2006 (12) TMI 79 - HC - Income Tax

AO is not entitled to make a pure guess without reference to any evidence or material expenses vouched by internal debit vouchers AO rejected the books of accounts without noticing any inconsistency or infirmity in audit report or books of account best judgment assessment u/s 144 invalid

Summary

Issues:
1. Rejection of books of account by Assessing Officer
2. Estimation of net profit based on best judgment assessment
3. Application of section 145 and 144 of the Income-tax Act, 1961
4. Discrepancies in the assessment process
5. Interpretation of principles of best judgment assessment

Analysis:

Issue 1: Rejection of books of account by Assessing Officer
The appellant, a private limited company engaged in works contracts, filed its return of income for the assessment year 1993-94. The Assessing Officer, upon finding vouched expenses not verifiable and sundry creditors untraceable, issued a show-cause notice for explanation. Despite the appellant's objection, the Assessing Officer rejected the books of account and completed the assessment based on best judgment, estimating the net profit at 8 per cent.

Issue 2: Estimation of net profit based on best judgment assessment
The CIT (Appeals) directed the Assessing Officer to accept the net profit as per the books of account, but the Tribunal, after considering the facts and circumstances, estimated the net profit at 6 per cent. The appellant challenged this decision, arguing that the rate was not suitable given compliance with section 44AB requirements and submission of relevant documents.

Issue 3: Application of section 145 and 144 of the Income-tax Act, 1961
The High Court observed that the Assessing Officer did not find the books of account incorrect, rendering the invocation of best judgment principles improper. The court highlighted that section 144 could only be invoked if the accounts' correctness or completeness was in doubt, which was not the case here.

Issue 4: Discrepancies in the assessment process
The court criticized the Assessing Officer and Tribunal for not duly considering the appellant's explanation regarding the purchase of raw materials in a disturbed area, leading to a mere guesswork estimation of net profit at 6 per cent. The court emphasized the lack of detailed inquiry before resorting to best judgment assessment.

Issue 5: Interpretation of principles of best judgment assessment
Citing various legal precedents, the court emphasized that best judgment assessment should not be based on mere suspicion or guesswork. The court stressed the need for concrete evidence or material to support such assessments, highlighting that low profit in a particular year alone cannot justify invoking best judgment without proper grounds.

In conclusion, the High Court allowed the appeal, setting aside the Tribunal's order and answering the question of law in favor of the appellant-assessee against the Revenue.