LAKSHYA SETH,DELHI vs. ITO, NEW DELHI

This appeal by the assessee has been directed against the order of the CIT, Delhi-VII dated 13.11.2014 passed u/s 263 of the Income Tax Act, 1961 (for short the Act) for AY 2011-12.

“1. That on the facts and in the circumstances of the case the Ld. CIT has erred in holding the order of assessment dated 20.12.2013 passed u/s 143 (3) as erroneous and prejudicial to the interest of revenue and having so held 1 AO to make a fresh assessment.”

After considering the reply and explanation of the assessee, the CIT held that impugned assessment order is erroneous and prejudicial to the interest of revenue as not only assessment order has been passed in utmost haste and in a cryptic manner but the AO has also allowed benefit of section 44AD/AF of the Act erroneously without considering whether conditions thereto are fulfilled, and also not by applying provisions of section 69A of the Act. The CIT further AO resulting into non-application of correct provisions of law, though the said issues were most crucial issues for the current assessment scrutiny process. Finally, the CIT held that the order passed by the AO u/s 143(3) of the Act deserves to be cancelled and he directed the AO to make a fresh assessment after considering correct and legal and factual position in this regard. Now, the aggrieved assessee is before this Tribunal in this appeal with the sole ground as reproduced hereinabove, challenging the valid assumption of jurisdiction by the CIT for passing impugned order.

6. Ld. Counsel further pointed out that the assessee had declared the details of all seven bank accounts showing total cash deposit of Rs.70,77,034/- during original assessment proceedings as against the details asked by the AO for only bank account with HDFC Bank where the cash of Rs.30,59,310 was reported in the AIR as available with the Income tax department. Ld. AR strongly contended that the assessee was fair enough in submitting all details of cash deposits to his bank account and the assessee not only submitted details of cash deposit with HDFC Bank but also submitted details of other bank accounts of the assessee and these facts were properly explained before the AO and after examining the same, the AO recorded his satisfaction in this regard. Ld. AR further submitted that there was no mala fide during assessment proceedings as the AO adopted the course in the best interest of the revenue and took 8% of gross receipts of trading business of cloth for estimation of business income of the assessee. The AR has further drawn our attention towards contents of the notice issued to the assessee u/s 263 of the Act and reply of the assessee to the said notice and submitted that while the AO is adopting higher percentage of profit for estimation of business income of the assessee, then the order cannot be held as erroneous and prejudicial to the interest of revenue because for invoking provisions of section 263 of the Act, twin conditions are required to be fulfilled, viz. the assessment order should be erroneous and secondly, the assessment order should be prejudicial to the interest of revenue and in the present case, the assessment order cannot be held as erroneous and prejudicial to the interest of revenue. Ld. Counsel finally submitted that as per dicta laid down by Hon’ble Jurisdictional High Court of Delhi in the case of ITO vs D.G. Housing Projects Ltd. dated 1.3.2012 in ITA 179/2011, when the AO had adopted one of the courses permissible and available to him and this has resulted in loss to revenue; or two views are possible and the AO has taken one view with which the CIT may agree; the said orders cannot be treated as erroneous order prejudicial to the interest of revenue unless view taken by the AO is unsustainable in law. Ld. AR further submitted that the CIT has not given any finding to establish that the view taken by the AO is unsustainable in law and therefore order is erroneous and prejudicial to the interest of revenue because the CIT must show that prejudice is caused to the interest of revenue.

The AR vehemently contended that while the AO has taken higher percentage of 8% instead of 5% as provided u/s 44AF of the Act, then the view taken by the AO cannot be held as erroneous and prejudicial to the interest of revenue.

7. Replying to the above, ld. DR supporting the action of the CIT submitted that the case was selected for scrutiny with the main objective that the AO should examine the source of cash deposited in the SB account of the assessee and the AO, instead of examining the source of said cash deposit, proceeded to invoke provisions of section 44AF of the Act which was not applicable to the assessee’s case as the turnover of the assessee was much higher than the prescribed limit of Rs. 60 lakh, hence order passed by the AO was not only erroneous but also prejudicial to the interest of revenue which cannot be held as sustainable and in accordance with the provisions of the Act. Justifying the action of the CIT, ld. DR further pointed out that the AO is not allowed to make estimation of profit u/s 44AB of the Act where the total turnover/gross receipts are higher than Rs. 60 lakh during the relevant financial year, therefore, the approach of the AO was not sustainable and in accordance with the provisions of the Act and hence, the CIT rightly clothed himself for invoking provisions of section 263 of the Act and for passing impugned order directing the AO to make fresh assessment after considering the correct legal and factual position of the case.

