1. This is a petition under Articles 226 and 227 of the Constitution.
2. The material facts giving rise to this petition briefly are as follows: The petitioner carries on business as a contractor and is an assessee under the I.T. Act, 1961, hereinafter called 'the Act'. For the assessment year 1974-75, the petitioner filed his return on estimate basis by computing the profit at a flat rate of 10 per cent, on gross receipts, as the petitioner did not maintain any account books. The ITO, however, computed net profit at 15 per cent, on the contract payments received by the petitioner. Being aggrieved by the order passed by the ITO, the petitioner filed a revision petition under Section 263 of the Act to the Commissioner. The learned Commissioner, by his order dated 23rd September, 1977, dismissed the revision petition. Aggrieved by that order, the petitioner has filed this petition.
3. Learned counsel for the petitioner contended that though the ITO had jurisdiction to make a best judgment assessment as no account books were produced by the assessee, the ITO could not act arbitrarily. It was also contended that the learned Commissioner committed an error apparent on the face of the record in upholding the order of the ITO by merely observing that in view of the nature of the business, the estimate of net profit at 15 per cent, appeared reasonable.
4. On behalf of the department, no return was filed. Having heard learned counsel for the parties, we have come to the conclusion that this petition deserves to be allowed. Neither the ITO nor the Commissioner has referred to any material for applying the flat rate of 15 per cent, while estimating net profits. It was now well settled that while making a best judgment assessment, though there must necessarily be guess-work in the matter, it must not be arbitrary. In the instant case, the basis on which the computation is made is not disclosed in the order. Learnedcounsel for the department was unable, to support the impugned order.The assessment order cannot but be held to be arbitrary. The order dated7th August, 1976, passed by the ITO and that dated 23rd September, 1977,passed by the Commissioner, therefore, deserve to be set aside. The ITO,however, shall be at liberty to pass the assessment order afresh inaccordance with law.
5. For all these reasons, this petition is allowed. The order dated 7th August, 1976, passed by the ITO and that dated 23rd September, 1977, passed by the Commissioner are quashed. In the circumstances of the case, parties shall bear their own costs of this petition. The outstanding amount of security deposit shall be refunded to the petitioner.