Kempaiah Kemparaju Vs DCIT (ITAT Bangalore)
In a significant ruling, the Bangalore ITAT held that best judgment assessment u/s 144 cannot be based on mere suspicion, arbitrary assumptions or “wild guesswork.” The Tribunal reduced the AO’s estimated profit rate from 15% to 7% in the case of a civil contractor whose receipts were entirely from Government/PWD contracts through banking channels with TDS deductions.
The assessee had not filed returns for AYs 2013-14 and 2017-18 despite contract receipts exceeding ₹17 crore. The AO completed reassessment ex parte u/s 147 r.w.s. 144 and estimated profit at 15% of gross receipts, primarily because books of account and supporting records were not produced.
Before the Tribunal, the assessee explained that he had actually declared net profit of around 6.06% after depreciation and that the effective cash profit margin exceeded 10%-12%. The ITAT observed that the AO had completely misunderstood the assessee’s submissions and mechanically applied a 15% rate without any supporting material or industry basis.
Relying on the Supreme Court ruling in Brij Bhushan Lal Parduman Kumar v. CIT and Karnataka High Court decisions including Jayanthilal R. Tunk and Sri Shankar Khandasari Sugar Mills, the Tribunal reiterated that although some guesswork is inevitable in best judgment assessments, the estimate must have a reasonable nexus to available material and cannot be capricious or vindictive.
The Tribunal particularly noted that the entire receipts were through banking channels from Government departments and even section 44AD recognizes 6% presumptive income for digital receipts. Therefore, flat estimation of 15% was held to be highly excessive and unjustified. The ITAT finally directed the AO to recompute income at 7% of the turnover declared by the assessee.
The Tribunal also condoned a substantial delay of 957 days in filing appeal before CIT(A), accepting the assessee’s explanation regarding family disputes, communication gaps with the relative handling tax matters and the fact that he became aware of proceedings only after bank account attachment. The ITAT emphasized that substantial justice should prevail over technicalities.
Further, the ITAT restored issues relating to Chapter VI-A deductions, TDS credit and self-assessment tax credit back to the AO for verification and proper allowance in accordance with law.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These appeals at the instance of the assessee are directed against the separate orders of the ld. CIT(A)/NFAC both dated 4.12.2025 vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1083325287(1) for the AY 2017-18 and vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1083321492 (1) for the AY 2013-14 passed u/s. 250 of the Income Tax Act, 1961 (in short “the Act”). Since the issue in both these appeals is common in nature, these are clubbed together, heard together and disposed of by this common order for the sake of convenience and brevity.
