2008 (7) TMI 260 - HC - Income Tax

Best judgment assessment - question as to whether the estimation made by the Assessing Officer is correct or not is normally treated as a question of fact. However when the concerned authority like in the present case does not follow a uniform practice and applies different yardsticks in similar cases then such action is hit by article 14 and becomes arbitrary and capricious - appeal filed by the assessee is allowed - order of the CIT of reducing the enhanced income is restored

Summary

Issues:
1. Estimation of income by the Assessing Officer without proper basis.
2. Justification of the Tribunal's decision in upholding the addition made by the Assessing Officer.

Issue 1: Estimation of income by the Assessing Officer without proper basis:
The appellant, engaged in the restaurant business, filed a return for the assessment year 1993-94 showing an income of Rs. 24,350 based on the books of account. However, the Assessing Officer rejected the books of account and enhanced the income by Rs. 3,74,387 through estimation. The Commissioner of Income-tax (Appeals) partly allowed the appeal, making an addition of Rs. 1,20,000 only. Both parties appealed to the Appellate Tribunal, where the assessee's appeal was dismissed in default, and the Revenue's appeal was decided in their favor, restoring the Assessing Officer's order. The appellant challenged this decision, arguing that the estimation should have been rational, following a similar methodology applied in another case. On the other hand, the Revenue contended that the estimation was evidence-based, citing a judgment emphasizing that estimation correctness is a factual question.

Issue 2: Justification of the Tribunal's decision in upholding the addition made by the Assessing Officer:
The Tribunal and the Commissioner of Income-tax had previously dealt with estimation cases of different restaurants in Shimla, applying varying multiples to the cost of raw materials to estimate sales. The appellant argued that the Tribunal had applied a lower multiple in a similar case, while the Revenue argued that the Tribunal's estimation was based on the gross profit declared in previous years. The court observed that the Assessing Officer must follow principles even in estimation, ensuring consistency for similar businesses. It was noted that the appellant had provided comparative gross profit data for previous years, similar to another restaurant case. Deviating from established norms without valid reasons was considered arbitrary and a violation of Article 14, indicating a substantial question of law. Consequently, the court allowed the appeal, setting aside the Tribunal's order and restoring the Commissioner of Income-tax's decision.

This detailed analysis of the judgment addresses the issues involved, providing a comprehensive overview of the legal reasoning and arguments presented by the parties involved in the case.