INCOME TAX ACT, 1961

Section 145(3)

Accounting method - Rejection - Estimation of profit - Revenue proceeded with guess work to arrive at estimation

Assessee showed labour receipts of Rs. 12 crores from M/s PACL. AO relying on the statement of assessee recorded under section 131 and information received subsequent to search in case of M/s. PACL concluded that dealings of assessee with M/s. PACL were accommodation entries and issued show-cause calling upon assessee to show-cause notice as to why labour receipt income should not be treated as income from other sources under section 56. Assessee explained that he had only received commission of Rs. 0.30 on Rs. 100, i.e., Rs. 3,60,000 on Rs. 12 crores which had already been included in net profit and reflected in profit & loss account. AO rejected books of account under section 145(3) and estimated the income @ 10% of gross receipts. Assessee preferred appeal before CIT(A) and that submitted estimation of net profit at 10% was on higher side and commission for accommodation entries should have been within the range of 0.15% to 0.25%. CIT(A) took the view that 3% of commission as declared by assessee was on a lower side as it translated to 1% of benefit derived. Accordingly, CIT(A) estimated commission at 2% on the basis that same was 6.7% of tax benefit derived by PACL, i.e., 30%. Tribunal confirmed this. Assessee approached High Court.Held: Although clause (3) of section 145 gives discretion to revenue to make an assessment in the manner provided in section 144 yet this discretion cannot be exercised arbitrarily. The question to determine in every such case is, whether there is any material for the basis adopted by AO or the Tribunal, as the case may be, for computing income of assessee. The material which is irrelevant or which amounts to mere guesswork or conjecture is no material. In the instant case, CIT(A) without there being anything on record, thought fit to take the view that estimate by assessee at 3% translated to 1% of benefit derived, which could be termed as too low, and in such circumstances estimated at 2%, which would translate to about 6.7% of benefit alleged to have been dervied byM/s. PACL. This was nothing but pure guesswork without there being any material or basis for arriving at the same. The way the authorities had proceeded with guesswork, could not be approved and impugned order passed by Tribunal was quashed and set aside.

Relied:Lalchand Bhagat Ambica Ram v. CIT (1959) 37 ITR 288 : 1959 TaxPub(DT) 181 (SC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2011-12

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