee has submitted some details and explanations called for which in fact have not been furnished is a matter of record. Such assessment made under s. 143(3) is liable to be quashed. We accordingly, direct the AO to quash the assessment so made by the AO. Even if the assessment has been made under s. 143(3) or in a manner provided under s. 144 of the Act, the AO should have invoked the provisions of s. 145(3) of the Act, which has not been done. In the facts and circumstances of the case also, the assessment made by the AO is bad in law and is directed to be quashed. - Decided against revenue

Issues Involved:
1. Validity of assessment under Section 143(3) without invoking Section 145(3).
2. Estimation of net profit rate by the Assessing Officer (AO) at 10% versus 4% declared by the assessee.
3. Direction by CIT(A) to adopt a net profit rate of 7% instead of 10% as applied by the AO.
4. Reopening of assessment and legal objections raised by the assessee.

Issue-wise Detailed Analysis:

1. Validity of Assessment under Section 143(3) without Invoking Section 145(3):

The assessee argued that the AO erred in estimating the income by applying the net profit rate in the assessment order under Section 143(3) without invoking the provisions of Section 145(3). The Tribunal noted that the AO should have made a best judgment assessment under Section 144 since the assessee did not maintain books of account and failed to comply with notices under Section 142(1). The Tribunal emphasized that the AO's assessment under Section 143(3) was invalid as the AO did not follow the proper procedure, thus quashing the assessment.

2. Estimation of Net Profit Rate by the AO at 10% versus 4% Declared by the Assessee:

The AO applied a net profit rate of 10% on the contract receipts, citing the non-maintenance of books of account by the assessee. The AO referenced the case of Shivam Construction Co., where a 10% net profit rate was deemed fair. The assessee contended that the estimation was arbitrary and without basis. The Tribunal observed that the AO's estimation was based on comparable cases and the absence of books of account, which justified a higher profit rate.

3. Direction by CIT(A) to Adopt a Net Profit Rate of 7% Instead of 10%:

The CIT(A) reduced the net profit rate from 10% to 7%, taking into account various factors and precedents. The Revenue challenged this reduction, arguing that the CIT(A) erred in not adhering to the 10% rate applied by the AO. The Tribunal upheld the CIT(A)'s decision, noting that the 7% rate was reasonable given the circumstances and comparable cases.

4. Reopening of Assessment and Legal Objections Raised by the Assessee:

The assessee raised legal objections regarding the reopening of the assessment, which were rejected by the CIT(A). The Tribunal admitted additional legal grounds raised by the assessee, emphasizing that these grounds were crucial and had a significant bearing on the tax liability. The Tribunal concluded that the AO's failure to invoke Section 145(3) and the improper procedure followed in making the assessment under Section 143(3) rendered the assessment invalid.

Conclusion:

The Tribunal quashed the assessment made under Section 143(3) due to the AO's failure to invoke Section 145(3) and follow the correct procedure. The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, upholding the CIT(A)'s decision to apply a 7% net profit rate instead of 10%. The judgment emphasized the importance of adhering to procedural requirements in tax assessments.

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