Facts of the Case

The assessee filed its return of income declaring nil income for Assessment Year 2015-16. However, the return lacked essential particulars and details. Despite issuance of statutory notices under Sections 143(2) and 142(1), the assessee failed to furnish the required information.

Consequently, the Assessing Officer (AO) completed the assessment ex parte under Section 144 (Best Judgment Assessment). The AO treated the entire bank deposits of the assessee as gross receipts/turnover and estimated income by applying a net profit rate of 10%, resulting in a substantial addition.

Issues Involved

  1. Whether the assessment framed under Section 144 was valid.
  2. Whether income can be estimated solely on the basis of total bank deposits.
  3. Whether the applied net profit rate (10% reduced to 5%) was reasonable without reference to past history or business circumstances.
  4. Whether the alleged non-service of notice under Section 143(2) vitiated the assessment.

Petitioner’s Arguments (Assessee)

  • The Assessing Officer arbitrarily treated total bank deposits as turnover without considering withdrawals, contra entries, or actual receipts.
  • The audited accounts showed significantly lower gross receipts than those assumed by the AO.
  • The applied net profit rate was excessive and unsupported by past financial performance.
  • The assessee had historically shown lower profit margins, which were accepted in earlier assessments.
  • The failure to produce details was attributed to the death of the Chartered Accountant handling the case, and additional time was sought to submit relevant evidence.
  • The matter should be remanded for proper verification.

Respondent’s Arguments (Revenue)

  • The return filed by the assessee was almost blank and did not contain necessary details.
  • The assessee failed to comply with statutory notices, leaving the AO with no alternative but to frame a best judgment assessment.
  • The estimation based on bank deposits was justified under the circumstances.
  • The CIT(A) had already granted relief by reducing the profit rate to 5%, which was reasonable.
  • In a similar earlier year, the assessee accepted a comparable addition under the Vivad Se Vishwas Scheme.

Court Order / Findings (ITAT)

  1. Service of Notice under Section 143(2)
    The Tribunal found that notice under Section 143(2) had been duly served within the prescribed time. Accordingly, the challenge to the validity of assessment on this ground was rejected.
  2. Estimation Based on Bank Deposits
    The Tribunal observed that:
    • The AO treated the entire bank deposits as turnover without examining whether deposits represented actual receipts or recycled funds.
    • Relevant details available within the bank statements themselves were not analyzed.
    • Estimation of profit at 10% lacked any rational basis such as past profit history or industry norms.
    • Even the CIT(A) failed to provide justification for adopting a 5% rate.
  3. Need for Proper Verification
    The computation of turnover and estimation of income required detailed verification of facts and supporting documents.
  4. Remand to Assessing Officer
    In the interest of justice, the Tribunal set aside the matter to the file of the Assessing Officer for fresh adjudication after granting the assessee an opportunity to furnish evidence.
  5. Result
    The appeal was allowed for statistical purposes.

Important Clarification

  • Best judgment assessment does not authorize arbitrary estimation.
  • Total bank deposits cannot automatically be treated as business turnover.
  • Profit estimation must be based on reasonable criteria such as past results, comparable cases, or industry standards.
  • Proper opportunity must be granted to the assessee to substantiate claims.

Link to download the order -  https://itat.gov.in/public/files/upload/1647342818-ita%20no.%2087%20Alld%202019%20Hotel%20Ajay%20International.pdf

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