2013 (10) TMI 75 - HC - Income Tax

Addition on account of suspicion - disallowance of expenditure on estimation basis - adhoc disallowance - Held that - It is accepted principle that where the books of account are rejected or true profits are not disclosed in the books of account, some element of guess work while framing the assessment is inevitable. The guess work should not be a wild one, but should have a reasonable nexus to the available material and the circumstances of each case. There has to be some basis for arriving at the estimate and it should not be on mere suspicion. The assessment order does not depend upon the arbitrary caprice of the Assessing Officer, but on settled principles of justice. The authority concerned has to make an honest and fair estimate of income. Reliance has been placed on the judgment of Hon ble Supreme Court of India in the case of Dhakeswari Cotton Mills Ltd 1954 (10) TMI 12 - SUPREME Court , wherein it has been held that in making an assessment under Section 23(3) of the Indian Income-tax Act, the Income-tax Officer is not fettered by technical rules of evidence and pleadings and he is entitled to act on material which may not be accepted as evidence in a court of law, but the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under Section 23(3). Revenue authorities had acted on surmises and guess work while sustaining the additions of different amounts. Further, the authorities were required to have some material to come to the conclusion that the addition was required in the case and not just because the case was selected for scrutiny that the addition was to be made Decided in favor of Assessee.

Summary

Issues:
- Disposal of three appeals bearing ITA Nos. 615, 616, and 617 of 2008
- Justification of interference by Ld. ITAT in the findings of the 1st appellate authority
- Basis for making an addition of 50,000/- in the total income of the assessee by disallowing expenditure
- Prima facie material for formation of opinion by the assessing authority

Analysis:

The judgment by the High Court of Punjab and Haryana pertains to the disposal of three appeals (ITA Nos. 615, 616, and 617 of 2008) where the factual and legal issues were found to be identical. The primary issue revolved around the justification of the Ld. ITAT's interference in the findings of the 1st appellate authority regarding the disallowance of expenditure claimed by the assessee. The key questions raised were whether the ITAT was justified in disallowing the expenditure of Rs. 3 lacs out of Rs. 3.50 lacs claimed by the assessee and whether there was a valid basis for making an addition of 50,000/- in the total income of the assessee by disallowing expenditure.

The case involved a Private Limited Company engaged in building and road construction, which filed its return for the assessment year 2003-04. The Assessing Officer disallowed an expenditure of Rs. 3,50,000/-, treating it as income of the assessee due to lack of proper evidence supporting the claimed expenses. The CIT(A) upheld a partial disallowance of Rs. 50,000/-, which was further increased by the Tribunal to Rs. 2,50,000/-. The court examined the basis for these decisions and the principles governing such assessments.

The court emphasized the need for prima facie material for the formation of an opinion by the assessing authority when rejecting accounts or making additions to income. It cited legal precedents to support the requirement for a reasonable nexus between available material and the assessment. The court highlighted that assessments should not be based on guesswork or mere suspicion but should be supported by some basis and not arbitrary decisions.

Ultimately, the court found that the authorities had relied on surmises and guesswork without substantial material to justify the additions made to the income of the assessee. It concluded that the additions were not based on valid grounds and overturned the decisions, ruling in favor of the assessee. The substantial questions of law were answered in favor of the assessee, leading to the allowance of the appeals.

In summary, the judgment addressed the proper basis for making additions to income, emphasizing the need for a reasonable nexus between available material and assessments. It underscored the importance of avoiding arbitrary decisions based on guesswork or suspicion, highlighting the requirement for a fair and honest estimation of income by the assessing authorities.