2024 (7) TMI 1607 - AT - Income Tax

ITAT reduces income estimation from 8% to 5% of contract receipts for assessee without books of accounts

Karuppannan Thulasimani Versus The Income Tax Officer, Ward-1 (1), Erode

The ITAT Chennai reduced the income estimation from 8% to 5% of contract receipts for an assessee who maintained no books of accounts and filed returns at ... Estimation of the income @ 8% of contract receipts available in Form 26 AS - HELD THAT:- Admittedly, the assessee does not maintain any books of accounts and has filed return of income @ 1.5% gross turnover. AO has taken 8% of the contract receipts estimated @ 8% of gross receipts citing the case of Ganga Prasad Sharma [1980 (3) TMI 49 - MADHYA PRADESH HIGH COURT] that there is a certain degree of guess work in best judgment assessment and he has taken income @ 8% of contractual receipt taking into contract works. AR has submitted that the assessee is not in civil contract business and section 44AD is not applicable as turnover of the assessee is more than 4 Crores. AR has also submitted that in similar line of business, the profit margin is 3.5%. We have gone through the assessment order, CIT (A) order, and comparable cases. Considering the turnover and the nature of business, in our opinion 5% of turnover will be reasonable estimate for estimating the income of assessee. Appeals filed by the assessee are partly allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the reopening of assessments for the Assessment Years (AYs) 2014-15 to 2017-18 was justified.The appropriate percentage of income estimation for the assessee's contract receipts in the absence of maintained books of accounts.Whether the addition made under section 69C of the Income Tax Act for AY 2016-17 was valid.ISSUE-WISE DETAILED ANALYSISReopening of AssessmentsAlthough the assessee initially challenged the reopening of assessments, this ground was not pressed during the appeal. Therefore, the Court did not provide a detailed analysis on this issue. The reopening was based on the assessee not filing returns despite having substantial contract receipts.Estimation of IncomeRelevant Legal Framework and Precedents: The case references the principle of 'best judgment assessment,' allowing the Assessing Officer (AO) to estimate income when books of accounts are not maintained. The precedent cited is Ganga Prasad Sharma vs. CIT, which acknowledges a degree of guesswork in such assessments.Court's Interpretation and Reasoning: The Court evaluated the AO's decision to apply an 8% estimation rate based on contract receipts. However, it considered comparable cases and industry standards to determine that a 5% estimation was more appropriate for the nature of the assessee's business.Key Evidence and Findings: The assessee did not maintain books of accounts and filed returns estimating income at 1.5% of the bank credits. The AO initially applied an 8% rate, citing industry standards for contract work, which was contested by the assessee.Application of Law to Facts: The Court applied the principle of best judgment assessment and industry comparisons to conclude that a 5% estimation was reasonable, aligning with similar cases and the business's nature.Treatment of Competing Arguments: The assessee argued for a lower rate based on industry norms and comparable cases, while the Department supported the higher rate. The Court balanced these arguments by choosing a middle ground supported by precedent.Conclusions: The Court directed the AO to estimate the income at 5% of the turnover for AYs 2014-15, 2015-16, and 2017-18.Addition under Section 69C for AY 2016-17Relevant Legal Framework and Precedents: Section 69C relates to unexplained expenditure. The AO treated the contract receipts as unexplained payments, leading to an addition under this section.Court's Interpretation and Reasoning: The Court found the AO's approach inconsistent with the treatment in other years where income was estimated based on receipts. It deemed the addition under section 69C inappropriate.Key Evidence and Findings: The AO's addition was based on treating contract receipts as payments, which was not aligned with the treatment in other years.Application of Law to Facts: The Court applied the same reasoning as for other years, directing income estimation at 5% of receipts instead of treating them as unexplained payments.Treatment of Competing Arguments: Both parties agreed on the factual similarity across years, leading to a consistent approach in estimation.Conclusions: The Court directed the AO to estimate the income for AY 2016-17 at 5% of the turnover, consistent with other years.SIGNIFICANT HOLDINGSCore Principles Established: The judgment reinforces the principle of best judgment assessment and the need for consistency in income estimation across similar cases and years.Final Determinations on Each Issue: The Court set aside the AO's 8% estimation and directed a 5% estimation for all relevant years, including reversing the section 69C addition for AY 2016-17.Verbatim Quotes of Crucial Legal Reasoning: The Court referenced the Madras High Court's decision in K. Kannan vs. Assistant Commissioner of Income-tax, emphasizing the appropriateness of a 5% estimation: 'we have no hesitation in restoring the order of the Commissioner of Income Tax (Appeals) and thereby set aside the order of the Tribunal.'