ITAT Bangalore On Best Judgment Assessment: Profit Estimation Must Be Reasoned, Not Guesswork

Background Of The Dispute

The matter in Kempaiah Kemparaju Vs DCIT (ITAT Bangalore) revolves around reassessment and best judgment assessment in the case of a civil contractor who executed works for Government/PWD departments. For the relevant years, the assessee had substantial contract receipts exceeding ₹17 crore, all received through banking channels with TDS duly deducted, yet no return of income was filed for AY 2013-14 and AY 2017-18.

Based on information from the NMS (Non-filer Monitoring System) in the AIMS module of the ITBA portal, the Assessing Officer (AO) noticed:

  • Contract receipts of Rs.17,27,04,584/-
  • Interest income of Rs.23,550/- during FY 2012-13 relevant to AY 2013-14

Considering non-filing of return despite significant receipts, the AO formed a belief that income had escaped assessment within the meaning of Explanation 2(a) to Section 147 and issued notice under Section 148 on 31.03.2021 after obtaining sanction under Section 151(1) from the Principal Commissioner of Income Tax, Bengaluru-1.

The assessee did not respond by filing a return either to:

  • The notice under Section 148, or
  • Subsequent notices and reminders under Section 142(1)

Given this non-compliance, the AO proceeded to conclude the assessment ex parte under Section 144(1).

AO’s Best Judgment Assessment And Estimation At 15%

Approach Of The AO

Due to the absence of books of account and documentary evidence, the AO treated the entire contract receipts of Rs.17,27,04,584/- as business turnover. As the turnover exceeded Rs.1 crore, the AO held that:

  • The assessee was obliged to maintain books and get them audited, and
  • In the absence of such records, net profit had to be estimated.

Relying on his understanding of the business and provisions from Section 30 to Section 43B, the AO:

  • Estimated net profit at 15% of gross contract receipts
  • Computed business income at Rs.2,59,05,690/-
  • Issued a draft assessment order/show-cause notice dated 04.03.2022 on this basis

Assessee’s Late Response During Assessment

In response, the assessee finally appeared and submitted on 10.03.2022:

  • A Statement of Income
  • Copy of Form 26AS

In this statement the assessee declared:

  • Turnover of Rs.17,40,30,425/-
  • Net profit of Rs.1,05,45,500/-
  • Resultant net profit rate of about 6.06%

The assessee also showed tax of Rs.30,66,539/- as discharged through:

  • TDS as per Form 26AS – Rs.26,51,922/-
  • Self-assessment tax – Rs.7,00,000/- (paid on 28.03.2016)

Assessee’s Explanation On Profit Margin

The assessee clarified that:

  • Depreciation of Rs.70,00,217/- had been debited while arriving at the net profit
  • Cash profit before depreciation thus amounted to Rs.1,75,45,719/- (about 10.08% of turnover)
  • After also adding back bank interest cost, the effective cash profit margin would exceed 12%

On this footing, the assessee argued that:

  • A flat 15% profit rate was arbitrary and excessive
  • The estimation had no rational or industry-based support
  • Net profit already disclosed at 6.06% deserved to be accepted, particularly when the entire receipts were through banking channels and Government contracts with TDS.

AO’s Rejection Of Assessee’s Explanation

The AO rejected the assessee’s submissions, primarily on the grounds that:

  • No return was filed originally under Section 139 or in response to Section 148
  • No books, vouchers, or documentary evidence were produced during assessment
  • A mere statement of income without supporting records lacked credibility

The AO further held that:

Once profit is determined on an estimated basis, no separate deduction under Sections 30 to 43D/43B is permissible.

On this reasoning:

  • The AO refused to consider depreciation
  • Asserted that, according to the assessee himself, income before depreciation was Rs.1,75,45,719/-, being about 10.16% of receipts
  • Concluded that the declared results were unreliable in the absence of books
  • Retained 15% estimation on contract receipts and made an addition of Rs.2,59,05,690/- as net business profit

Addition On Interest Income

The AO also noticed from AIMS that:

  • Interest income for FY 2012-13 was Rs.23,550/- with TDS of Rs.2,355/- under Section 194A

However, since the assessee’s own statement of income disclosed interest income of Rs.55,235/-, the AO adopted this higher figure and added Rs.55,235/- as income from other sources.

Accordingly, the reassessment order under Section 147 r.w.s. 144 was finalised on 16.03.2022 with total assessed income of Rs.2,59,60,925/-.