Addition Deleted Due to Pure Estimation on Borrowed Satisfaction Without Verification

Major Suresh Yadav Vs ITO (ITAT Delhi)

Income Addition Rejected Due to Reliance on Borrowed Satisfaction from External Authorities;  ₹1.20 Crore Addition Set Aside Due to Lack of Evidence on Actual Subscriber Base;  Ex-Parte Assessment Overturned Due to Arbitrary Profit Estimation Method;  Cable Income Addition Deleted Due to Failure to Verify Assessee’s Claims.

The appeal concerned reassessment proceedings for Assessment Year 2001–02, where the Assessing Officer (AO) estimated the assessee’s income from cable operations based on information received from the entertainment tax department indicating approximately 28,000 subscribers, as against 2,000 reported by the assessee. Relying on an Inspector’s local inquiry estimating ₹200 per month per subscriber, the AO computed gross receipts at ₹6.72 crore and, after allowing 50% expenses, assessed income at ₹3.36 crore under sections 147/144 due to non-compliance. The Commissioner (Appeals) partly upheld the addition, estimating subscriber base as reasonable considering area coverage and business scale, but reduced the profit margin to 20% after allowing 10% rebate, resulting in a sustained addition of ₹1.20 crore.

Before the Tribunal, the assessee challenged the assessment as being based on “borrowed satisfaction” and lack of independent verification, arguing that the AO relied solely on third-party information and estimation without substantiating actual subscriber numbers. It was also noted that similar issues for other years had been adjudicated earlier. In a prior order, the Tribunal had restored the matter to the AO for fresh examination, emphasizing the need to consider past records and factual accuracy. Upon remand, the AO accepted the returned income after verification.

Further, in a similar case for another assessment year, the Tribunal had held that additions based purely on estimates without verifying the correctness of the assessee’s claim were not sustainable in law. Applying this reasoning, the Tribunal observed that the AO had not independently verified the number of subscribers or the income claimed and had proceeded solely on estimation derived from external reports.

Accordingly, following its earlier decisions on identical facts and in the absence of contrary material, the Tribunal held that the addition of ₹1,20,06,010 was unsustainable. The addition was deleted, and the appeal was allowed. Other grounds were treated as academic in view of this decision.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-XXII, New Delhi, [hereinafter referred to as the ‘Ld. CIT(A)] dated 15.03.2010 arising out of the assessment order dated 30.12.2008 passed u/s 147/144 of the Income Tax Act, 1961 (hereinafter referred to as the ‘the Act’) by the ITO, Ward-19(1), New Delhi (hereinafter referred to as the ‘AO’) pertaining to Assessment Year (A.Y.) 2001-02.

2. Brief facts of the case: The assessee is an individual, proprietor of M/s. World Vision India and during the year was engaged in providing cable connections in the area Shalimar Bagh, Rohini, Model Town and Pitampura etc. of Delhi. An information was received by the AO from the Income Tax Officer (Inv.), Unit-V(5), New Delhi vide letter dated 28.3.2008, which was based on the report received from the entertainment tax department, Government of Delhi, that the assessee was having over 28000 subscribers whereas he was paying tax in respect of 2000 subscribers only. Further on the basis of the above facts, the Entertainment Tax Officer, Delhi had passed an assessment order on 17.12.2002 as per which a demand of Rs.3,86,82,000/- was raised on account of entertainment tax + penalty + interest for the period of January 2000 to March 2001. After recording reasons based on these information, notice u/s 148 of the Income Tax Act was issued, but no compliance was made by the assessee. The notice u/s 148 was followed by several notices, which were also remained non-complied with. On 06.8.2008 summons u/s 131 was issued for personal deposition of the appellant and the case was fixed for hearing on 19.8.2008. In response the appellant did not appear personally but Sh. Pradeep Saluja, CA appeared on his behalf before the AO on 19.8.2008 and filed a letter seeking adjournment on the ground of illness of assessee’s wife. On scheduled date of hearing, i.e. on 27.08.2008 also the assessee failed to attend the proceedings without reasonable cause. Finally, letter dated 27.11.2008 was issued and served on the assessee. During the assessment proceeding, Inspector of the ward was instructed by the AO to make local inquiries and submit report regarding the average monthly cable charges in the area during the period under scrutiny. The Inspector of the ward, vide his report dated 27.11.2008 submitted that:

In this connection after making the local inquiries form M/s Ashiana Cable and M/S Win Cable (operation in the Pitampura and Shalimar Bagh Area) and meeting with some of the local subscribers it has revealed that the average monthly charge for each cable connection was about Rs. 200/- during the F.Y.2000-01.

