It has been held by the Allahabad High Court in the case of Commissioner of Income Tax – II vs. Har Dayal Singh, Kanpur, 2015 (3) TMI 97, that the income assessed by the Assessing officer can be less than the income filed in the return.
Hon’ble J. Tarun Agarwala and Hon’ble J. Dr. Satish Chandra, held that the estimation of income by the department is purely a question of fact and that of the department is based only on guess work and any addition on estimate basis is not sustainable.
It was observed by the High Court that the Assessing Officer estimated the total income at Rs. 10, 12,289/-. During the relevant assessment year, the assessee stated gross profit at the rate of 0.5% on the total turnover. It was also evident from the records that in the previous years, the Department had accepted the turn over at the rate of 0.6%. But it was also observed that during the relevant assessment year, the amount of turnover was higher, as such, the High Court was of the opinion that the Tribunal rightly observed that the gross profit shown by the assessee at the rate of 0.5% was justifiable.
The High Court admitted that the appeal involved the substantial question of law that whether total income can be reduced below the Total income declared in the return of income filed by the assessee.
The appeal was decided in favour of the assessee.
Provisions of law dealing with the issue:
Section 143 of the Income Tax Act, 1961 was substituted by the Direct Tax Laws (Amendment) Act, 1987. According to the provisions of section 143(3) of the Act, the Assessing Officer after examining the matter was required to assess of total income or loss of the assessee by virtue of a written order and determine the sum payable by the assessee or refundable to him based on such assessment.
However, after amendment on and from 1.4.1989, as per the provisions of section 143 (3) of the Act, the Assessing Officer after hearing of the issue was required to assess the total income or loss of the assessee by an order in writing and determine the sum payable by the assessee based on such assessment.
The term “or refundable to the assessee” which was present in the old sub-section (3) is absent in the new sub-section. Moreover, the Central Board of Direct Taxes explained the amendments through the Circular No. 549 dated 31.10.1989.
Thereafter under the new section 143 of the Act, the provisions of sub-section (2) and (3) have also been reconstructed and are totally different from the earlier provisions.
A notice under sub-section (2) only in cases picked up for scrutiny is now issued to ensure that the assessee has not understated his income or has not stated excessive loss or has not evaded the tax while furnishing his return of income.
Under the new provisions in an assessment order as per section 143(3) of the Act in a scrutiny case, neither the income can be assessed at a lower amount than that in the returned income, nor can loss be assessed at an amount higher than the returned loss.
A refund cannot also be given except which was due on the basis of the returned income and could have been allowed as per section 143(1) (a) (ii).
In an assessment completed under the new section 143(3), neither the returned income can be assessed at a figure lower that stated in the return, nor can further refund be granted at a lower figure.
In view of the above, the department till date had been reluctant to assess total income at a figure lower than the returned income.