Income Tax Officer vs Singhal Securities Private Limited

PERSHRI ANUBHAV SHARMA, JUDICIAL MEMBER:

These cross appeals preferred by the assessee and revenue against the order dated 20.02.2026 of the Ld. National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in DIN & Order No: ITBA/NFAC/S/250/2025-26/1086289852(1)arising out of the order dated 11.12.2019 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by ITO, Ward 23(2) Delhi, for AY: 2017-18.

Heard and perused the records. The assessee filed the return declaring loss and the case of assessee was selected for scrutiny for the reasons of high revenue from operations and no scrutiny is last five years. After giving assessee an opportunity of hearing the ld. AO, rejected the books and gross profit was estimated at 2% of the turnover and an addition of Rs. 4.10 Cr. was made to the assessee’s income. Ld. CIT(A) has sustained the rejection of accounts but held that addition be restricted to .5% of the turnover. Thus both the sides are in appeal. As for completeness the relevant part of impugned order of ld. CIT(A), is reproduced below;

Assessee vide appeal has primarily raised the ground no. 1 & 2 in its appeal and the assesse has challenged the assessment order in view of the provision of Section 144B r.w.s 144C of the Act asserting that the assessment order is not passed in accordance with the said provisions as no show cause notice was issued by the AO. In this context, as we go through the assessment order we find that there is no mention of the issuance of such a notice. Assessee has provided copy of show cause notice u/s 143(2) of the Act at page No. 146-147 and at page No. 550 copy of notice dated 19.07.2019 u/s 142(1) has been provided. Similarly, at page No. 553 copy of notice dated 26.08.2019 u/s 142(1) is provided at page No. 557 assesse had provided copy of notice dated 05.12.2019 which is show cause notice wherein there is reference of notice dated 23.08.2018 and subsequent notice u/s 142(1) dated 19.07.2019 and 26.08.2019 and penalty show cause notice u/s 272A(1)(d) dated 20.09.2019 and further show cause notice for ex-parte assessment dated 20.09.2019 and penalty imposed u/s 272A(1)(d) order dated 22.10.2019 and the notice mentions that there is no compliance and in the absence of response of the assesse the assessment has been completed on the basis of material available on record. Thus here the assessment was conducted by the jurisdictional Assessing Officer outside the scope of section 144B and the detailed procedure of section 144B, such as the faceless Assessment Unit procedure, electronic show-cause mechanism, etc., does not apply. The necessary mandatory notices u/s 143(2) and 142(1) of the Act were issued. Therefore, failure to follow section 144B, by itself, cannot invalidate an assessment if section 144B was not applicable to that assessment in the first place.

Then coming to the appeal of department, admittedly the appellant assessee company is engaged in the business of purchase and sale of listed securities on online portal of recognized stock exchanges through the recognized well known stock broker and member M/s Globe Capital Market Limited, of NSE and BSE. The Id. Assessing Officer has estimated GP rate @2% of total turnover of Rs. 205,43,39,418/- however, there is no indication that on what parameters or assumptions of profit in the business of purchase and sale of shares, ld. AO has quantified the profits. As per the assessee, copy of ledger account of appellant assessee in the books of the broker along with all the contract notes of transaction carried out containing the all the necessary information along with all other supporting documents was filed before Id CIT(A) as no such information was asked for by ld. Assessing Officer and not even a single defect was pointed out by the Id. CIT (A) in the same. The Id CIT(A) too has restricted the profit margin arbitrarily at.5% by upholding the rejection of the books of accounts. The case of assessee is that in stock market pay in and payout is made by/to broker. There is hardly any banking transaction for the reason that consideration of sale of shares was adjusted with the further purchases of shares made by the appellant assessee company. Banking transactions are verifiable form the ledger account in the books of the broker. Regarding allegation of the Id. Assessing officer that no detail of party wise purchase and sale of shares is furnished, in this connection it was submitted that ld. Assessing Officer failed to appreciate that in online stock market trading of shares, no one can have the knowledge of person by whom shares are purchased which is sold by assessee and the person by whom shares are sold and purchased by appellant assessee.

A conjoint reading of section 144 and 145 of the Act indicate that the AO wields an authority to make additions on the basis of estimation of income upon fulfillment of the conditions mentioned in Section 145(3) of the Act. Once the AO is satisfied about the existence of irregularities in the books of account as per Section 145(3) of the Act, it shall proceed in the manner provided under Section 144 of the Act. Thus, Section 145(2) of the Act empowers the assessing officer to make a best judgment assessment when he is not satisfied about the correctness or completeness of the accounts of the assessed but at the same time it is not possible to categorise various types of defects which may render rejection of books of account of an assessed on the ground that the accounts are not complete or correct. Each case has to be considered on its own peculiar facts, having regard to the nature of business. Reliance for this proposition is placed on the decision of Hon’ble Delhi High Court in Action Electricals vs Dy. CIT [2002]258ITR188(DELHI). Thus where the rejection of books of accounts has to made by the A.O some observations or some substantial discrepancies in the books of account need to be pointed then assessment has to be u/s 144 of the Act. However, here assessment is completed u/s 143(3) of the Act. Thus appears to be inherent defect in the manner AO has passed made the additions in the impugned order.

In the case before us, we find that assessee relies a voluminous paper book running upto 560 pages containing all the necessary information about the nature of share trading activity of the assessee, its accounting and reporting. It is certified that most of these were flied before the ld. AO or ld. CIT(A). However, both the orders are silent on these substantial evidences.

We thus find substance in contention that the given the nature of business of assessee, expenses and turnover ratio or lack of corresponding credit entries to the turnover, cannot have been basis of rejection of books of accounts. There is no allegation that the method of accounting has not been regularly followed by assessee more so when one of the reasons for scrutiny was that in past five years there has been no scrutiny assessment.

We find that both the authorities below have proceeded to reject the books and then made the addition attributing possible profit but have failed to substantiate the same with any methodical reasoning. Profit estimation has to be by thoroughly understanding the nature of business activity. There is nothing on assessee's past accepted trading results as basis for estimating income.When same has not been done and rejection of books is done with superfluous observation, the addition on profit estimation cannot be sustained. In this context the Hon’ble Supreme Court decision in State of Kerala v. C. Velukutty, (1966) 60 ITR 239 (SC) comes to rescue of assessee where Hon’ble Court laid down the classic principle that an estimate must be based on a rational basis and cannot be the result of pure guesswork or caprice. Thus, in given facts and circumstances, we are of considered view that impugned addition made by ld. AO deserved to be deleted and not just reduced, as done by ld. CIT(A).

We are thus inclined to sustain ground no. 3 and 4 in the appeal of assessee. The appeal of assessee is allowed and as a consequential effect the appeal of department stands dismissed.