2.1 Thereafter, the AO noted that, it was gathered from the Inspectors report which he made after local inquiries and contacting personally with the cable subscribers/ consumers of the area that average subscription of the cable services in the Financial Year 2000-01 was Rs. 200/- per month. On the basis of this report the AO estimated the assessee’s income as under:

Less: 50% of the gross receipts on account of various expenditure Incurred, for earning the above income. In this way taxable income for the year under consideration was estimated at Rs.3,36,00,000/.

2.3 A fresh letter dated 22.12.2008 was issued to the assessee asking the assessee to show cause as to why the assessment should not be completed at a total income of Rs. 3,60,000/-. The relevant extract of the said order is reproduced as under:

It may be noted that, it has gathered from the Inspectors report (which he made after local inquiry and contacting personally with the cable subscribers/consumers of the area that average subscription of the cable services in the Financial Year 2000-01 was Rs. 200/- per month. On the basis of this report 1 estimate your income as under:

Total No. of the cable subscribers =28000

Total monthly subscription recovered =28000 X 200

Total Annual subscription received by you = 28000 X 200 X 12 =Rs.6,72,00,000/-Less: 50% of the gross receipts, on account of various expenditure incurred, for earning the above income. In this way your taxable income for the year under consideration comes to Rs. 3,36.00,000/-. In case of further non-compliance, the case will be decided exparte on the basis of above.

2.4 The case was fixed for hearing on 26.12.2008, when again there was no compliance and the AO completed the assessment u/s 144/147 of the Act at a total income of Rs. 3,36,00,000/-.

3. Aggrieved with the said order, the assessee filed an appeal before the Ld. CIT(A).

3.1 The Ld. CIT(A) reduced the said addition to Rs. 1,20,06,010/-. The relevant extract of the order of the Ld. CIT(A) is reproduced as under:

“ 6.4 The appellant has contested that he was having just 2000 cable connections based on the ground that he was not having authorization from his principal broadcaster beyond 2000 connections, so how can he give 28000 connections. Here one relevant fact, which is of utmost importance, is that during that period set top boxes were not in operation. Hence, the principal channel like Star, ESPN etc. were not having any means to control the number of connection the operator was running. The operator was directly receiving signals through the Antenna system set up at these control rooms and providing signals directly to the subscribers without having any franchisees in between. The appellant was not a small cable operator who receive the signals from Multi System Operations. The appellant was receiving the signals directly from the broadcaster, which clearly shows that he was having large number of subscribers. Further, the appellant had mentioned before the Entertainment Tax authorities during the proceedings there, that he was having a big establishment comprising of 2 managers and about 100 other employees, which establishes that he was having very large number of subscribers to manage that affair. There existed no check from the principal broadcaster to ascertain as to how many subscribers a cable operator was having. All the principal broadcaster were also in their promotional era and could not heed toward this over subscription factor. Hence, there existed no correlation between the actual connection that the cable operator was charging the fee for and the fee cable operator was depositing with the principal broadcaster. Moreover, the appellant had given different number of subscribers before the Entertainment Tax authorities, Government of Delhi at different points of time. In submission before me “us Proof 4” the appellant himself stated that the Entertainment Tax Department, Government of Delhi could find 6000-7000 connections whereas he is pleading that he had given only 2000-3000 connections. As is evident and without any dispute that the area of operation of the appellant was Shalimar Bagh, Pitampura, Sector-9 & 13, Rohini, Sector-3, 7 & 8, Rohini, Sector-11,15 & 17, Rohini, Narela, Shakurpur, Police colony. Vishal Market, Tagore Park, Malik Puri, Parmanand Colony, Camp (T.B.Hospital), Mukherjee Nager, Vijay Nagar (Police Line), Dhakka Colony, Mahendru Enclave, Hakikat Nagar and Nirankari Colony. It is a common knowledge that there areas are highly populated and dense residential area where a single building may have many connections. So the number of connections cannot be considered as hypothetical case.

The appellant contention that he was having one control room is also devoid of merit because six location with complete addresses have been mentioned in para 6.3.

