ANUGRAHA,BANGALORE vs. ITO, WARD 6(3)(2), BANGALORE

PER SHRI WASEEM AHMED, ACCOUNTANT MEMBER: The present appeal filed by the assessee is directed against the order under section 250 of the Income Tax Act, 1961 (hereafter the Act) passed by the learned Commissioner of Income Tax (Appeals) under the National Faceless Appeal Centre-Delhi (hereafter the Ld. CIT(A)) for A.Y. 2017-18 bearing DIN & Order No: ITBA/NFAC/S/250/2025-26/1085615510(1).

3.1 The AO observed that the tax auditor, in column 13(e) of Form No. 3CD, reported a reduction in profit of Rs. 13,95,979/- due to the application of ICDS. The AO further observed that the tax auditor in Form 3CD has reported that “the assessee has not maintained details of stock due to the nature of business and trading of numerous varieties of items and in absence of detail it is not possible to verify & furnish quantitative detail of closing stock”. The AO noted that the assessee specifically asked to explain/comment about the remarks of the tax auditor and furnish the details of opening stock as well as closing stock along with purchases made. The assessee was also asked to furnish the details of current liabilities and details of expenses such as advertisement, business promotion, conveyance/traveling expenses along with supporting bills. But the assessee did not respond to the queries raised and failed to furnish the required details.

3.2 The AO held that a prudent assessee has to maintain its books of account as per the law irrespective of the nature of business and the volume of items traded. Therefore, it cannot be accepted that the value of closing stock would not be arrived at due to the volume of items traded. The AO was of the view that since the assessee has not provided the necessary details, the books of account maintained by the assessee are not accurate and reliable. Hence, the AO proceeded to estimate the income. The AO, after referring to the provisions of section 44AD of the Act, estimated the profit @ 8% of total turnover and accordingly made an addition of Rs. 28,11,910/- to the total income as income underreported.

4.1 It was further submitted that the main objection of the AO was regarding non-furnishing of quantitative details of opening and closing stock and certain supporting details of expenses.

According to the assessee, the AO had not brought any adverse material on record to disprove the value of closing stock shown in the books. The assessee contended that mere non- maintenance of quantitative stock details could not, by itself, justify rejection of the entire books of account, particularly when the accounts were audited and no specific defect in the books had been pointed out.

4.2 The assessee also contended that the AO had not specifically rejected the books of account in the assessment order, but had merely disagreed with certain aspects of the accounts. It was argued that estimation of profit could be made only after proper rejection of the books of accounts. Rejection of certain selected aspects, such as quantitative stock details or supporting vouchers, could not justify estimation of the entire business income.

4.3 As regards estimation of profit at 8%, the assessee submitted that the AO had wrongly invoked section 44AD of the Act. The turnover of the assessee was Rs. 3,51,48,917, which was above the prescribed limit for applicability of section 44AD of the Act. Therefore, estimation of income at 8% by applying section 44AD of the Act was stated to be legally unsustainable and arbitrary.

4.4 The assessee further explained that it was a new firm and, in order to establish goodwill, reputation and increase turnover, the textile goods were sold at highly competitive rates. This was stated to be the reason for earning a lower profit during the year. Accordingly, the assessee prayed that the estimation of income at Rs. 28,11,910, being 8% of the turnover, be deleted and the income disclosed as per the audited books of account be accepted.

5 The learned CIT(A) considered the assessee's submission. However, the ld. CIT-A did not find it convincing and confirmed the AO’s finding. The relevant observation and finding of the learned CIT(A) are extracted as under:

5.3 I have considered the assessment order and submissions of the appellant. It is observed that the appellant admittedly did not maintain quantitative details of opening and closing stock, a fact which is expressly recorded in the tax audit report. Maintenance of stock records is a fundamental requirement for determination of correct business profits, particularly in a trading concern. In the absence of such records, the correctness and completeness of the trading results cannot be verified. Further, the appellant also failed to produce supporting bills and vouchers in respect of certain expenses during the assessment proceedings. The contention that audited accounts by themselves are sufficient cannot be accepted, as audit does not substitute proper maintenance of primary records. In these circumstances, I find that the Assessing Officer was justified in rejecting the books of account. Once the books are rejected, estimation of income becomes inevitable. The rate applied by the Assessing Officer is found to be reasonable having regard to the nature of business and surrounding facts. Accordingly, the action of the Assessing Officer in estimating income is upheld.

6.1 The learned AR before us submitted that the AO was not justified in estimating the profit at 8% of the turnover merely by referring to section 44AD of the Act, which was not applicable to the assessee since its turnover exceeded the prescribed limit. The Ld. AR further submitted that even after rejection of the books of account, the profit has to be estimated on a reasonable basis. The assessee's own past results provide the best guide for such estimation. It was pointed out that the assessee had declared net profit of 2.78% and 2.94% in the two preceding years and 2.94%, 2.06% and 1.76% in the three subsequent years. As against the same, the assessee had declared net profit of 3.76% during the year under consideration. Therefore, the rate declared during the year was higher than the surrounding years and no further addition on estimation basis was called for.

8.1 Without prejudice to the correctness and veracity of the rejection of books of account by the AO under the provisions of section 145(3) of the Act, we are of the considered view that even after rejection of the books of account u/s 145(3) of the Act, the AO cannot estimate the income at any arbitrary rate. The assessment thereafter is required to be made on a fair and reasonable basis. The estimate must have some nexus with the material available on record. Rejection of the books of account does not automatically justify enhancement of the profit by adopting a certain percentage of the turnover in an arbitrary manner.

