2010 (8) TMI 27 - HC - Income Tax

Best judgment assessment estimation of income reasonable basis Held that - Undoubtedly, the AO has the power to frame an assessment under Section 144 of Act, 1961, but while doing so, he must make an honest and fair estimate of the income of an assessee by following rules of natural justice, equity and good conscience. The AO s best judgment and order should have a reasonable nexus to the available material and circumstances of the case. While passing the best judgment and order, AO should have collected the material by exercising his quasi-judicial powers. However, as found by the CIT(A), the AO has not given any reasons for determining the respondent-assessee s income at Rs. 25,00,000/-. Consequently, the said finding of the AO is unsustainable. matter remanded back

Summary

Issues:
Appeal under Section 260A of Income Tax Act, 1961 challenging ITAT order for Assessment Year 2006-2007 regarding addition of Rs. 25,00,000/- made by AO under Section 144.

Analysis:
1. The appeal was filed challenging the ITAT order that deleted the addition of Rs. 25,00,000/- made by the AO under Section 144 of the Income Tax Act, 1961. The AO completed the assessment to the best of his judgment as the respondent-assessee did not respond to notices under Section 143(1)/143(2) of the Act. The CIT(A) later deleted the addition based on the audited balance sheet and loan confirmation submitted by the assessee.

2. The Revenue contended that the CIT(A) violated Rule 46A of the Act by not allowing the AO to examine fresh evidence and that the AO had the authority to complete the assessment under Section 144. The Revenue sought to set aside the ITAT order and reinvestigate the matter. However, the High Court found that the AO had estimated the income without basis and failed to provide reasons for determining the income at Rs. 25,00,000/-, making the finding unsustainable.

3. The High Court emphasized that while the AO has the power to frame an assessment under Section 144, it must be done fairly and based on natural justice, equity, and good conscience. The AO's best judgment should be reasonable and supported by available material and circumstances. In this case, the AO did not justify the income estimation, rendering it unsustainable.

4. Regarding the alleged violation of Rule 46A, the High Court supported the ITAT's decision, which stated that the AO should have collected material during the assessment process. The ITAT rejected the Revenue's request to remand the matter to the AO, as no useful purpose would be served. The High Court upheld the ITAT's decision, dismissing the appeal as devoid of merit.

In conclusion, the High Court upheld the ITAT's decision to delete the addition of Rs. 25,00,000/- made by the AO, emphasizing the importance of a fair and justified assessment process under Section 144 of the Income Tax Act, 1961.