2023 (11) TMI 1390 - AT - Income Tax

Appellate authority cuts undisclosed commission addition from 2% to 0.1% after estimation lacked supporting material

DCIT, Central Circle-4 (4), Kolkata Versus Aryav Securities Pvt. Ltd.

ITAT upheld the appellate authority's reduction of undisclosed commission income addition from 2% to 0.1% of total turnover, finding the AO's estimation ... Undisclosed commission income @ 2% - CIT(A) restricted addition to 0.1% of the total turnover (both of buy and sell) - share trading activity/non-genuine transactions made by the assessee on behalf of his client over Bombay Stock Exchange during the year. HELD THAT:- CIT(A) has brought on record that in case of other parties, the Assessing Officer has assessed the commission income at different rates. He has further observed that the estimation made by the Assessing Officer was not based on any relevant material. He has further observed that the assessee had given details of entire modus operandi followed by him and pointed out names of key persons who obtained clients from him with regard to bogus trades. We find that the order of the CIT(A) is well-reasoned and we do not find any reason to interfere with the same. In view of this, we do not find any merit in the appeal of the revenue and the same is accordingly dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer (AO) was justified in estimating undisclosed commission income at 2% of turnover for share-trading transactions when a statement recorded under survey (u/s 133A) expressly attributed only 0.1% commission to the assessee and 2% to third parties? 2. Whether an estimate in assessment proceedings-particularly following survey material-may be sustained where the AO fails to record reasons, to show basis for the chosen rate, or applies rates inconsistently across assessees exposed to the same survey material? 3. Whether the Commissioner (Appeals) properly exercised appellate jurisdiction in restricting the addition to 0.1% of turnover and deleting the balance of the AO's estimate. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of AO's 2% estimation when survey statement allocated 0.1% to the assessee Legal framework: Assessments based on estimation must rest on rational material and reasons; statements recorded during survey under section 133A are admissible material for assessment; two core obligations for the AO are (i) to confront material that is relied upon and (ii) to provide reasons/basis where an estimate departs from available statements or records. Precedent Treatment: No precedent was cited or relied upon in the text; the Tribunal applied general principles of estimation and consistency. Interpretation and reasoning: The CIT(A) found that the AO accepted the survey statement of the key witness in virtually all respects but arbitrarily ignored the portion stating that the assessee's commission was 0.1% while third parties received 2%. The AO neither recorded any contradiction of that statement nor explained why the assessee's commission should be treated as 2%. An estimate made in the face of uncontradicted contemporaneous admission requires specific reasoning if the AO departs from that admission. Ratio vs. Obiter: Ratio-where an assessing officer relies on a survey statement but departs from a clear quantification in that statement, the AO must provide reasons and basis for the departure; mere assumption without basis is impermissible. Obiter-observations as to commercial reasonableness of commission splits were ancillary to the core ratio. Conclusions: The AO's estimation at 2% vis-à-vis the assessee was arbitrary in absence of any material contradicting the survey statement; the CIT(A) correctly restricted the addition to 0.1% as stated in the survey statement and uncontroverted in the record. Issue 2: Requirement of a rational basis and consistency in estimated assessments arising from the same survey Legal framework: Estimates must be founded on rational, concrete material and consistent application of methodology where similar facts and source material exist; internal consistency removes arbitrariness in estimation; administrative uniformity is a relevant consideration when the same AO deals with multiple assessees arising from identical survey material. Precedent Treatment: No direct authorities were invoked; the Tribunal applied established principles governing estimation and reasoned decision-making. Interpretation and reasoning: The record showed divergent approaches by the same AO across multiple assessments arising from the same survey-ad hoc lumpsum additions in some matters, acceptance of surrendered amounts in others, and assumed percentages (0.15% to 2%) without uniform or documented basis. Such disparate treatment, absent explanation, indicates arbitrariness. An estimating officer must either base the estimate on objective indicia or explain why departure from comparable cases is justified. Ratio vs. Obiter: Ratio-an assessing officer cannot apply differing ad hoc rates to similarly situated taxpayers based on the same survey material without articulating reasons; lack of consistency and absence of basis renders such estimates unsustainable. Obiter-comparative tabulation of other assessments served evidentiary role rather than establishing new legal doctrine. Conclusions: The AO's approach lacked the necessary rational foundation and internal consistency; the CIT(A) correctly relied on the inconsistency to invalidate the higher ad hoc rate and to adopt the commission rate supported by the contemporaneous statement. Issue 3: Appellate authority's powers to re-evaluate survey statements and quantify additions Legal framework: Appellate authority is empowered to scrutinize assessment material, evaluate the weight of evidence (including survey statements), and substitute quantification where the AO's estimate is found to be without basis; principles of fairness and reasoned decision-making govern appellate interference. Precedent Treatment: None cited; the Tribunal endorsed the appellate authority's fact-based reassessment in light of record deficiencies. Interpretation and reasoning: The CIT(A) examined the survey statement, the AO's assessment order and comparative orders in other linked cases, and found the AO had no material basis to quantify the assessee's commission at 2%. On that analysis, the appellate restriction to 0.1%-the rate expressly admitted in the survey statement and not rebutted-was a reasoned exercise of appellate jurisdiction. Where the AO's estimate is arbitrary, the appellate authority may correct quantification to the rate supported by credible evidence. Ratio vs. Obiter: Ratio-an appellate authority may restrict or revise an AO's estimate where the AO has not furnished basis or contradicted admissible statements relied upon in the assessment; such restriction to the rate supported by credible, uncontradicted material is sustainable. Obiter-commentary regarding business practice expectations for commission splits was illustrative only. Conclusions: The CIT(A) acted within jurisdiction and on proper reasoning in restricting the addition to 0.1% of turnover; the Tribunal upheld the appellate order and dismissed the revenue's appeal. Overall Conclusion Where an AO relies on a survey statement but departs from its clear quantification without recording reasons or producing contradicting material, and applies inconsistent/ad hoc rates across similarly situated assessees from the same survey, the estimate is arbitrary and unsustainable; the appellate restriction to the commission rate supported by the uncontradicted survey statement (0.1%) was justified and correctly upheld by the Tribunal.