8. In the rejoinder, ld. AR submitted that even if it is presumed that the provisions of section 44AF/44AD of the Act are not applicable to the assessee’s case, then also if the AO is adopting higher percentage of 8% for making estimation of business income, then the view is obviously favourable to the revenue which cannot be held as erroneous or prejudicial to the interest of revenue because as per ratio of the decision of Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs CIT (2000) 243 ITR 83 (SC), the phrase ‘prejudicial to the interest of revenue’ has to be read in conjunction with an erroneous order passed by officer. Ld. AR contended that every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interest of revenue and in the present case, the AO has taken a view by adopting 8% instead of 5% for making estimation of business income of the assessee which was not prejudicial to the interest of revenue and hence notice u/s 263 of the Act and impugned order may kindly be quashed.

“9. Section 263 of the Act, reads as under:- "263. Revision of orders prejudicial to revenue.--(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation.--For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,-- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include-- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income Tax Officer on the basis of the directions issued by the Joint Commissioner under Section 144-A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under Section 120; (b) "record" shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject-matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub- section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation.--In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to Section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded."

These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return.

" inadequate inquiry" . If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has a different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open. In Gabriel India Ltd. [1993] 203 ITR 108 (Bom), law on this aspect was discussed in the following manner (page 113): " . . . From a rending of sub-section (1) of section 263, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is „erroneous in so far as it is prejudicial to the interests of the Revenue . It is not an arbitrary or unchartered power, it can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be against the well- accepted policy of law that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity. (See Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) at page 10) . . . From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income- tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is held to be erroneous. Cases may be visualised where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be formed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion . . . There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed . . . We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The Income-tax Officer in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be „ erroneous‟ simply because in his order he did not make an elaborate discussion in that regard.""

16. Thus, in cases of wrong opinion or finding on merits, the CIT has to come to the conclusion and himself decide that the order is erroneous, by conducting necessary enquiry, if required and necessary, before the order under Section 263 is passed. In such cases, the order of the Assessing Officer will be erroneous because the order passed is not sustainable in law and the said finding must be recorded. CIT cannot remand the matter to the Assessing Officer to decide whether the findings recorded are erroneous. In cases where there is inadequate enquiry but not lack of enquiry, again the CIT must give and record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the CIT and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in Law. In some cases CIT can also show and establish that the facts on record or inferences drawn from facts on record per se justified and mandated further enquiry or investigation but the Assessing Officer had erroneously not undertaken the same. However, the said finding must be clear, unambiguous and not debatable. The matter cannot be remitted for a fresh decision to the Assessing Officer to conduct further enquiries without a finding that the order is erroneous. Finding that the order is erroneous is a condition or requirement which must be satisfied for exercise of jurisdiction under Section 263 of the Act. In such matters, to remand the matter/issue to the Assessing Officer would imply and mean the CIT has not examined and decided whether or not the order is erroneous but has directed the Assessing Officer to decide the aspect/question.

17. This distinction must be kept in mind by the CIT while exercising jurisdiction under Section 263 of the Act and in the absence of the finding that the order is erroneous and prejudicial to the interest of Revenue, exercise of jurisdiction under the said section is not sustainable. In most cases of alleged "inadequate investigation", it will be difficult to hold that the order of the Assessing Officer, who had conducted enquiries and had acted as an investigator, is erroneous, without CIT conducting verification/inquiry. The order of the Assessing Officer may be or may not be wrong. CIT cannot direct reconsideration on this ground but only when the order is erroneous. An order of remit cannot be passed by the CIT to ask the Assessing Officer to decide whether the order was erroneous. This is not permissible. An order is not erroneous, unless the CIT hold and records reasons why it is erroneous. An order will not become erroneous because on remit, the Assessing Officer may decide that the order is erroneous. Therefore CIT must after recording reasons hold that the order is erroneous. The jurisdictional precondition stipulated is that the CIT must come to the conclusion that the order is erroneous and is unsustainable in law. We may notice that the material which the CIT can rely includes not only the record as it stands at the time when the order in question was passed by the Assessing Officer but also the record as it stands at the time of examination by the CIT [see CIT vs. Shree Manjunathesware Packing Products, 231 ITR 53 (SC)]. Nothing bars/prohibits the CIT from collecting and relying upon new/additional material/evidence to show and state that the order of the Assessing Officer is erroneous. 14

