2021 (5) TMI 146 - AT - Income Tax

Tribunal adjusts profit estimation, emphasizes reasonableness and proper justification for fair assessment

The Tribunal partially allowed the appeal, directing the Assessing Officer to estimate profit at 3% on total gross receipts instead of the initially ... Rejection of books of accounts - Estimation of income - assessment in the manner provided u/s.144 - best judgement assessment - HELD THAT:- It is an admitted fact that if books of accounts maintained by the assessee are incomplete or not supported by necessary evidences then the AO is empowered to complete assessment in the manner provided in section 144 of the Act. But fact remains that still in the best judgement assessment, the AO has to bring on record material on the basis of which he has arrived at the conclusion with regard to rate of profit for estimation of income from the business. No doubt, under the best judgement assessment there is an element of guesswork but it should not be arbitrary. While completing the assessment under best judgement assessment, the AO has to bring on record certain material to support his finding with regard to rate of profit admitted for estimation of profit with some comparable cases of similar nature or the profit declared in the similar industry. In this case, although the AO has adopted 5% net profit on gross receipts, but failed to bring on record any comparable case of similar nature nor give reasons for adopting such rate of net profit. On the other hand, the assessee has agreed for estimation of 3% profit on gross receipts considering the nature of business and place of work. Further in the civil construction work, the rate of profit varies from nature of contract executed by the assessee and place of such contracts. No uniform yardsticks can be applied for estimating net profit. Therefore, considering the fact that the assessee is into civil construction business and also the AO has not given any reasons for adopting 5% net profit rate, we are of the considered view that a reasonable profit of 3% on total receipts would meet the ends of justice. Therefore, we direct the AO to estimate 3% profit on total gross receipts received by the assessee for the year. Issues:1. Rejection of books of accounts under Sec. 145(3) by the Assessing Officer (AO) and estimation of profit at 5% on gross receipts.2. Validity of the rejection of books of accounts and the estimation of profit by the AO.3. Applicability of Sec. 144 for best judgment assessment.4. Admissibility of the appeal against the order of the Commissioner of Income Tax (Appeals).Issue 1: Rejection of Books of Accounts and Estimation of Profit:The appellant contested the rejection of books of accounts by the AO under Sec. 145(3) and the subsequent estimation of profit at 5% of gross receipts. The AO justified the rejection due to the inability of the appellant to provide supporting bills and vouchers for expenditures. The AO conducted a best judgment assessment under Sec. 144, estimating the total income at 5% of gross receipts. The appellant argued that the estimation was unjustified, especially considering the nature of the business where profits typically range from 2-3%. The Tribunal noted that while the AO had the authority to reject the books under Sec. 145(3), the estimation of profit should be reasonable and supported by material. As the AO failed to provide a basis for adopting the 5% profit rate and considering the nature of the business, the Tribunal directed the AO to estimate profit at 3% on total gross receipts.Issue 2: Validity of AO's Actions:The appellant challenged the validity of the rejection of books of accounts by the AO and the subsequent estimation of profit. The Tribunal acknowledged that if the books were incomplete or lacked necessary evidence, the AO could resort to best judgment assessment under Sec. 144. However, the Tribunal emphasized that the best judgment assessment should not be arbitrary and must be supported by material. In this case, the AO failed to provide any comparable cases or reasons for adopting the 5% profit rate. The Tribunal found the AO's approach lacking and directed a more reasonable estimation of profit at 3% based on the nature of the business and the absence of supporting material for the 5% rate.Issue 3: Applicability of Sec. 144 for Best Judgment Assessment:The Tribunal addressed the applicability of Sec. 144 for best judgment assessment in cases where books of accounts are rejected under Sec. 145(3). While recognizing the AO's authority to resort to best judgment assessment, the Tribunal emphasized the importance of providing a reasonable basis for the estimation of profit. The Tribunal highlighted that the best judgment assessment should not be arbitrary and must consider the specifics of the business and industry. In this case, the Tribunal found the AO's estimation of profit at 5% without proper justification to be unreasonable and directed a more appropriate estimation at 3% on total gross receipts.Issue 4: Admissibility of the Appeal:The appellant appealed against the order of the Commissioner of Income Tax (Appeals) who upheld the AO's rejection of books of accounts and the estimation of profit at 5%. The Tribunal reviewed the arguments presented by both parties and analyzed the validity of the AO's actions. After finding the AO's estimation arbitrary and unsupported, the Tribunal partially allowed the appeal, directing the AO to estimate profit at 3% on total gross receipts. The Tribunal's decision aimed to ensure a fair and reasonable assessment based on the specifics of the appellant's business activities.This detailed analysis of the judgment addresses the issues raised by the appellant regarding the rejection of books of accounts and the estimation of profit by the Assessing Officer, highlighting the legal principles and considerations applied by the Tribunal in reaching its decision.