After invoking sec 145(3), still income to be assessed based on past years or AO can decide on its own?

Choudhary & Brothers vs. ACIT - ITAT Jaipur- 30 June 2017

Question of law disucssed:

1) In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the ld. AO in estimating the net profit rate at 11.50% against the declared N.P. rate of 11.44% which resulted into confirming the addition of Rs. 1,05,428/,

2) In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the ld. AO in not allowing the deduction towards interest paid to third parties amounting to Rs.24,10,948/- out of the estimated net profit


Important statements/ interpretation statements of the cases for easy references :


1) It was deliberated by the learned court that "It may be noted that the A.O. has not given any specific reason as to how the closing stock can be part of contract receipts for estimation of profit. It is also noted that in earlier assessment years whenever the cases were completed under scrutiny assessment the profit was determined with respect to the contract receipts and closing stock was never made part of the contract receipts. Therefore even the past history does not suggests inclusion of closing stock in the contract receipts. Moreover, the closing stock is the inventory available with the assessee which will be opening stock in the next year and will be forming part of the contract work in the next year. Therefore the action of the A.O. of inclusion of closing stock in the contract receipts cannot be approved."

2) Secondly the learned court stats that "On consideration of relevant facts as regards estimation of profit, after invoking the provisions of sec. 145 (3) of IT Act, it may be stated that it is a settled law that even after invoking the provisions of sec. 145 (3), the AO is not empowered to assess the income at whatever figures he wants and the AO is supposed to make an honest estimation either based on the past history of the appellant’s own case or on the basis of any comparable case. For such proposition reliance is placed on the following case laws:

I) M/s Brijbhushan Lal Pradhuman Kumar vs. CIT, 115 ITR 524
II) Shree Shankar Khandsari Sugar Mills vs. CIT, 193 ITR 669
III) CIT vs Dr. A.P. Bahel 2 DTR 387 (Raj)
IV) CIT vs. Suresh Marbles Pvt. Ltd. 18 DTR 118 (Raj)
V) CIT vs. Inani Marbles Pvt. Ltd. [2009] 316 ITR 125 (Raj)
VI) Shri Ram Jhanwar vs. ITO 98 TTJ, (ITAT, Jodhpur)
VII) Ajay Goyal vs. ITO 99 TTJ 164, (ITAT, Jodhpur)
VIII) Ghasi Ram Todarmal Vs. ITO 196 ITR 329 (Raj.)]
IX) M/s Bhikha Ram Devrath Vs. ITO, Ward-1, Chura, ITA No. 245/Jodh/2013, date of order 23.09.2013 (ITAT, Jodhpur)
X) The income Tax Officer, Ward-2, Chura Vs. M/s Jai Construction Co., ITA No. 64/Ju/2014, date of order 12.06.2014 (ITAT, Jodhpur).

3) Further it was stated by the leared court "The Hon’ble Jurisdictional High Court and Hon’ble Jurisdictional ITAT has consistently held that estimation of profit after rejection of books of accounts u/s 145 (3) of IT Act, the past history of the assessee’s own case should be the best guide. Keeping in view the consistent decisions of Hon’ble Jurisdictional High Court as also Hon’ble ITAT, the profit is to be determined on the basis of past history of the appellant case in respect of immediate preceding assessment year"

4) It was worth to be noted that which has been stated by the learned court "As regards reliance on various case laws by the appellant for allowing of interest to third parties, it may be stated that the decision of the Hon’ble Courts for allowing of third parties interest are case specific and it is not the settled law that in each and every case of the contractor, third party interest is to be allowed. In fact, the settled law is that after rejection of books of accounts, profit is to be estimated on the basis of the past history of the case.”

5) It was interested to note in one of the decided case where "Further, Hon’ble Jurisdictional High Court in the case of Jain Construction Company, Barmer [2014] 52 taxmann.com 167 (Rajasthan), observed that:


“......After rejecting the books of accounts and while referring to the order as passed in relation to the assessee for the Assessment Year 1993-94, the AO proceeded to apply net profit rate of 12.5% on the net contract receipts subject to depreciation, interest, remuneration to partners and interest payment to third parties for the purpose of making assessment of income.....” To this, Hon’ble Jurisdictional High Court even allowed deduction of Sales Tax Payment from the Net Profit Estimated in addition to deduction of depreciation, interest, remuneration to partners and interest payment to third parties allowed by the AO in assessment proceedings

For reading full judgement please refer https://www.taxpundit.org/phocadownload/Taxpundit_Reporter/Taxpundit_Reporter_2017/August_2017/817Taxpundit118.pdf