Facts of the Case

The assessee, S. Kumar Contractors, engaged in contract work, was subjected to assessment proceedings in which the Assessing Officer rejected the books of account and completed the assessment on a best-judgment basis. Additions were made by estimating income and/or treating certain receipts or deposits as unexplained. The assessee challenged the assessment contending that the estimation was arbitrary and not supported by proper material.

Issues Involved

  1. Whether the rejection of books of account by the Assessing Officer was justified.
  2. Whether income estimation under best-judgment assessment was reasonable and based on relevant material.
  3. Whether additions made as unexplained income were legally sustainable.

Petitioner’s Arguments (Assessee’s Contentions)

  • The assessee contended that the books were properly maintained and no valid grounds existed for rejection.
  • It was argued that the Assessing Officer adopted an excessive and arbitrary rate of profit without considering past results or industry standards.
  • The assessee submitted that additions based on conjectures and without supporting evidence are unsustainable.

Respondent’s Arguments (Department’s Contentions)

  • The Revenue argued that the assessee failed to maintain reliable books and did not produce necessary records.
  • It was contended that the Assessing Officer was justified in invoking best-judgment provisions.
  • The Department maintained that the estimation was reasonable given deficiencies in accounts and absence of verifiable data.

Court Order / Findings (ITAT Decision)

The Tribunal examined whether the statutory conditions for rejection of books were satisfied and whether the estimation of income was made on a rational basis. It observed that while the Assessing Officer is empowered to make a best-judgment assessment where accounts are unreliable, such estimation cannot be arbitrary and must be supported by objective criteria such as past performance or comparable cases.

The Tribunal accordingly evaluated the reasonableness of the profit rate applied and the basis of additions. Relief was granted to the extent the estimation was found excessive or unsupported, reaffirming that best-judgment assessment does not confer unfettered discretion on tax authorities.

Important Clarification

  • Rejection of books of account must be based on specific defects, not mere suspicion.
  • Income estimation must be fair, reasonable, and supported by material evidence.
  • Even in best-judgment assessments, principles of natural justice apply.
  • Arbitrary additions without nexus to facts are liable to be deleted or reduced.

Link to download the order - https://itat.gov.in/public/files/upload/1610687066-73%20Alld%202018%20S.%20Kumar%20Contractors.pdf

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