2019 (8) TMI 567 - HC - Income Tax

Estimation of income - alleged commission income on accommodation entry - assessee stated that he had received commission of ₹ 0.30/0.45 on ₹ 100/- only - AO estimated commission @10% which was reduced by CIT(A)@ 2% which got approval of ITAT - existence of evidence or material on record for making such estimate - HELD THAT - It must be noted that Section 145(3) gives discretion to the AO to make an assessment in the manner provided in Section 144, yet this discretion cannot be exercised arbitrarily. The question to determine in every such case is, whether there is any material for the basis adopted by the AO or the Tribunal, as the case may be, for computing the income of the assessee. The material which is irrelevant or which amounts to mere guesswork or conjecture is no material. The AO thought fit to estimate 10% commission for providing accommodation entries to the tune of ₹ 12,00,02,100/-. The CIT(A) took the view that the estimation of commission @ 10% by the AO is 1/3rd of the said benefit, which could be termed as excessive and not a reasonable estimate. The CIT(A), without there being anything on record, thought fit to take the view that the estimate by the appellant at 3% translates to 1% of the benefit derived, which could be termed as too low, and in such circumstances, estimated at 2%, which would translate to about 6.7% of the benefit alleged to have been derived by M/s.PACL India Limited. This is nothing but pure guesswork without there being any material or basis for arriving at the same. Ordinarily, we would not have entertained the appeal of the present nature having regard to the fact that the income has been assessed based on estimation. However, the way the authorities have proceeded with the guesswork, it cannot be approved. In view of the above, this Tax Appeal succeeds and is hereby allowed. The question of law is answered in favour of the assessee

Issues Involved:
1. Validity of the estimation of commission income by the Assessing Officer (AO) and subsequent authorities.
2. Adequacy of material or evidence to support the income estimation.
3. Rejection of books of accounts and the method of estimation under Section 145(3) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the Estimation of Commission Income:
The main issue revolved around whether the Income Tax Appellate Tribunal (ITAT) was right in confirming the addition of ?22,53,100/- on account of alleged commission income at 2% without any evidence or material on record. The appellant filed a return declaring a total income of ?5,34,342/-, later revised to ?7,44,070/-. The AO, based on the statement of the appellant and information from a search in the case of M/s. PACL India Limited, concluded that the dealings were accommodation entries and estimated the income at 10% of the gross receipts, adding ?1,20,00,210/- as income from other sources under Section 56 of the Act.

2. Adequacy of Material or Evidence:
The appellant contended that the estimation of income by the AO and CIT(A) was without any material or basis. The AO estimated 10% commission for providing accommodation entries, which the CIT(A) reduced to 2%, translating to ?24,00,042/-. The appellant argued that there was no cross-inquiry with M/s. PACL India Limited to determine the actual commission paid and that the estimation was based on guesswork. The Tribunal upheld the CIT(A)'s estimation at 2%, which was challenged by the appellant as being arbitrary and without evidence.

3. Rejection of Books of Accounts and Method of Estimation:
The appellant's books of accounts were rejected under Section 145(3) of the Act. The appellant argued that after such rejection, the AO could not estimate the income without any material or basis. The appellant cited several legal precedents emphasizing that estimation should not be based on mere guesswork. The CIT(A) and Tribunal's reliance on an estimated commission of 2% was challenged as it lacked a concrete basis and was deemed excessive.

Analysis by the Court:
The court noted that the AO's and subsequent authorities' estimations were based on pure guesswork without any material evidence. The court referred to various Supreme Court decisions, emphasizing that income estimation should be based on some material and not mere suspicion. The court found that the authorities had indulged in guesswork in estimating the commission income and had not provided a fair basis for their estimations.

Conclusion:
The court concluded that the authorities had erred in their estimation of commission income without any material or basis. It held that the estimation of 2% commission was arbitrary and not supported by evidence. The court allowed the appeal, quashing the impugned order of the ITAT and ruling in favor of the assessee. The question of law was answered in favor of the assessee, highlighting the need for a fair and evidence-based approach in income estimations.

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