1980 (3) TMI 20 - HC - Income Tax

Summary

Issues involved: Jurisdiction of ITO in making best judgment assessment without account books, error in Commissioner's order, arbitrary assessment of net profits at 15%.

Jurisdiction of ITO in Best Judgment Assessment: The petitioner, a contractor and assessee under the Income Tax Act, 1961, filed a return for the assessment year 1974-75 based on an estimate of 10% profit on gross receipts due to lack of account books. The ITO, however, assessed the net profit at 15% without providing a basis for this computation. The court held that while best judgment assessment involves guesswork, it must not be arbitrary. The lack of disclosed basis for the 15% estimation rendered the assessment order arbitrary, leading to the quashing of both the ITO's and Commissioner's orders.

Error in Commissioner's Order: The petitioner challenged the Commissioner's decision to uphold the ITO's order, arguing that the Commissioner erred in not providing any material for applying the 15% flat rate for net profit estimation. The court agreed that the Commissioner's order lacked justification and failed to address the arbitrary nature of the assessment. Consequently, the court set aside both the ITO's and Commissioner's orders, allowing the ITO to reassess the petitioner's case in accordance with the law.

Arbitrary Assessment of Net Profits: The court emphasized that in cases of best judgment assessment, there must be a reasonable basis for the estimation of profits, even in the absence of account books. The failure of the ITO and Commissioner to provide any rationale for the 15% net profit calculation led to the conclusion that the assessment was arbitrary. As a result, the court quashed the previous orders and directed the ITO to conduct a fresh assessment based on proper grounds. The petitioner's petition was allowed, and the parties were instructed to bear their own costs, with the petitioner entitled to a refund of the security deposit.