18. It is in this context that the Supreme Court in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax, (2000) 243 ITR 83 (SC), had observed that the phrase „prejudicial to the interest of Revenue‟ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of Revenue. Thus, when the Assessing Officer had adopted one of the courses permissible and available to him, and this has resulted in loss to Revenue; or two views were possible and the Assessing Officer has taken one view with which the CIT may not agree; the said orders cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer is unsustainable in law. In such matters, the CIT must give a finding that the view taken by the Assessing Officer is unsustainable in law and, therefore, the order is erroneous. He must also show that prejudice is caused to the interest of the Revenue.” 10. When we analyse the facts and circumstances of the present case, from the original assessment order passed u/s 143(3) of the Act, we note that the main thrust of the department was that the AO should examine and verify the amounts of cash deposited to the bank account of the assessee and during the assessment proceedings, the assessee not only submitted details of alleged amount of Rs.30,59,310 but submitted details of Rs.42,64,130 deposited in HDFC Bank and in addition to that, the assessee also submitted details of total cash deposit of Rs.70,77,034 of all seven bank accounts including bank account in HDFC Bank which was pointed out by the AIR information. We cannot ignore that the total financial/trading transaction of the assessee were adopted by the AO for making estimation of business profit at 8% of gross receipts/turnover putting all the accounts together irrespective of any real profit earned by the assessee. When 44AF of the Act by the AO in the original assessment order passed u/s 143(3) of the Act, then from the said provision, it is clear that this is a special provision of computing profits of retail business and sub-section (i) of this provision shall not apply in respect of assessee whose total turnover exceeds an amount of Rs.40 lakh during the relevant previous year. In the present case, the assessee has not disputed this fact that his total turnover was more than Rs.40 lakh during the relevant financial period and at the same time when we analyse the totality of the contents of the impugned assessment order, we can safely infer that the intention of the AO was to estimate business income of the assessee and he estimated the same by taking 8% of total gross receipts of Rs.76,40,380 vide order sheet entry dated 20.12.13 and the AO made an addition of Rs.6,11,230 as business income from trading of cloth on account of profit earned from this business. However, it is clear that when the gross receipts of the assessee were more than Rs.40 lakh, then the provisions of section 44AF(1) of the Act are not applicable but the AO made estimate of profit earned by the assessee during the relevant financial period for trading of cloth by estimating 8% of total gross receipts, then the recourse adopted by the assessee is more than beneficial to the revenue and which cannot be held as prejudicial to the interest of revenue.

11. From the operative part of the impugned order passed u/s 263 of the Act, we clearly note that the CIT has directed the AO to make a fresh assessment after considering the correct legal and factual position and he has not drawn any definite conclusion that the view taken by the AO is not sustainable and in accordance with law and therefore, the same is erroneous and prejudicial to the interest of revenue. At this stage, at the cost of repetition, we find it appropriate to reproduce relevant operative part of the impugned order which reads as under:-

“ 4. In the instant case, the assessee during the financial year relevant to the assessment year under consideration deposited cash amounting to Rs.76,40,3801- in six different bank, accounts and deposit by cheque was only to the extent of Rs.5,63,346/- and as per the submission of the assessee's AR, the assessee had lost his books of account and other records and lodged FIR with P.S. Naiaina, New Delhi, vide his submission dated 20.12.2013, before the Assessing Officer. However, in the FIR, the assessee has only mentioned loss of cash book and ledgers without specifying any particular financial year, though he has claimed loss of miscellaneous documents of vouchers & other records for the last five years. The Assessing Officer, during the course of regular assessment under reference, conducted no enquiry about the genuineness of the business of the assessee as the assessee could not produce any single document pertaining to his so called business activities. It is not a normal feature that a business having a turnover of Rs.76,40,380/- was being run from the residence of the assessee and it was closed soon after the detection of cash deposits in the undisclosed bank accounts of the assessee. Further, the assessee did not show any income from business or profession in his return of income. Hence, there was absolutely no basis to assess the income at the rate of 8% of the gross turnover u/s 44AD /AF of the Act, more so when the provisions of section 44AD of the Act is not applicable in the case of assessee in terms of nature of business & turnover. Assessee did not produce the books of account under the pretext that these were lost but no further enquiry was conducted by the Assessing Officer from the Police Authorities regarding the outcome of the FIR lodged. The Assessing Officer did not even seek a 17 44AB of the Act was not conducted and also if the assessee has taken any backup of the so called loss of books of accounts and other documents. The Return of Income filed by the assessee for the relevant assessment year reflects receipt of a sum of Rs.1,80,000/- from M/s Shine Bath, his employer, towards salary. All these facts clearly indicate that the money deposited in the various bank accounts of the assessee was not in the nature of sale proceeds/business receipts, since the assessee is not even aware of the nature and type of business carried on by him and could not produce Sales Tax/V AT details in this regard. In such a situation the entire cash deposits in different bank accounts of the assessee should be treated as unexplained money of the assessee u/s 69A of the I.T. Act.

