Madras High Court Dismisses Tax Case Appeal on Estimation of Income in the Absence of Maintained Books of Accounts

Case Name:

Commissioner of Income Tax, Circle-3, Trichy vs. Shri Srinivasan Devendran (High Court of Madras)

Key Takeaways:

1. The Tax Case Appeal raised the substantial question of law regarding the estimation of income of the respondent at 4% of the turnover, as the assessee had not maintained books of accounts and had not audited his accounts by a Chartered Accountant.

2. The Tribunal’s order primarily related to estimation and was considered a question of fact, with no substantial question of law arising for consideration in the case.

3. The Court found no reason to interfere with the findings of the Tribunal on estimation, which was considered a question of fact/discretion, and dismissed the Tax Case Appeal.

Case Synopsis:

The case “Commissioner of Income Tax, Circle-3, Trichy vs. Shri Srinivasan Devendran” was brought before the High Court of Judicature at Madras, with the Honorable Mr. Justice S. Vaidyanathan and Mr. Justice Mohammed Shaffiq presiding. The case was filed as T.C.A.No.15 of 2023 under Section 260-A (of Income Tax Act, 1961), 1961, challenging the order dated 12.10.2022 in I.T.A.No.2675/Chny/2019 on the file of the Income Tax Appellate Tribunal - “A” Bench, Chennai.

The substantial question of law raised in this appeal was whether the Income Tax Appellate Tribunal was correct in upholding the order of the Commissioner of Income Tax (Appeals) estimating the income of the assessee at 4% of the turnover, considering that the assessee had not maintained the Books of Accounts and had not audited his accounts by a Chartered Accountant.

The respondent, Shri Srinivasan Devendran, was involved in executing works contracts for the State Public Works Department related to road construction. The respondent had not maintained the accounts, and the income was estimated for the previous four years by the Assessing Officer, resulting in an enhancement of the income liable to tax.

The Tribunal’s order considered the details of the previous years’ assessment and the estimation of net profit by the assessee. The Tribunal found no infirmity in the order passed by the ld. CIT(A), reducing the net profit to 4%. The Tribunal’s decision was based on the principle that the estimation is by way of ‘best judgment assessment,’ and there cannot be any rigid formula for estimation based on best judgment. The Court found no reason to interfere with the findings of the Tribunal on estimation, especially in the absence of challenge to the estimate as being arbitrary or perverse.

In conclusion, the Tax Case Appeal was dismissed, and there shall be no order as to costs.

FAQ

Q1: What was the substantial question of law raised in the Tax Case Appeal?

A1: The substantial question of law raised in the appeal was whether the Income Tax Appellate Tribunal was right in upholding the order of the Commissioner of Income Tax (Appeals) estimating the income of the assessee at 4% of the turnover, given that the assessee had not maintained books of accounts and had not audited his accounts by a Chartered Accountant.

Q2: What was the decision of the Madras High Court regarding the Tax Case Appeal?

A2: The Madras High Court dismissed the Tax Case Appeal, upholding the findings of the Tribunal on estimation, which was considered a question of fact/discretion.

This Tax Case Appeal is filed raising the following substantial question of law:

Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in upholding the order of the Commissioner of Income Tax (Appeals) estimating the income of the assessee at 4% of the turn-over on the basis of the earlier year assessment orders, when the assessee has not maintained the Books of Accounts and has not audited his accounts by a Chartered Accountant ?

2. Very briefly the facts are that the respondent/assessee was executing works contract for the State Public Works Department relating to road construction. The respondent-assessee had procured the work through Tender process and the payments are made by various State Government Departments and receipts are available and found in Form 26-AS under the Income Tax Act and TDS was deducted by the Government Departments. It is submitted that the respondent-assessee has not got his books audited and had furnished income of Rs.2.30 crores and added 3% on the turn-over and estimate was made, which had been followed for the previous years. Since the assessee had not maintained the Accounts, the income was estimated for the previous four years by the Assessing Officer, who proceeded to make and determine the income on the basis of the estimation by adding 8% to the income reported as per Section 44-AB (of Income Tax Act, 1961), resulting in enhancement of the income liable to tax.

3. Now, we find that the order in appeal, namely the order of the appellate authority, dated 12.10.2022 is primarily one relating to estimation and thus, essentially a question of fact. No question of law much less substantial question of law, arises for consideration in this case. To appreciate the same, it is relevant to extract the portion of the Tribunal's order:

"7. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. During the course of assessment proceedings, the assessee has justified for adopting 3% of receipts from civil contract as net profit by stating that his volume of work was more and due to heavy competitions, he could not get more profit in these kind of contract.

In support of his contention, before the Assessing Officer, the assessee gave the details of the previous years' assessment completed which are as follows:

8. The assessment year under consideration is 2016-17. In the assessment year 2015-16, the assessee has estimated the net profit at 3% and the same was accepted by the Assessing Officer under Section 143(3) (of Income Tax Act, 1961). In the assessment year 2014-15, the assessee has estimated the net profit at 3% and the Assessing Officer determined the net profit at 3.50% under section 143(3) (of Income Tax Act, 1961).

In the assessment year under consideration, the assessee has declared the net profit at 3% and the Assessing Officer has estimated the net profit at 8%. On appeal, the ld. CIT(A) scale it down to 4% without depreciation. We find that by referring to various case law and after considering earlier assessment years' estimation of the Assessing Officer, the ld. CIT(A) has reduced the net profit to 4%. Thus, we find no infirmity in the order passed by the ld. CIT(A). Thus, the ground raised by the Revenue is dismissed."

4. The estimation is by way of 'best judgment assessment' and it has been consistently held that there is bound to be an element of guess work and there cannot be any rigid formula for estimation based on best Judgment, no interference is warranted unless and until it is shown that the estimation / best Judgment is palpably arbitrary or perverse.

5. In the circumstances, we do not find any reason to interfere with the findings of the Tribunal on estimation, which is essentially a question of fact/discretion, more so, in the absence of challenge to the estimate as being arbitrary or perverse.

6. In view of the above conclusion, the Tax Case Appeal is dismissed.

There shall be no order as to costs.

(S.V.N., J) (M.S.Q., J)

10.01.2023

Index: Yes/no

Speaking Order: Yes/no

Neutral Citation : Yes/no