Facts of the Case

The assessee, Rajesh Kumar Singh, engaged in transportation business and trading of bricks and sand, filed return for AY 2010-11 declaring income of ₹4,23,316. The Assessing Officer completed scrutiny assessment under Section 143(3), determining income at ₹9,66,650 after rejecting the books of accounts under Section 145(3) and estimating profits by applying higher net profit rates. The Commissioner (Appeals) upheld the additions, leading to the appeal before the ITAT.

Issues Involved

  1. Whether rejection of books of accounts justified estimation of income at substantially higher net profit rates.
  2. Whether past profit history must guide estimation after rejection of books.
  3. Whether separate estimation of profit for brick trading at 1% was reasonable.

Petitioner’s Arguments (Assessee)

  • The Assessing Officer applied excessive and arbitrary net profit rates without proper basis.
  • In transport business, the profit declared was consistent with past years, and depreciation figures used by the AO were incorrect.
  • For brick and sand trading, low profit was due to purchase of sand at inflated rates caused by market conditions (sand mafia control).
  • Therefore, additions were unjustified and should be deleted.

Respondent’s Arguments (Revenue)

  • The AO’s estimation was reasonable after rejection of books.
  • Higher depreciation considered did not prejudice the assessee.
  • No business would operate at negligible or loss-level profits; therefore, applying 1% net profit on brick trading was justified.
  • The assessee failed to produce evidence to show that the applied rates were unreasonable.

Court Findings / Order

  • After rejecting books under Section 145(3), income must be estimated on a reasonable basis.
  • Past accepted profit history is a proper guide for estimation.
  • The AO adopted a net profit rate of 4.5% without reasonable justification.
  • The Tribunal found the average net profit of preceding years (1.34%) to be a more appropriate benchmark.
  • Directed recomputation of income by applying this average rate (after depreciation).

Important Clarification / Legal Principle

  • Rejection of books does not automatically justify arbitrary additions.
  • Best-judgment assessment must rely on reasonable criteria.
  • Past accepted profit history is a key guiding factor for estimating income.
  • Separate business segments may be assessed independently if justified.

Link to download the order –

https://itat.gov.in/public/files/upload/1627972634-ita%20no.%20117%20of%202017%20Rajesh%20Kumar%20Singh.pdf

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