5. In CIT vs Raja Industries (2012) 340 ITR 344 (P&H), it has been held that where enquiry is warranted but not made, it would certainly constitute prejudice to revenue, so that jurisdiction for the Commissioner is available for remanding the matter for such enquiry.

12. In view of above and in the light of ratio of the judgment of Hon’ble Jurisdictional High Court of Delhi in the case of ITO vs DG Housing Projects Ltd. (supra), we clearly note that the CIT observed that the assessee did not produce books of accounts under the pretext that these were lost but no further inquiry was conducted by the AO regarding the outcome of the FIR lodged. The CIT has merely alleged the way of conduction of assessment proceedings in para 4 and in para 5, he has noted that where inquiry is warranted but not made, it would certainly constitute prejudice to revenue, so that jurisdiction for the Commissioner is available for remanding the matter for such enquiry. In para 6 and 7, the CIT has further noted the ratio of the judgment of Gujarat High Court in the case of Jyoti Electric Motors Ltd. vs CIT (1999) 237 ITR 280 (Guj), and ratio of the judgment of Hon’ble Calcutta High Court in the case of CIT vs Active Traders (P) Ltd. (1995) 3214 ITR 583 (Cal) and noted that in the instant case, facts are not disclosed by the assessee in his return of income as regards maintenance of bank accounts and deposit of cash in the said bank accounts. The CIT also held that the AO passed order in utmost haste 19 AO to investigate the fact stated in the return particularly when the circumstances suggest that inquiry would have been necessary and prudent. In para 8, the CIT without drawing any conclusion about the outcome of the impugned assessment order has held that the assessment made by the AO u/s 143(3) of the Act dated 20.12.13 is treated as erroneous and prejudicial to the interest of revenue as not only assessment order has been passed in a cryptic manner but the AO has also the benefit of section 44AD/44AF of the Act erroneously without considering whether the conditions are fulfilled or not. The CIT also held that the assessment order has been passed by not applying the provisions of section 69 of the Act resulting in non-application of correct provisions of law though the said issues were most crucial issues for the concerned scrutiny assessment proceedings. Finally, the CIT, without drawing any conclusion about the correctness and sustainability of the impugned assessment order, directed the AO to cancel the impugned assessment order and directed the AO to make a fresh assessment after considering correct legal and factual position. As we have already analysed the view taken by the AO that the AO firstly inquired about the cash deposited to the bank account of the assessee and in his reply, the assessee submitted details of cash deposits to all the seven bank accounts of the assessee showing total cash deposits of Rs.70,77,034 during relevant financial period as against the details asked by the AO for only bank account with HDFC Bank about the cash deposit of Rs. 30,59,310 which was reported in AIR information sent to the AO 20 for picking up the case for scrutiny. As we have already observed that the AO estimated the business income of the assessee @8% of Rs.76,40,380 being gross receipts referring to provisions of section 44AF of the Act, at the same time, we may point out that when the assessee could not file his books of accounts and other record and he lodged an FIR with Police Station, Naraina, New Delhi, then the AO had no alternative but to estimate the profit on the basis of information available before him during the assessment proceedings and the AO estimated the business income of the assessee @8% of gross receipts merely referring to section 44AF of the Act which provides application of 5% in the cases where turnover is not more than Rs. 40 lakh from retail business.

