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2025 (1) TMI 1171 - AT - Income TaxBest judgment assessment - AO has made additions towards net profit from business by estimating 10% profit on total turnover of the assessee - HELD THAT - Unless the AO reject the books of accounts with valid reasons he cannot resort to estimation of profit even in case of best judgement assessment. Although in best judgement assessment there is certain degree of guess work but the said guess work cannot arbitrary and without any basis. In the present case the assessee claims that profit margin in this line of business is very low and compared to net profit rate adopted by the AO it is on higher side. In our considered view although no evidences have been filed to justify its argument that the net profit adopted by the AO is on higher side in our considered view since the AO has not given any reasons for rejection of books of accounts and also estimated 10% net profit on turnover without any basis the matter needs to be set aside to the file of the lower authorities for reconsideration of the issue. Additions made u/s 68 towards liabilities - The assessee has filed unaudited unsigned copy of balance sheet but as per the said balance sheet the total non-current liabilities under the long-term borrowings. The assessee claims that it has received loans and advances from related parties and obtained all the information including confirmation letters from the parties and requested to give another opportunity to explain its case. Since the assessment order passed by the AO is ex-parte and there is no occasion for the assessee to file relevant evidences in our considered view this issue also needs to go back to the file of the lower authorities for reconsideration. Addition u/s 69A - unexplained money towards cash deposited in the bank account during the demonetisation period - AO has made additions towards total cash deposited during demonetization period without any analysis whether it is recorded in the books of accounts of the assessee or it is unexplained money not recorded in the books of accounts of the assessee to make additions u/s 69A of the Act. In our considered view in order to make additions u/s 69A of the Act the AO has to give a clear finding that the assessee is owner of the money and could not explain the source of the said money to the satisfaction of the AO. Since the AO has not recorded any findings as to how the money is as in the nature of unexplained money and made additions only on the basis of bank statements in our considered view this issue also needs to go back to the file of the lower authorities for re-examination of the facts. Since the assessment proceedings are ex-parte u/s 144 of the Act and further during the appellate proceedings the assessee could not file relevant evidences to justify its case the matter needs to be set aside to the file of the CIT(A) for fresh examination and to give another opportunity of hearing to the assessee. Penalty levied u/s 270A for under reporting of income as a consequence of misreporting and Penalty levied u/s 271AAC towards additions made u/s 69A - Since the addition made by the Assessing Officer on both the issues has been set aside to the file of the Ld.CIT(A) for denovo consideration in our considered view the consequent penalty levied by the AO u/s 270A and 271AAC of the Act and confirmed by the CIT(A) also needs to be set aside to the file of the CIT(A) for reconsideration.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment include:
ISSUE-WISE DETAILED ANALYSIS 1. Validity of Assessment under Section 144 The legal framework for assessments under Section 144 involves best judgment assessment when an assessee fails to comply with notices. The Court noted that the assessee neither appeared nor provided necessary information during the assessment proceedings, justifying the AO's decision to proceed with a best judgment assessment. The Court acknowledged that the assessee was undergoing liquidation proceedings, which might have contributed to non-compliance. However, it emphasized that the AO had provided sufficient opportunities for compliance, which were not availed by the assessee. 2. Estimation of Profit at 10% The Court examined the AO's estimation of a 10% profit margin on the total turnover. The AO's rationale was based on historical profit margins in the jewelry business, which were significantly higher. However, the Court noted that the AO did not provide sufficient justification for rejecting the books of accounts, a necessary step before resorting to estimation. The Court highlighted that while estimation involves guesswork, it must be based on reasonable grounds. The lack of evidence or comparable data to support the AO's estimation led the Court to conclude that this issue required reconsideration. 3. Additions under Section 68 Section 68 pertains to unexplained cash credits. The AO added liabilities appearing in the balance sheet as unexplained cash credits. The assessee argued that these were legitimate business liabilities, including loans and advances from related parties. The Court found that the assessee had not provided adequate evidence to substantiate the identity, creditworthiness, and genuineness of the transactions. However, given the ex-parte nature of the assessment, the Court deemed it appropriate to remand the issue for further examination. 4. Additions under Section 69A Section 69A addresses unexplained money. The AO added cash deposits made during the demonetization period as unexplained money. The assessee contended that these deposits were from recorded sales. The Court observed that the AO did not adequately analyze whether the deposits were recorded in the books of accounts. The lack of detailed findings on the nature of the deposits led the Court to remand this issue as well. 5. Penalties under Sections 270A and 271AAC These sections pertain to penalties for underreporting and misreporting of income. The penalties were linked to the additions made by the AO. Given that the primary issues were remanded for reconsideration, the Court also set aside the penalties for reevaluation. SIGNIFICANT HOLDINGS The Court emphasized the necessity of rejecting books of accounts with valid reasons before estimating profits. It reiterated that estimation should be grounded in reasonable assumptions and evidence. On the issue of unexplained cash credits and deposits, the Court underscored the importance of providing adequate evidence to substantiate claims. The lack of such evidence necessitated a remand for further examination. The Court concluded by setting aside the orders of the CIT(A) and remanding the matters for fresh consideration, ensuring that the assessee is given a fair opportunity to present its case with relevant evidence.
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