Facts of the Case

The assessee company, engaged in real estate development, filed its return declaring a modest income for Assessment Year 2015-16. The case was selected for limited scrutiny regarding:

  • Correct reporting of turnover/receipts
  • Allowability of business expenses
  • Genuineness of current liabilities

Despite issuance of notices under Sections 143(2) and 142(1), the assessee did not respond during assessment proceedings. Consequently, the Assessing Officer (AO) completed assessment under Section 144 (best judgment assessment) and made substantial additions on account of:

  • Current liabilities
  • Commission expenses
  • Consultancy fees

The assessed income was determined at a significantly higher figure than returned income.During appellate proceedings, the assessee produced books of accounts, vouchers, agreements, and other supporting documents for the first time. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted these submissions and deleted the additions.

 Issues Involved

  1. Whether additions made under best judgment assessment u/s 144 were justified when the assessee failed to comply during assessment proceedings.
  2. Whether CIT(A) was justified in deleting additions based on fresh evidence without giving the AO an opportunity to examine the same.
  3. Whether estimation or additions can be made without rejection of books of account u/s 145(3).

 Petitioner’s Arguments (Assessee)

  • Current liabilities represented genuine sundry creditors, customer advances, and TDS payable.
  • Commission and consultancy expenses were legitimate business expenditures necessary for real estate operations.
  • Books of account were audited and supported by documentary evidence produced before the appellate authority.
  • CIT(A) has co-terminus powers with the AO and was competent to examine evidence and grant relief.

 Respondent’s Arguments (Revenue)

  • The assessee failed to respond to multiple statutory notices during assessment.
  • No evidence was furnished before the AO to substantiate liabilities or expenses.
  • CIT(A) accepted fresh evidence without providing the AO an opportunity to verify or rebut the same.
  • Such action violated principles of natural justice and appellate procedure.

Court Order / Findings (ITAT)

  • The assessee did not cooperate during assessment proceedings, leading to best judgment assessment u/s 144.
  • However, CIT(A) deleted additions based on material produced for the first time without referring it to the AO.
  • This constituted a clear violation of principles of natural justice.
  • Proper procedure requires giving the AO an opportunity to examine additional evidence.
  • Therefore, the order of CIT(A) was not sustainable.

 Important Clarification

 Best judgment assessment must follow statutory procedure.

 Additions or estimations ordinarily require rejection of books u/s 145(3) where accounts are relied upon.
Appellate authorities must provide opportunity to the AO when admitting fresh evidence.
Violation of natural justice renders the order unsustainable.
 Matters may be remanded for de novo assessment to ensure fairness.

 Link to download the order - https://itat.gov.in/public/files/upload/1671451972-Monad%20Infrasolution%20Pvt%20PDF%20VP%20Rao.pdf

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