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2011 (7) TMI 1274 - HC - Income TaxScope of Best Judgement Assesment - Power of AO u/s 144(1) and 145(3) - Assessee, arrack contractor were engaged in selling arrack - AO while not accepting the returns, rejected the book results and by adopting best judgement method estimate of gross profit at 40 per cent - HELD THAT:- We sum up the principles to be followed when best judgment assessment is undertaken by a taxing officer as follows: (1) The power to levy assessment on the basis of best judgment is not an arbitrary power. It is an assessment on the basis of best judgment of the officer ; (2) when best judgment assessment is undertaken it cannot be as per the whims and fancies of the Assessing Officer and it should base on some material either produced by the assessee or gathered by the taxing officer. If for any reason the material like books of account produced by the assessee is rejected as unreliable or unsatisfactory, there should be some valid reasons for doing so; and (3) whenever best judgment assessment is made, the court would not call for proof from the officer if there is some nexus between the amount arrived at after some guess work and the facts of the case. Estimation of Income u/s 145 - CIT(A) held that, though the AO was justified to reject the book results, estimate of gross profit at 40 per cent. of purchase price and disallowances of expenditure is arbitrary and excessive, thereby estimated the gross profit at 1 percent of estimated sales or declared sales, whichever is more, clear of all deductions and allowances, and if the profit so estimated is less than the profit declared should be accepted. HELD THAT:- We are convinced that the Tribunal estimated the net profit at 1 per cent. Though, we are of the considered opinion that estimation of net profit at 1 per cent. in arrack business is certainly on the lower side and, therefore, it needs to be re-estimated. Given the fact that there is no price fixed by the Government for sale of arrack and it is generally a seller's market, to assume that the gross profit would be at 1 per cent. of the estimated sales, in our considered view, is low. Indeed, in the case of A SANYASI RAO AND ANOTHER VERSUS GOVERNMENT OF ANDHRA PRADESH AND OTHERS [1989 (3) TMI 116 - ANDHRA PRADESH HIGH COURT] which was affirmed by Supreme Court in the case of UNION OF INDIA AND OTHERS VERSUS A. SANYASI RAO AND OTHERS [1996 (2) TMI 4 - SUPREME COURT], it was found that in some cases the profit margin was higher in arrack business. Therefore, estimating the net profit at 2 per cent. of the estimated sales or 16 per cent. of the purchase price (the Tribunal estimated at 8 percent. of the purchase price) would not be unreasonable. Therefore, we set aside the orders of the Tribunal directing that the net profit be estimated at 2 per cent. of the estimated sales or 16 percent. of the purchase value, whichever is higher.
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