The court affirmed the legitimacy of using Section 145(2) of the IT Act to estimate income when account books are found to be incomplete.

G.S.Singhvi, J.

1. In this appeal filed under S. 260A of the IT Act, 1961 (for short, the Act), the assessee has prayed for determination of the following question of law :

"Whether under the facts and circumstances of the case the Honble Tribunal was justified in concurring with the application of the provisions of Section 145(2) of the IT Act and estimating the income at a gross profit at 0.27 per cent of the turnover resulting into the enhancement of the income maintained by the learned CIT(A) at Rs. 1,60,000 by an amount resulting into the total income at Rs. 2,60,000 approximately."

2. The appellant-assessee is carrying on the business of sale and purchase of lottery tickets on commission basis. He did not file return of income for the asst. yrs. 1988-89 to 1994-95 till his premises were searched on 29th Oct., 1993, in terms of Section 132(1) of the Act and notices were issued by the Asstt. CIT, Investigation Circle-I, Patiala (hereinafter described as the AO). In the course of search, cash book, ledger and vouchers were seized from the premises of the appellant. He made a surrender under Section 132(4) of the Act of Rs. 1,00,000 each for the asst. yrs. 1993-94 and 1994-95. Thereafter, he filed return of income for the asst. yrs. 1989-90, 1991-92, 1992-93, 1993-94 and 1994-95. In the return filed on 30th March, 1994, for the asst, yr. 1993-94, the appellant declared an income of Rs. 1,35,000 which included an amount of Rs. 1,00,000 surrendered at the time of search. The AO issued notice to the assessee under Section 143(2) of the Act. He appeared before the AO along with his advocate and submitted reply dt. 9th Nov., 1994 stating therein that the books of account for the relevant period were in the possession of the Department. Thereupon, the AO supplied him photostat copies of the documents. However, no further return was filed by him. Vide letter dt. 12th Oct., 1994, the AO asked the assessee to disclose the basis on which he had estimated his income at Rs. 35,000. He was also asked to furnish the statement indicating the total turnover, gross profit, gross expenses and net profit of the business and indicate the basis on which the said amount was computed. In his reply dt. 9th Nov., 1994, the assessee stated that the income of Rs. 35,000 was given out on estimate basis because the books of account were not available.

3. After considering the replies filed by the assessee, the AO passed assessment order dt. 29th March, 1996. He held that the seized books of account are not correct and complete by observing that the assessee had not indicated cash balance as on 1st April, 1993, even though subsequent entries were recorded, Similarly, closing balance had not been worked out in the cash book. Accordingly, he invoked Section 145(2) of the Act and assessed the income of the assessee on estimate basis at Rs. 10,48,000 after deducting Rs. 5,00,250 as expenses on estimate basis. The AO also added Rs. 1,00,000 surrendered by the assessee on the premises that even though the assessee had claimed that amount to be agricultural income from HUF. The AO also levied interest under Sections 234A and 234B and initiated penalty proceedings under Section 271(1)(c) r/w Section 271A and 271B of the Act. The relevant extract of the order passed by the AO is reproduced below :

"A perusal of the seized documents revealed that the assessee has deliberately kept the account books incomplete as no cash balance as on 1st April, 1993, has been recorded even though the subsequent entries have been made in the cash book. Similarly closing cash balance has not been worked out in the cash book. The seized account books are not correct and complete and as such provisions of Section 145(2) are applicable in this case. The total sales for the year under consideration as per seized document No. 95 (after deduction 2 per cent security) Rs. 28,15,09,225. Since provisions of Section 145(2) are clearly attracted in this case, the assessee was requested