Even in best judgment assessment, AO is required to look into surrounding circumstances

Even in best judgment assessment, AO is required to look into surrounding circumstances, nature of expenditure claimed by other assessees in similar line of business

ABCAUS Case Law Citation:
ABCAUS 3156 (2019) (09) ITAT

Even best judgment assessment AO required look into surrounding circumstances

In the instant case, appeal was filed by the assessee against orders of the CIT(A) for two assessment years

The assessee had filed its return of income for the two assessment years. Assessment was framed for one Assessment year under section 143(3) r.w.s. section 148 and 144 of the Income Tax Act, whereas for the other Asstt.Year, it was framed under section 143(3).

The assessee was engaged in the business of transportation of goods under the proprietorship concern. On an estimate basis the AO disallowed 3%  of the total expenses/ purchases in one assessment year and 15% in the second Asstt. Year.

The CIT(A) confirmed the disallowance at 3% whereas for the next Asstt. Year, the CIT(A) reduced such disallowance to 5%.

Thus, the assessee impugned disallowance of expenditure out of transportation expenses at 5% and 3% in the two Asstt. Years respectively.

Before the Tribunal, the assessee submitted that though both disallowances had been made on an estimate basis, but while quantifying the expenditure, the AO had not adopted any yardstick rather estimated the expenses in a very unscientific manner which was evident from the fact that variation of 3% to 15% has been made between two assessment years.

It was prayed that the disallowance be reduced to reasonable amount which was at the most 1% of the total expenditure.

On the other hand, the Revenue contended that assessee failed to submit complete details i.e. bills and vouchers etc. Therefore, the AO was justified in estimating the disallowance.

The Tribunal opined that in the absence of complete details for verification of the expenditure, it is but natural to construe that assessee might have inflated its expenditure in order to reduce quantum of income assessable to tax.

However, the Tribunal stated that it is also true that even for best judgment assessment, the AO is required to look into surrounding circumstances, nature of expenditure claimed by other assessees in similar line of business. In other words, what is ratio of expenditure vis-àvis the turnover in the line of business claimed by other businessmen and the history of the assessee. The Tribunal noted that no such circumstances had been considered by both the authorities below.

Tribunal also noted that there was an increase in the GP as compared to earlier years and if this one factor is kept in mind, then also it will reveal that adhoc expenditure disallowed out of transportation expenses at 3% was on the higher side.

Therefore, the Tribunal set aside both the orders on this issue in both these assessment years and directed the AO to restrict such disallowance at 1.5% of the total expenditure debited by the assessee in both the years.

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