AO not being an expert of accounts, having regard to complexity of business of the assesse was duty bound to invoke & direct a special audit u/s 142(2A) of the Act.
In a recent judgment ITAT Panji has set aside assessment making ad hoc estimation of gross profits holding that Assessing Officer not being an expert of accounts, having regard to complexity of business of the assessee was duty bound to invoke & direct a special audit u/s 142(2A) of the Act.
ABCAUS Case Law Citation:
4510 (2025) (04) abcaus.in ITAT
Important Case Laws relied upon by Parties:
Dhondiram Dalichand Vs CIT
CIT V/s. Surjeet Singh Mahesh Kumar
Bastiram Narayandas Vs CIT
Kachwala Gems Vs Jt. CIT
In the instant case, the assessee had challenged the order passed by the CIT(A), NFAC in confirming the action of the Assessing Officer (AO) in making ad hoc estimation of the turnover/profits of the assessee u/s 143(3) of the Income Tax Act, 1961 (the Act).
The assessee was a partnership firm engaged in wholesale & retail trading of gold, silver and other small jewellery items. For the relevant Assessment Year, the assessee filed return of income declaring NIL income after claiming a setoff of carried forward loss & deduction u/s VI-A of the Act etc.
The case was selected for scrutiny u/s 143(2) of the Act primarily to scrutinise impact of tax auditor’s comment/reporting made against ‘clause 13(e)’ of Form No 3CD i.e. Tax Audit Report (‘TAR’) which states details of adjustment required to the profit/loss in compliance of ICDS notified under section 145(2).
The AO observed that the assessee in addition to regular purchases from registered dealers (RD) also had purchases from unregistered dealers (URD) and details of such URD purchases brought on record were insufficient to prove their genuineness as they lacked entire details for their confirmation and the assessee failed to maintain item-wise stock of small jewellery items along-with stock of gold & silver etc., and according to the AO, details of stock so maintained & produced for verification were insufficient to effectively demonstrate quantitative corroboration of stock-items with the corresponding amount of total purchases vis-à-vis sales turnovers reported by the appellant firm.
After considering submission & explanations offered by the appellant, the AO rejected the appellant’s books, audited results and the returned income.
The AO proceeded to determine the taxable income with two options first, addition on account of 100% disallowance of total URD purchases and Labour charges paid for ornamentation or secondly, addition on account of estimation of gross profit @40% of estimated ad-hoc sales/turnover. Since the first option resulted into profit of more than the turnover, the AO adopted the second option and estimated a gross profit @40% of estimated sales and made a consequential addition while assessing the total income u/s 143(3) of the Act.
Aggrieved by the estimated sales & gross profit and assessment, the assessee instituted an appeal thereagainst before NFAC, which came to be dismissed.
The Tribunal opined that since the stock/inventory records/details forms significant part of accounts which severally capable of influencing the determination of total income of the appellant assessee hence the non maintenance vis-à-vis non-production of such records so as to enable the tax authorities to deduce therefrom correct taxable income, is capable of construing accounts of the appellant were substantially incomplete & incorrect, thus there existed valid reason for rejection of books u/s 145(3) of the Act.
The Tribunal observed the assessee had contended that once books of account were rejected, the AO in view of prescription contained in s/s (3) of section 145 of the Act was duty bound to make an assessment in the manner provided u/s 144 of the Act. Since in the present case the assessment was framed u/s 143(3) of the Act, therefore such assessment was bad in law.
However, the Tribunal observed that where the books of accounts of an assessee for reasons stated in sub-sections (1) & (2) of section 145 of the Act are rejected, upon such rejection the sub-section (3) comes into play which mandates the assessing officer to determine the taxable in the manner provided u/s section 144(1) of the Act. Such direction of sub-section (3) of section 145 of the Act do not in any way direct framing of assessment u/s 144 of the Act but the manner of determination of income to best of judgement on the basis of material already gathered on record but after the assessee is put to show cause notice.
In view of the above the Tribunal opined that the appellant’s assertion of not framing the assessment u/s 144 of the Act when the books of the assessee were rejected u/s 145(3) was purely misconceived, baseless, therefore rejected.
The Tribunal further observed that a clear-cut distinction between Best Judgement assessment and in the manner provided u/s 144 of the Act is required to be understood while resorting to the provision of section 145(3) of the Act. It is well settled law that, in the case of Best Judgement assessment u/s 144 of the Act, the Assessing Officer exercising his jurisdiction cannot act arbitrarily or capriciously. The assessing officer must proceed on judicial considerations in the light of relevant material that may be brought on record by the assessee. Though such assessment would be based on some element of guess work but should clearly have nexus with material placed on records and should not been exercised arbitrarily or capriciously.
The Tribunal observed that in the present case, the appellant was engaged in precious metal business which by very nature is complex for the reason of involving intricate processes, high-value transactions with low margins, and a highly competitive market, demanding careful management of inventory, high volatility in pricing, and everchanging customer needs/experience, high risk of fluctuating cost etc. Admittedly, due to complex nature & high-volume transactions involved and insufficiency of inventory the audited books of account & financial results of the appellant were rejected. When such audited results are rejected, then the assessing officer not being an expert of accounts, having regard to complexity of business of the appellant was duty bound to invoke & direct a special audit u/s 142(2A) of the Act. The outcome of such direction could have to rightly enabled the AO in deducing taxable income in the manner & spirt provided u/s 144 of the Act.
The Tribunal opined that the ad-hoc determination of taxable income without such assistance from expert in the present case not only jostled ad-hoc & irrational estimations but led to farfetched determination. The said capricious determination of income since based upon adhoc estimation of sales/turnover and ad-hoc estimation of gross profit which in turn was devoid of all pivotal information & cogent material taken on records and without putting the appellant to notice is inconsonance with the provisions of section 144 of the Act.
In view of the above reasoning, the Tribunal disapproved the estimations and resultant determination of income and remanded the case to the AO with a direction to frame the assessment de-novo in accordance with law after taking on record the audit report in terms of section 142(2A) of the Act.
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