2021 (1) TMI 462 - AT - Income Tax

Estimation of income - suppression of income or the inflation of purchase or inflation of expenditure - search u/sec. 132 was conducted - assessee filed return of income disclosing loss u/s 139(1) and subsequently revised the loss duly decreasing the loss which was admitted as undisclosed income during the course of search - HELD THAT - In the instant case it is clear from the discussion that there was no material and no defects were pointed out by the AO. Even though search was conducted no evidence was found by the AO evidencing the suppression of income or the inflation of purchase or inflation of expenditure. The assessee has maintained regular books of account which are duly audited. A search u/sec. 132 was conducted but no evidence was found indicating concealment of income. In the case of Pr.CIT Vs. Marg Ltd. 2017 (7) TMI 823 - MADRAS HIGH COURT held that profits of the assessee cannot be estimated without rejection of books of account. In the case of Dhakeswari Cotton Mills Ltd. Vs. CIT 1954 (10) TMI 12 - SUPREME COURT held that AO is not entitled to make a pure guess work or suspicion without any reference or without any material at all. Taking into consideration of all the above aspects in the instant case there is no basis for estimation of income therefore estimation of income without having any seized material or any material is bad in law Hence we uphold the order of the ld. CIT(A) and dismiss the appeal of the Revenue.

Summary

Issues Involved:
1. Estimation of income by the AO.
2. Validity of the affidavit and admission by the assessee.
3. Rejection of books of account by the AO.
4. Material evidence found during the search.
5. Additional grounds raised by the assessee.

Detailed Analysis:

1. Estimation of Income by the AO:
The primary issue revolves around the income estimated by the Assessing Officer (AO) which was deleted by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO observed a sharp decline in the net profit of the assessee from the assessment years (A.Ys.) 2011-12 to 2015-16, averaging 8.51%, to negative figures in A.Ys. 2016-17 and 2017-18. The AO issued a show cause notice proposing to estimate the income at 8.51% of the gross turnover. The assessee objected, citing competition, reduced margins, and other factors leading to losses. Despite the objections, the AO estimated the income at 5.52%, which the assessee had agreed to under pressure.

2. Validity of the Affidavit and Admission by the Assessee:
The assessee filed an affidavit objecting to the income estimation, claiming the admission was made under pressure and misapprehension of penalty. The CIT(A) considered this affidavit and concluded that the admission was given under misapprehension of law and facts. The CIT(A) held that without pointing out defects in the books of account or evidence of income suppression, the affidavit and the admission letter should be ignored.

3. Rejection of Books of Account by the AO:
The CIT(A) emphasized that the AO cannot estimate income without rejecting the books of account. The AO did not find any defects in the books of account, nor did the search operation reveal any evidence of income concealment. The CIT(A) referenced judicial precedents stating that the AO must reject the books of account under section 145(3) of the Income Tax Act before estimating income. The AO's failure to do so invalidated the income estimation.

4. Material Evidence Found During the Search:
During the search operation under section 132, no evidence was found indicating income concealment. The AO's reason for income estimation was the decline in profit, which was not supported by any material evidence. The CIT(A) noted that the AO's basis for estimation was not convincing or logical, as the books of account and stock registers were seized and available for verification.

5. Additional Grounds Raised by the Assessee:
The assessee raised additional grounds before the CIT(A), which were allowed. The CIT(A) concluded that the AO's estimation of income was not justified without rejecting the books of account and without any material evidence of income suppression.

Conclusion:
The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal. The Tribunal agreed that the AO could not estimate the income without rejecting the books of account and without any material evidence. The cross objections filed by the assessee to support the CIT(A)'s order were dismissed as infructuous. The Tribunal emphasized that mere admission by the assessee cannot be the basis for income estimation without proper verification and evidence. The appeals of the Revenue and the cross objections of the assessee were dismissed.