13. On the basis of foregoing discussion, we reach to a conclusion that the AO followed a proper procedure for framing assessment and for estimating business income of the assessee which cannot be held as sustainable or against the provisions of the Act. At this juncture, it would be appropriate to respectfully refer to the dicta laid down by Hon’ble Jurisdictional High Court in the case of ITO vs DG Housing Projects Ltd. (supra) wherein their lordships held that in the case of wrong opinion or finding on merits, CIT has to come to the conclusion and himself decide that the order is erroneous by conducting necessary inquiry before the order u/s 263 is passed. In such a case, the order of the AO will be erroneous because the order passed is not sustainable in law and said finding must be recorded. In this judgement, it was also held that the CIT cannot remand the matter to the AO to decide whether findings recorded are erroneous. In the case where there is inadequate inquiry but not lack of inquiry, again the CIT must give and record his finding that the order/inquiry made is erroneous and this can happen if an inquiry is conducted by the CIT and thereafter he is able to establish and shows the error or mistake made by the AO, making the order unsustainable in law. It was further held that the matter cannot be remitted for a fresh decision to the AO to conduct further inquiry without a finding that the order is erroneous is a condition or requirement which must be satisfied for valid exercise of jurisdiction u/s 263 of the Act. Lastly, their lordships, speaking for the jurisdictional High Court, made it clear that in such matters, to remand the matter/issue to the AO would imply and mean that the CIT has not examined and decided whether or not the order is erroneous but has directed the AO to decide the aspect/question.

14. In para 17 of this order, their lordships enlightened us by explaining that this distinction must be kept in mind by CIT while exercising jurisdiction u/s 263 of the Act and in absence of the finding that the order is erroneous and prejudicial to the interest of revenue, the exercise of jurisdiction under the said section is not sustainable. It was also held that in most cases of alleged “inadequate investigation” it will be difficult to hold that the order of the AO, who had conducted inquiries and had acted as investigator is erroneous when CIT conducted verification /inquiry. The order of the AO may or may not be CIT cannot direct reconsideration of this ground but only when the order is erroneous. The order of remit/remand cannot be passed by the CIT to ask the AO to decide whether the order was erroneous and this is not permissible u/s 263 of the Act.

15. The present case is not a case of no inquiry and when the AO had adopted one of the courses permissible and available to him under the provisions of the Act and act of the AO has resulted in loss to the revenue or two views were possible and the AO has adopted one view which was not agreeable to the CIT, then the said assessment order cannot be treated as erroneous order prejudicial to the interest of revenue unless the view adopted by the AO is held as unsustainable and not in accordance with law. In such cases, CIT is required to give a finding that the view taken by the AO is not sustainable as per provisions of the Act and law and therefore, the order is erroneous and the CIT must also show that prejudice has been caused to the interest of revenue. In this context, the Hon’ble Supreme Court in the case of Malabar Industrial Company Ltd. vs CIT (supra) had observed that the phrase ‘prejudicial to the interest of revenue’ has to be read in conjunction with an erroneous order passed by the AO.

However, we cannot ignore that the AO in the operative part of the assessment order has referred to section 44AF of the Act while estimating the business income @8% of gross receipts but as per said provision, the business income has to be assessed @5% of the total turnover during the previous year on account of such business provided total turnover of the assessee does not exceed an amount of Rs.40 lakh in the relevant previous year.

The CIT has not brought out any fact to establish that the assessee had not undertaken any inquiry in regard to the alleged cash deposited to his bank account and the CIT has not brought out any fact to this effect that in absence of amount and other records, which were lost by the assessee, the AO was not correct in making estimation of business income @8% of gross receipts and the conclusion drawn by the AO was not in accordance with the provisions of the Act and thus, the same was unsustainable in law. Per contra, as we have already noted that the AO inquired from the assessee about the amount of cash deposited during the relevant financial period and after considering the reply of the assessee wherein the assessee stated that he had lost his books of accounts and other records, then the AO had no alternative but to estimate the business income of the assessee by taking a reasonable and appropriate recourse.

Thereafter, the AO proceeded to estimate the business income of the assessee @8% of gross receipts by merely referring to section 44AF of the Act. We cannot ignore this fact that in the letter dated 20.12.2013, the assessee pressing into service his revised computation of income pleaded that the surrendered amount may be considered as business income being 5% of gross receipts but the AO adopted higher percentage of 8% for estimation of business income which is very favourable to the revenue. It is also relevant to point out that the AO has taken 5% on gross turnover for AY 2010-11 viz. preceding assessment year to the present assessment year in the assessment order passed u/s 143(3) of the Act (Assessee’s paper book page 16-20).

Order pronounced in the open court on 7.10.2015.