Further, the list enumerated in preceding para 6.3 authenticate the fact that the number of connections are directly proportional to the residential density of the arca. For example Pitampura, Rohini are most dense whereas Narela, Shakarpu rand and other localities are comparatively less dense. Having said that 28000 connections appear to be a reasonable figure, the profit is to be worked out based on reasonable estimate. The inspector of the Assessing Officer conducted a local enquiry and reported that the appellant was charging Rs. 200/- per month during the relevant period.

The AO has assessed the income of the appellant at Rs.3,36,00,000/- by reducing the 50% on account of meeting the business expenses. The appellant was also charging the initial installation charges, security, which were not taken into consideration while calculating the profit. The appellant is running this business since 1994. Keeping in mind the nature of the business, the infrastructure cost is less in this type of business and if at all there is any, this is only in the initial phase of the business. The cable operator also charges the fee for wires, cable, and connection fee from the customers and brings their infrastructure cost to minimum. In the subsequent year i.e. A.Y. 2002­03, the A.O. in the scrutiny assessment has allowed rebate of 10% for non receipt of fee by the defaulters and for free connections and after reducing this applied a profit of 8% on above receipt. For rebate part I am inclined to apply but the profit margin in this kind of business where there is hardly any recurring expenditure is very low at 8%. At the same time profit @ 50% is also on higher side in absence of any direct evidence. I have to take support of profit margin as shown by some principal broadcaster such as ESPN etc. On going through their records of the A.Y. 2002-03, 1 gathered that they have shown a net profit of 13.5% during that period. The appellant being retailer certainly have more profit margin than the principal broadcaster. Keeping in view the nature of business and taking strength of the fact that the principal broadcaster was showing a profit of 13.5%, I expect 20% of total receipt as reasonable profit on retail distribution and direct AO to apply accordingly. The Addition is thus worked out as under.

The addition made to this extent is therefore, confirmed.”

4. Aggrieved with the said order, the assessee is in appeal before us on the following grounds of appeal:

“ 1. That the A.O has not applied his mind while recording satisfaction and reason to belief that the Income has been escaped. The re-assessment notice has to be issued by AO on his own satisfaction and not a borrowed satisfaction.

2. That A.O. has not made independent inquiry but only relied upon the order passed by Entertainment Officer, New Delhi and order confirmed by Deputy Commissioner (Taxes).

3. That the appeal has been pending before Appellate Authority, Excise and Luxury & entertainment Tax, Government of NCT of Delhi, Since 25/08/2005.

4. That Hon’ble Tribunal has jurisdiction to examine a question of law which arises from the fact as found by authority below and having bearing on tax liability of the assessee even through such question was not raised before authority below nor in grounds in appeal but raised by way of additional issue in forwarding letter.

5. Assessing Officer without verifying correctness of claim of assessee proceeded completely on estimate basis and made addition by taking higher number of cable connection subscriber, such addition deserved to be deleted.

6. That the assessee craves to add/alter any of the grounds of appeal on or before the date of final hearing.”

5. The Ld. AR during the course of hearing before us submitted that on similar facts, the Co-ordinate Bench of Tribunal in ITA No.-9432/Del/2019 had deleted similar addition for A.Y. 2003-04.

5.1 Further, the Ld. AR submitted that the Co-ordinate Bench of the Tribunal in ITA No.- 9431/Del/2019 for A.Y. 2001-02 had restored the matter to the file of the AO, where the AO after verifying the facts had completed the assessment at the returned income.

6. On the other hand, the Ld. Sr. DR supported the orders of the authorities below.

7. We have heard both the parties and perused the material available on record. For A.Y. 2001-02, the relevant extract of the order of the Co-ordinate Bench of Tribunal, restoring the matter to the file of the AO is reproduced as under:

“6. The most pertinent fact which has been ignored by the AO while conducting further enquiries is that the assessee had closed his business on 18.05.2005 as per the letter given to the entertainment office the enquiries were made somewhere in 2009. It would be in appropriate to accept that the Inspector /Entertainment department tax department gave accurate figures 4 years after the closer of the office and further find that in the immediately preceding year the subscription receipts are much lesser then estimated by the AO. It appears the AO has completely ignored the receipts of earlier years in the same business. Since correct facts are not emanating from the records, in the interest of justice and fair play I deem it fit to restore the quarrel to the files of the AO. The AO is directed to decide the issue afresh after considering the past history of the assessee and after calling past records from the Entertainment tax department. Needless to mention the AO shall give adequate opportunity of being heard to the assessee.”

