2020 (6) TMI 80 - HC - Income Tax

Revision u/s 263 - finding was based on Audit Objection - Rejection of books of accounts and estimation of income - Assessment Order u/s.143(3) is erroneous and prejudicial in nature in as much as the depreciation and interest were allowed as deduction after estimation of income thereby allowing double deduction to the assessee - HELD THAT - As the estimation of Income Tax is essentially a fact finding exercise, which becomes final at the hands of the final fact finding authority of Income Tax namely, Income Tax Appellate Tribunal and we would not have entertained this appeal which lies under section 260A of the Act, only on the 'substantial question of law' arising from the order of the learned Appellate Tribunal. But we see glaring perversity in the assessment order itself. The alleged 'market standards' adopted by the assessing authority to jack up the net profit from 1.56% on turnover declared by the Assessee to 8% seems to have been made without any basis whatsoever. There is not even an iota of evidence or reference, to any material or any parallel case referred by the assessing authority to adopt such rate of 8% of turnover. Even grounds or alleged discrepancies which permitted the assessing authority did not appear to be sufficient to reject the books of accounts. Arbitrarily assessed income tax by the assessing authority who had no legs to stand upon, cannot be sustained. More surprising is that even this assessment order which was unduly and falsely in favour of Revenue, (God Knows How??) was found to be erroneous and prejudicial to the interest of Revenue by the learned Commissioner and that is beyond our comprehension. Entire exercise of the fact finding in the form of estimation of income under the powers conferred upon the Assessing Authorities to make best judgment assessments, where the books of accounts are validly rejected, does not seem to have been adopted by the authorities below. We cannot countenance such an approach on the part of the revenue authorities of the Act. Therefore, we are inclined to set aside all the three orders passed under Section 263 of the Act and the order of the learned Tribunal dated 13.4.2016 and remit the matter back to the Assessing Authority to pass fresh assessments in accordance with law giving reasons for particular findings arrived at by the assessing authority.

Summary

Issues:
1. Revision of order under section 263 of the Income Tax Act based on audit objection.
2. Correctness of allowing deductions on interest and depreciation in the assessment order.

Issue 1: Revision of order under section 263 of the Income Tax Act based on audit objection
The High Court examined whether the Income Tax Appellate Tribunal was justified in setting aside the revision order under section 263 solely on the ground that the finding was based on an audit objection. The Tribunal reinstated the order of the Assessing Officer, emphasizing that the assessment was based on estimation and the audit report did not consider the specific facts of the case. The Court observed that the Principal Commissioner was influenced by the audit report without adequately examining the case's details. The Court found no merit in the revisional order and set it aside, reinstating the Assessing Officer's order.

Issue 2: Correctness of allowing deductions on interest and depreciation in the assessment order
The Court analyzed the correctness of the Assessing Authority's decision to estimate the profit of the assessee at 8% on turnover and allow deductions on interest and depreciation. The Principal Commissioner under section 263 found this best assessment order erroneous, as allowing further deductions after estimating income at 8% was deemed prejudicial to the Revenue's interest. The Tribunal, however, upheld the Assessing Authority's order, leading to the Revenue's appeal. The Court noted the lack of evidence or basis for adopting the 8% profit rate, highlighting discrepancies in the assessment process. The Court found the assessment order to be arbitrarily made without proper justification, leading to the decision to set aside all three orders and remit the matter back to the Assessing Authority for fresh assessments in accordance with the law.

In conclusion, the High Court remitted the matter back to the assessing authority for fresh orders, setting aside the previous orders due to the lack of proper justification and evidence in the assessment process. The Court emphasized the importance of proper assessment procedures and the need for valid reasoning behind estimation of income and deductions in accordance with the law.