2022 (8) TMI 1562 - AT - Income Tax

Estimation of income @ 10% of the turnover by rejecting the book results - disallowing the expenditure as the assessee had failed to comply with the notices issued u/s 143(2) of the Act by resorting to best of judgement assessment - HELD THAT - It is settled position of law that the Assessing Officer while making the best judgement of assessment must make honest and fair estimate of income of an assessee. The same must not be capricious but should have reasonableness to the available material on record under the facts and circumstances of the case. In the present case the disallowance resulted into profit @ 40% of the contract receipts which is very unreasonable. When the matter carried on appeal before the ld. CIT(A) one of the courses available before the CIT (A) is rejecting the book results estimating the profits. This action of the ld. CIT (A) is not under challenge before us. Therefore in our considered opinion the ld. CIT (A) had rightly exercised one of the possible course of action available before him when the additions were made by the Assessing Officer are arbitrary unreasonable etc. Decided against revenue. Estimation of profit @ 10% of gross receipts from execution of civil contracts - as submitted that once book results were rejected by the CIT(A) the estimation of profit should be made either on past history of the assessee or the profits of the comparables in the similar line of business - HELD THAT - We are of the considered opinion that in order to meet the ends of justice we direct the AO to estimate the profit @ 5% of the contract gross receipts. Accordingly the Cross Objection stands partly allowed.

2025 (1) TMI 1064 - AT

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in the judgment are:

Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in rejecting the book results and estimating the profits at 10% of the gross receipts.
Whether the Assessing Officer's disallowance of expenses leading to a higher profit estimation was arbitrary and unreasonable.
Whether the estimation of profit at 10% of gross receipts was excessive and not based on the past history of the assessee or comparable cases.
Whether the principles of natural justice were violated during the assessment proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of CIT(A)'s Rejection of Book Results

Relevant legal framework and precedents: The legal framework involves the provisions under the Income Tax Act, 1961, particularly sections related to the assessment of income and disallowance of expenses. Precedents require that any estimation of income should be honest and fair, not capricious.
Court's interpretation and reasoning: The court noted that the CIT(A) had rejected the book results and estimated the profits at 10% of the gross receipts because the disallowance by the Assessing Officer resulted in an unreasonable profit estimation of 40%.
Key evidence and findings: The CIT(A) found that the assessed income at 40% of the turnover was unrealistic and therefore chose to estimate the income at a more reasonable rate.
Application of law to facts: The CIT(A) applied the principle of making a fair estimate by choosing a 10% profit estimation, which was considered more reasonable than the 40% resulting from the disallowance.
Treatment of competing arguments: The Revenue argued against the estimation, while the assessee contended that the estimation was excessive. The court found the CIT(A)'s decision to be a reasonable exercise of discretion.
Conclusions: The court upheld the CIT(A)'s decision to reject the book results and estimate profits at 10% of the gross receipts.

Issue 2: Arbitrariness of Assessing Officer's Disallowance

Relevant legal framework and precedents: The assessment of income must be based on reasonable and justifiable grounds, as per the Income Tax Act.
Court's interpretation and reasoning: The court found that the disallowance of Rs. 7,09,47,237/- by the Assessing Officer, leading to an estimated profit of 40%, was arbitrary and unreasonable.
Key evidence and findings: The court noted that the assessee had failed to comply with notices, leading to a best judgment assessment by the Assessing Officer.
Application of law to facts: The court concluded that the disallowance was not based on a fair estimate, given the circumstances of the case.
Treatment of competing arguments: The Revenue's argument for upholding the disallowance was not accepted, as the court found it unreasonable.
Conclusions: The court dismissed the Revenue's appeal, finding no merit in the grounds presented.

Issue 3: Excessiveness of 10% Profit Estimation

Relevant legal framework and precedents: The estimation of profits should consider past performance and comparable cases in the industry.
Court's interpretation and reasoning: The court considered the assessee's argument that the 10% estimation was excessive, given the past profit percentages and the nature of the business.
Key evidence and findings: The court reviewed past profit percentages, which were significantly lower than 10%, and noted that most work was executed through sub-contracts.
Application of law to facts: The court agreed that a 10% estimation was excessive and directed a reduction to 5% of the gross receipts.
Treatment of competing arguments: The court found the assessee's argument persuasive and the Revenue did not controvert these submissions.
Conclusions: The court partly allowed the assessee's cross-objection and directed the profit estimation to be reduced to 5%.

Issue 4: Violation of Principles of Natural Justice

Relevant legal framework and precedents: The principles of natural justice require that parties are given a fair opportunity to present their case.
Court's interpretation and reasoning: The court acknowledged the assessee's claim of not being given sufficient opportunity during the assessment proceedings.
Key evidence and findings: The court noted the assessee's lack of cooperation was due to preparation of accounts, suggesting a lack of opportunity to respond adequately.
Application of law to facts: The court recognized the procedural shortcomings in the assessment process.
Treatment of competing arguments: The court found the assessee's claim of procedural unfairness credible.
Conclusions: The court implicitly acknowledged the procedural issues by directing a fairer estimation process.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The disallowance of Rs. 7,09,47,237/- resulted into profit @ 40% of the contract receipts which is very unreasonable."
Core principles established: The estimation of income must be reasonable and consider past performance and industry standards. The principles of natural justice must be upheld during assessment proceedings.
Final determinations on each issue: The court dismissed the Revenue's appeal, upheld the CIT(A)'s rejection of book results, and directed a reduction of profit estimation from 10% to 5% of gross receipts for the assessee's cross-objection.

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