7.1 Upon setting aside, the AO passed the order u/s 147 r.w.s. 254 of the Act on 06.09.2023 (placed page no. 61-62 of the paper book) accepting the returned income. The relevant extract of the said order is reproduced as under:

“1. Sh. Suresh Yadav alias Major (Retired) Suresh Yadav (hereinafter to be referred as “assessee” or “the assessee” or “he”) has filed return of income for the period relevant to the Assessment Year (in short AY) 2002-03 on 22.01.2003 declaring total income at Rs. 90,350/-. The return filed by the assessee has been processed as per the provisions of section 143(1) of Income Tax Act, 1961 (hereinafter to be referred as “Act” or “the Act” or “IT Act’ or “the IT Act”) at the returned income.

2. As per records and submissions by the assessee, during the period relevant to the AY 2002-03, the assessee was engaged in the business of providing cable connections in name & style of “World Vision India” in the vicinity of Pitampura, Shalimar Bagh & Rohini. On the basis of information received from third party, the assessment / re­assessment proceedings have been initiated in the case as per the provisions of section 147 of the Act. The assessment / reassessment proceedings were completed on 22.12.2009 as per the provisions of section 147 read with section 144 (ex-parte) of the Act, and total income has been ascertained at Rs. 48,50,350/-. The additions were made on the basis of estimation as the assessee has not co-operated during the entire period of re-assessment proceedings.

3. The assessment order passed by the then AO has not been accepted by the assessee, and an appeal has been preferred before the Ld. CIT(A) – 34, Delhi. The Ld. CIT(A)-34, Delhi, vide order dated 12.09.2019 (in Appeal No. 1/446/09-10), has dismissed the appeal of the assessee primarily on the grounds that the assessee has not attended the appellate proceedings despite granting ample opportunities for being heard.

3.1 The assessee has further challenged the order of the Ld. CIT(A)-34, Delhi, before the Hon’ble ITAT, Delhi. Now, the Hon’ble ITAT, Bench-SMC, Delhi, vide order dated 23.01.2023 in ITA No. 9431/DEL/2019, has restored back the file to the AO for fresh adjudication after giving reasonable opportunity to the assessee for being heard.

4. As per the directions of Hon’ble ITAT vide order dated 23.01.2023 in ITA No. 9431/DEL/2019, specific questionnaires along with notice u/s 142(1) of the Act, were issued on 18.04.2023 & 08.07.2023, and the assessee has been requested to upload/submit certain details/documents by 03.05.2023 & 14.07.2023 respectively. In response to the said notices/questionnaires, the assessee has uploaded / submitted responses vide letters dated 02.05.2023, 14.07.2023 & 03.09.2023 respectively enclosing details/information/documents as called for.

5. After examination of details/documents/information as uploaded/submitted by the assessee from time to time, the returned income of the assessee is accepted, and no adverse view has been taken. Credit of prepaid and post paid taxes, if any, is allowed after due verification. Other necessary forms are issued with this order.”

(emphasis supplied by us)

7.2 Further, the Co-ordinate Bench of Tribunal on similar facts for A.Y. 2002-03 had deleted the said addition and the relevant extract of the same is reproduced as under:

“12. Now, coming to the merit of the addition, it was the case of the assessee before lower authorities that the assessee had taken only 2000 cable connections from service provider. Therefore, he could not have subscribed higher numbers. The AO has not verified this fact and estimated the gross profit. From the records, it is clear that the AO did not verify the claim of the assessee and proceeded purely on estimate basis which was not justified. I therefore, hold that the addition made by the AO purely on estimation basis without verifying the correctness of the claim of the assessee, is not in accordance with law, the same deserves to be deleted. The AO is therefore, directed to delete the impugned addition. Grounds raised by the assessee are thus, allowed.”

7.3 Therefore, respectfully following the order of the Co-ordinate Bench of the Tribunal for A.Y. 2002-03, on similar facts, and in absence of any contrary material brought on record by the Ld. Sr. DR, we delete the addition of Rs. 1,20,06,010/- for the present assessment year. Ground no. 5 of the appeal is allowed. In view of the ground no. 5 being allowed, the other grounds of appeal become academic and are left open in this case.

8. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 20.04.2026.