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Facts
The assessee filed a return declaring total income of Rs. 55,930/-. During scrutiny, the AO rejected the books of account under Section 145(3) due to non-furnishing of details and estimated a gross profit of 6% on a turnover of Rs. 3,06,45,140/-, leading to an addition of Rs. 10,54,689/-. The Ld. CIT(A) upheld the AO's findings and dismissed the assessee's appeal.
Held
The Tribunal upheld the rejection of the books of account under Section 145(3) but found the estimated gross profit rate of 6% to be high, considering the assessee's past gross profit declarations. The Tribunal directed the AO to re-compute the gross profit at 5.5% on the reported turnover.
Key Issues
Whether the rejection of books of account and the subsequent estimation of gross profit by the lower authorities were justified, and what constitutes a reasonable gross profit rate for best judgment assessment.
Sections Cited
145(3)
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Order PER VIKRAM SINGH YADAV, A.M: This appeal by the assessee is directed against the order dated 04/03/2025 passed by the Ld. CIT(A), NFAC, Delhi, for the Assessment Year 2022-23.
Briefly the facts of the case are that the assessee had filed its return of income declaring total income of Rs. 55,930/- which was selected for scrutiny and thereafter notices were issued calling for the necessary information and documentation. As per the AO, during the assessment proceedings despite giving sufficient opportunity, the assessee failed to furnish required details / explanation with regard to purchases, sundry creditors, bills and vouchers, ledger accounts and in view thereof, books of accounts were found not reliable and rejected under section 145(3) of the Act. Thereafter, referring to the P&L Account, the AO determined gross profit @ 6% on the reported turnover of Rs. 3,06,45,140/- which comes to Rs. 18,38,708/- and thereafter after allowing partners interest and partners salary and income already declared in the return of income, the addition of Rs. 10,54,689/- was made under the head “Profit & Gains of Business and Profession”.
2 3. Being aggrieved, the assessee thereafter, carried the matter in appeal before the Ld. CIT(A). Again, there was no compliance on the part of the assessee and thereafter, basis material available on the record and referring to the findings of the AO wherein the AO has rejected the books of account under section 145(3) of the Act and estimated gross profit @ 6% of the turnover and allowed interest and salary to the partners, the Ld.CIT(A) had held that the assessee other than taking the claim that the AO was not right in doing so has not provided any documentary evidence to rebut findings of the AO and findings of the AO were accordingly upheld by the Ld. CIT(A) and the appeal of the assessee was dismissed.
Against the said order and findings of the ld CIT(A), the assessee is in appeal before us.
During the course of hearing, the Ld. AR submitted that the AO has estimated the gross profit rate @ 6% as against 5.12% declared by the assessee and has allowed partners interest and salary payment which has resulted in addition of Rs. 10,54,689/-. It was submitted that the same is clearly on higher side as compared to the earlier years. It was submitted that in the previous years, the assessee has disclosed gross profit of 3.41% for A.Y 2021-22 and 5.01% for A.Y 2020-21 and as compared to earlier years, the gross profit for the year under consideration is on a higher side and therefore, no addition should be made in the hands of the assessee.
The Ld. Sr DR is heard who has relied on the order of the AO. It was submitted that the books of account have been rejected by the AO as the assessee failed to furnish books of accounts and related documents during the course of assessment proceedings and thereafter, the AO has estimated the gross profit @ 6%. Further, there was no compliance during the course of appellate proceedings before the Ld. CIT(A) and the ld CIT(A) has rightly upheld the findings of the AO. It was accordingly submitted that the order so passed by the lower authorities be sustained.
We have heard the rival contentions and perused the material available on the record. In the instant case, the books of accounts have been found unreliable and rejected by the AO invoking provisions of section 145(3) by the AO and are not in challenge before us. Once the books of accounts are rejected, the AO has to proceed with best judgement assessment and is required to estimate the income. It
3 is well settled position that in a best judgment assessment, the AO should try to make an honest and fair estimate of the income and should not act arbitrarily, but there is necessarily some amount of guess work involved in a best judgment assessment. For estimation of income, the past results declared by the assessee or comparative third party comparables act as a good benchmark. In the instant case, the AO has estimated gross profit rate of 6% as against 5.12% declared by the assessee on reported turnover of Rs 3,06,45,140/-. Considering the past history of the assessee wherein the assessee has declared 5.01% on turnover of Rs 1,64,20,789/- in A.Y 2020- 21 and the fact that the turnover for the year under consideration has almost doubled, we believe that it would be just and proper to estimate the gross profit @ 5.5% in the facts and circumstances of the case. In the result, the AO is directed to consider gross profit rate of 5.5% as against 6% on the reported turnover and the matter is accordingly remitted to the file of the AO for the limited purposes of re- computation of gross profit.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 20/08/2025.