Facts of the Case

The assessee had not filed his return of income for Assessment Year 2017-18 within the prescribed time. During verification under “Operation Clean Money,” the department identified substantial cash deposits, including deposits during the demonetization period.

A notice under Section 142(1) was issued directing the assessee to file the return. The Assessing Officer recorded non-compliance and noted that the assessee had deposited cash aggregating to ₹1,71,72,650 during the year, including ₹16,74,500 during demonetization.

Subsequently, the assessee submitted replies along with ledger accounts, balance sheet, profit and loss account, audit report, computation of income, Form 26AS, and a belated return declaring income of ₹2,17,700.

The Assessing Officer rejected the audit report on the ground that it had not been uploaded before the specified date and that complete books of account were not produced. Treating the entire cash deposits as turnover, the AO estimated income at 8% and completed assessment under Section 144.

Issues Involved

  1. Whether a return filed beyond the time allowed in a notice under Section 142(1) could be treated as non-est.
  2. Whether the Assessing Officer was justified in ignoring a belated audit report filed before completion of assessment.
  3. Whether income could be estimated at 8% of cash deposits treated as turnover.
  4. Whether best-judgment assessment under Section 144 was valid in the circumstances.
  5. Whether the matter required fresh verification of books of account.

Petitioner’s Arguments (Assessee) 

  • Due to technical glitches, the return could not be uploaded within time.
  • A grievance petition had been filed with the department regarding the issue.
  • The return and supporting documents were submitted before completion of assessment.
  • The audited profit and loss account disclosed net profit of ₹3,38,105 (1.93%), which should have been accepted.
  • Application of 8% profit rate on deposits was excessive for retail motorcycle trade.
  • The assessment order was invalid for want of notice under Section 143(2).

Respondent’s Arguments (Revenue)

  • The assessee failed to file the return within the statutory timeline.
  • The belated return filed after expiry of time allowed under Section 142(1) could be treated as non-est.
  • The audit report was not uploaded within the prescribed time.
  • Complete books of account were not produced for verification.
  • Therefore, the Assessing Officer rightly proceeded under Section 144.

Court Order / Findings (ITAT Allahabad)

1. Validity of Return Filed After Time Under Section 142(1)

The Tribunal held that once the time specified in a notice under Section 142(1) has expired, the assessee cannot file a return at any later time of his choosing. In such circumstances, the Assessing Officer is justified in treating the return as non-est and proceeding as if no return had been filed.

2. Treatment of Belated Audit Report

The Tribunal observed that several judicial decisions hold that filing an audit report before completion of assessment constitutes sufficient compliance, since the requirement of filing it along with the return is directory and not mandatory.

Therefore, the Assessing Officer was not justified in completely ignoring the audit report once it had been submitted.

3. Need for Verification of Books

The AO could not verify the audit report because the assessee failed to produce complete books of account. Proper verification was necessary before determining income.

4. Estimated Profit on Cash Deposits

Estimating income at 8% of deposits without examining audited accounts and books was not appropriate without verification.

Accordingly, the Tribunal restored the matter to the Assessing Officer with directions:

  • The assessee shall produce complete books of account
  • The AO shall verify the audit report and claims
  • Income shall be determined afresh in accordance with law

Other grounds became academic due to the remand.

Important Clarification

  • Filing of audit report before completion of assessment amounts to substantial compliance.
  • The requirement of filing audit report along with return is directory, not mandatory.
  • A return filed beyond the time allowed in a Section 142(1) notice can be treated as non-est.
  • Best-judgment assessment should not ignore available evidence without verification.
  • Restoration ensures fair assessment but does not validate the assessee’s claims.

Link to download the order -  https://www.mytaxexpert.co.in/uploads/1771221486_PRADEEPKUMARKESHARWANIPRAYAGRAJVS.INCOMETAXOFFICER22PRAYAGRAJ.pdf

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