Assessment completed by AO relying on estimations cannot be remanded back by CIT to reverify some aspects of estimation relied on

Brief of the case:

• The ITAT Hyderabad in the case of Sri Surakshitha Homes vs. ITO held that where the AO has assessed income on estimation basis then CIT cannot order to revise the assessment by picking and choosing some aspects of estimation to be re-verified.
• Therefore, the assessment cannot be remanded back to AO to afresh examination of some aspects of estimation made by AO.

Facts of the case:

• The assessee is a partnership firm engaged in the business of real estate. It purchases lands and after developing the same into residential and commercial plots, sells such plot.
• A survey under section 133A was carried out at the business premises of the assessee on 04.09.2008.the assessee firm filed its return of income for the year under consideration declaring total income of Rs.1,06,95,780.
• During the course of scrutiny assessment AO utilized the material impounded during the course of survey.AO observed that sale consideration of Sai Royal Residency project for the year under consideration was shown by the assessee at Rs.12.88 crores whereas the same as per the relevant impounded documents was found to be Rs.15.33 crores.

• AO adopted said amount of Rs.15.33 crores as sale consideration and deducted the purchase cost of land of Rs.10.03 crores, the balance amount of Rs.5.30 crores was taken by the A.O. as representing the gross profit of the assessee from the project of Sai Royal Residency.
• AO also observed that as per the working of partners accounts given in the relevant impounded material identified, the profit of Sai Royal Residency project for the year under consideration was shown at Rs.3,98,88,000. Accordingly, the AO adopted the same as the net profit of the project.
• The assessee finally accepted the assessment made by AO . Later on the case was revisited by CIT u/s 263 wherein he pointed out four errors in the order of the A.O. which were duly communicated by him to the assessee in the notice issued under section 263.
• CIT pointed out that AO failed to take into consideration the value of un-sold plots as well as to make disallowance under section 40A(3) and also allowed deduction on account of land development expenditure without verifying any documentary evidence.
• Therefore, CIT remanded back the case to AO to consider these issues afresh.

 Contention of the Assessee:

• It was submitted that the income of the assessee from Sai Royal Residency project was finally estimated by the A.O. on the basis of documents impounded during the course of survey. The assessment was purely made on estimation basis as a result of which the CIT not justified in finding fault in estimation process to bring a part of incomes and testing certain expenditures on the actual basis.

• It was also contended that the provisions of section 40A(3) were also not applicable in the case of estimation of income. Further , even otherwise the relevant payments in cash having been made by the assessee under exceptional circumstances for which no disallowance u/s sec 40A(3) as per Rule 6DD.

Contention of the Revenue:

• The learned counsel for the revenue contended that if the Ld. CIT, on examination of the records of the assessment proceedings, is of the opinion that the order passed by the AO is erroneous causing prejudice to the interests of the Revenue, he can exercise his powers under section 263 to set aside such order.

• He contended that in the present case , the AO made assessment by making incorrect assumptions. An incorrect assumption of facts and incorrect application of law would satisfy the requirement of order being erroneous.

• CIT ,therefore, was fully justified in setting aside the said order by exercising the powers conferred upon him under section 263.

Held by ITAT Hyderabad:

• ITAT observed that the profit of the assessee from Sai Royal Residency project was not determined by the A.O. on the basis of books of account or any other working, but the same was estimated by adopting the figure of profit as given in the working of partners accounts in the impounded material as found during the course of survey.
• The profit appearing in the working of partners accounts was a net profit for as available for distribution which must have been arrived at after taking into consideration all the relevant facts and figures including the value of un-sold plots. Further, there is nothing available on record to show that the estimation of income of the assessee from Sai Royal Residency project as finally done by the AO was without taking into consideration the value of the unsold plots.
• Regarding the error pointed out by CIT that land development expenditure was allowed without checking the compliance of Sec 40A(3) , tribunal relied on the decision of the Hon’ble Allahabad High Court in the case of CIT vs. Banwari Lal Banshidhar wherein the court held that when the income of the assessee was computed on estimate basis, there was no need to look into the provisions of section 40A(3) read with Rule 6DD. It is because when estimations are made, it is not possible to say that specific items of expenditure in cash have gone into computation of those estimations so that such items can be disallowed under section 40A(3).
• In result the appeal of revenue was dismissed on the above two grounds.