2024 (7) TMI 146 - HC - Income Tax

Rough-and-ready assessment as to the quantum of tax - Validity of Best judgment assessment - Net profit determination - HELD THAT - It has not been disputed by the assessing officer that the assessee carried civil work and in view thereof he received a certain amount as consideration. The materials in execution of contract have not been disbelieved by the AO. In this regard, the CIT(A) and ITAT have also recorded findings of fact. ITAT has also noticed net profit rate of last seven years which ranged from 0.45% to 3.84%. ITAT has also noticed net profit rate determined in matters of others in the same line of trade, to be about 4%. Assessee himself has agreed before the CIT(A) for net profit at the rate of 8% on the gross receipts under the contract. Appellant could not place any material before us on the basis of which determination of net profit at the rate of 8% in the line of trade of the assessee can be said to be perverse or insufficient under the facts and circumstances of the present case. The findings recorded by the CIT(A) and the ITAT for applying the net profit rate of 8% on the gross receipts under the contract, cannot be said to suffer from any apparent illegality in the facts and circumstances of the present case. Thus, applying the principles of best judgment assessment and the net profit rate, we do not find any illegality in the impugned order of the ITAT. Decided in favour of the assessee.

Issues Involved:
1. Authority of Commissioner (Appeals) or Appellate Tribunal to make rough-and-ready assessments.
2. Legitimacy of additions made by the assessing officer based on discrepancies in purchase figures.
3. Application of net profit rate by CIT(A) and ITAT.
4. Principles and standards for best judgment assessment.

Issue-wise Detailed Analysis:

1. Authority of Commissioner (Appeals) or Appellate Tribunal to make rough-and-ready assessments:
The substantial question of law addressed was whether the Commissioner (Appeals) or the Appellate Tribunal have the authority to make rough-and-ready assessments regarding the quantum of tax and the percentage of net income demanded as tax in the absence of statutory guidelines. The court concluded that in a best judgment assessment, a certain degree of guesswork is permissible, provided it is honest, fair, and not arbitrary. The CIT(A) and ITAT's application of a net profit rate of 8% was found to be reasonable and supported by precedent and the specific facts of the case.

2. Legitimacy of additions made by the assessing officer based on discrepancies in purchase figures:
The assessing officer found discrepancies in the purchase figures disclosed by the assessee and the responses received from parties under Section 133(6) of the Income Tax Act, 1961. Several parties did not respond to the notices, leading the assessing officer to reject the books of accounts and make significant additions to the disclosed income. The court noted that the assessing officer's actions were based on the lack of verification of purchases and the failure of the assessee to produce necessary evidence.

3. Application of net profit rate by CIT(A) and ITAT:
The CIT(A) applied a net profit rate of 8% on the contract receipts, which was affirmed by the ITAT. The CIT(A) referenced various judgments and considered the appellant's acceptance of the 8% rate as fair and reasonable. The ITAT reviewed similar cases and found that applying a reasonable percentage of profit based on comparable cases was appropriate. The court upheld the application of the 8% net profit rate, noting that the assessee's historical net profit rates and industry standards supported this determination.

4. Principles and standards for best judgment assessment:
The court emphasized that a best judgment assessment must be conducted with fairness and impartiality, adhering to principles such as deficiency of information, due diligence, prudence and reasonableness, objective standards, and comprehensive documentation. The assessing officer must not act arbitrarily or capriciously, and the assessment should be based on judicial considerations and relevant material. The court found that the CIT(A) and ITAT's assessments met these standards, as they were grounded in factual evidence and logical reasoning.

Conclusion:
The court concluded that the CIT(A) and ITAT's determination of the net profit rate at 8% was fair and reasonable, given the facts and circumstances of the case. The substantial question of law was answered in favor of the assessee, and the appeal filed by the revenue was dismissed. The court's decision underscored the importance of adhering to principles of best judgment assessment and ensuring that assessments are based on objective and reasonable standards.

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