2010 (12) TMI 65 - HC - Income Tax

Court overturns AO's arbitrary assessment, supports assessee's audited accounts.

The High Court upheld the decisions of the CIT(A) and ITAT, ruling in favor of the assessee. It found the AO's estimation method arbitrary and unsupported ... Best Judgment Assessment – Profit margin - Reliance on declaration made under VDIS scheme - Held that: - The scheme (VDIS) does not contain any provision declaring as inadmissible in evidence against the declarant the particulars contained in the declaration filed for the purpose of proceedings under the Income Tax Act. Thus, in our view, it is not open to the assessee to contend that the declarations filed by him could not have been looked into by the Assessing Officer for the purpose of estimating his income for the assessment year in question - that while making the best judgment assessment, the Assessing Officer should do so on a rational basis and without any bias. The scope of 'best judgment' assessment under the Income Tax law came up for consideration before the Judicial Committee as early as 1937 in Commissioner of Incom-tax vs. Laxminarain Badridas. - It cannot be denied that there must be some material before the Income-tax Officer on which to base his estimate, but no hard and fast rule can be laid down by the court to define what sort of material is required on which his estimate can be founded - even assuming for the sake of argument that the assessee's profit and loss account was rightly discarded by the Assessing Officer, it is for this Court to examine whether a rational basis was adopted by the Assessing Officer. The answer is our opinion must be an emphatic no. – CIT(A) and ITAT has corrected set aside the “best judgment assessment” on the ground that AO had 'not brought on record any comparable case wherein the net profit declared by a tax payer in the similar business was higher than the one declared by the assessee. - the profit margins of a tax payer as declared by him, could be varied and disturbed only if the profit margins in the case of other assesses engaged in similar business are higher. Issues Involved:1. Deletion of addition made by the AO in absence of books of account based on financial results of the succeeding year.2. Acceptance of assessee's statement of account due to deletion of additions in the case of a sister concern.3. Validity of ITAT and CIT(A) orders considering the absence of account books and other details.Issue-wise Detailed Analysis:1. Deletion of Addition Made by AO in Absence of Books of Account:The Department questioned whether the Tribunal was correct in deleting the addition made by the AO by estimating the income based on the financial results of the succeeding year. The assessee firm, engaged in manufacturing and trading footwear, did not file returns for several assessment years. The AO estimated the income for the assessment year 1994-95 using the average profit percentage from subsequent years declared under the VDIS. The CIT(A) and ITAT found this method arbitrary and not based on material facts. They concluded that the net profit declared by the assessee, supported by audited accounts, should not be disturbed. The ITAT upheld the CIT(A)'s decision, emphasizing that the best judgment assessment should not be capricious or arbitrary but based on facts on record.2. Acceptance of Assessee's Statement of Account:The Department questioned whether the ITAT was correct in holding that the assessee's statement of account should be accepted since additions made in the case of a sister concern were deleted. The assessee argued that due to a dispute with their accountants, they could not produce the books of account. The CIT(A) accepted the explanation, noting that the books were seized by the police and the assessee had made efforts to retrieve them. The ITAT concurred, noting that the CIT(A) had considered a comparable case (Bata India Ltd.) and a sister concern (Aero Traders Pvt. Ltd.) where similar additions were deleted. The ITAT found no fault with the CIT(A)'s acceptance of the audited accounts and deletion of the ad hoc addition.3. Validity of ITAT and CIT(A) Orders Considering Absence of Account Books:The Department contended that the orders of the ITAT and CIT(A) were vitiated as they failed to consider the absence of account books and other details. The AO had noted that no documents/books of account were found from the accountants' possession and the FIR was filed months after the survey. The CIT(A) and ITAT, however, held that the assessee was not prevented by circumstances beyond its control from filing the required return in time. They emphasized that the best judgment assessment should be based on rational and unbiased estimation. The CIT(A) and ITAT found that the AO's estimation lacked a rational basis and did not consider comparable cases where profit margins were lower than those declared by the assessee. The ITAT upheld the CIT(A)'s decision, concluding that the net profit declared by the assessee should not be disturbed.Conclusion:The High Court concurred with the findings of the CIT(A) and ITAT, emphasizing that the best judgment assessment should be rational and based on facts. The Court found that the AO's method of estimation was arbitrary and not supported by comparable cases. The Court upheld the deletion of the addition made by the AO and accepted the assessee's audited accounts, answering the questions in favor of the assessee and against the revenue.