8.2 We find that the AO in the present case has adopted the rate of 8% mainly by referring to the provisions of section 44AD of the Act. On the contrary, the turnover of the assessee during the year was Rs. 3,51,48,91/-, which was admittedly beyond the prescribed monetary limit for applicability of section 44AD of the Act for the relevant year. Therefore, the 8% rate provided under section 44AD of the Act could not be mechanically adopted as a benchmark for estimating the assessee's income. In our considered view, this approach is not justified.

8.3 It is settled that where the books of account are rejected, the estimate of profit should be based upon some reasonable and scientific basis. The assessee's own past history is ordinarily one of the most reliable guides for this purpose. If reliable comparable cases are available, the same may also be considered. However, where no comparable case or other cogent material has been brought on record by the AO, the past and subsequent results of the assessee provide a more reasonable basis for arriving at a fair estimate. In holding so, we draw support and guidance from the judgment of the Hon’ble Rajasthan High Court in the case of CIT vs Inani Marbles (P.) Ltd. reported in [2009] 316 ITR 125 (Rajasthan) wherein it was held as under:

2001-02 3.50

2002-03 5.15

2003-04 4.90

I. New Plaza Restaurant v. ITO [2009] 309 ITR 259/183 Taxman 33 (H.P);

II. Sajay Oil Cake v. CIT [2009] 316 ITR 274 (Guj.);

III. Vijay K. Talwar v. CIT [2011] 1SCC 673 ; and

IV. Commissioner, Custom v. Stoneman Marbels [2011] 2 SCC 758.

8.6 On the other hand, the assessee's own results provide a much better guide. In the two immediately preceding years, the assessee had declared net profit rates of 2.78% and 2.94%. In the three subsequent years, the assessee declared net profit rates of 2.94%, 2.06% and 1.76%. As against the same, in the year under consideration, the assessee has declared a net profit rate of 3.76%.

8.7 Thus, the net profit rate declared by the assessee during the year under consideration is not only consistent with its own past and subsequent results, but is in fact higher than the net profit rate declared in each of the five surrounding assessment years. This is an important fact which cannot be ignored while making a fair estimate of income. When the assessee's own trading results over a period of several years are available, there is no justification for discarding the same and applying a flat rate of 8% merely by taking guidance from section 44AD of the Act.

8.8 Considering the facts in totality, we are unable to sustain the estimation of profit at 8% of the turnover. In our view, the assessee's own accepted performance in the preceding and subsequent years provides the most appropriate basis for judging the reasonableness of the profit declared during the year. Since the assessee has declared net profit at 3.76% during the year under consideration, which is higher than the net profit rate declared in all the two preceding years as well as the three subsequent years, we find no justification for making any further enhancement of the business profit.

8.9 Accordingly, while we do not consider it necessary to interfere with the rejection of the books of account u/s 145(3) of the Act in the peculiar facts of the case, the estimation of profit at 8% of the turnover is set aside. The net profit declared by the assessee at 3.76% is directed to be accepted. Consequently, the addition made on account of estimation of business profit is deleted. The ground raised by the assessee is allowed.

11.1 The assessee further submitted that the AO had not brought any material on record to show that the cash deposited represented unexplained Specified Bank Notes. It was also argued that merely because the bank statement was not furnished during the assessment proceedings, the AO could not straightaway treat the deposit as unexplained. The AO could have obtained the bank statement directly from the bank by exercising powers u/s 133(6) of the Act and made proper enquiry.

11.2 It was further submitted that the total turnover of the assessee was Rs. 3,51,48,917/-, which worked out to an average monthly turnover of about Rs. 29.29 lakh. The assessee stated that its sales were mainly in cash. As per the cash book produced before the Ld. CIT(A), the cash balance as on 08.11.2016 was Rs. 22,34,688. Out of the said available cash balance, the amount was deposited into the bank. The assessee also stated that cash sales continued during November and the cash realised from such sales was also deposited into the bank. Accordingly, the assessee submitted that the addition of Rs. 17,50,000/- u/s 69A of the Act was based only on suspicion and surmises and was liable to be deleted.

6.3 I have examined the issue carefully. It is noted that the appellant did not produce the cash book during the course of assessment proceedings and no satisfactory explanation has been furnished as to why the same could not be produced before the Assessing Officer. The cash book filed is not supported by contemporaneous evidence such as stock records, expense vouchers or day-to-day verifiable documents. In the absence of reliable supporting evidence, the cash book cannot be accepted as a conclusive proof of source of cash deposits. Further, the rejection of books of account renders the cash book unreliable. The appellant has failed to establish a direct nexus between the cash deposits and disclosed business receipts. Therefore, the explanation offered by the appellant is not satisfactory. In these circumstances, the Assessing Officer was justified in treating the cash deposits of Rs.17,50,000/- as unexplained money u/s 69A of the Act. The contention that no separate addition can be made once income is estimated is not acceptable in the facts of the case, as the source of cash deposits has not been proved to be part of the estimated income. 13. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

13.1 The Ld. AR before us submitted that the cash deposit of Rs. 17,50,000/- was out of the regular business receipts of the assessee which was mainly making cash sales and the cash so realised was periodically deposited into the bank account. The Ld. AR further reiterated that, as per the cash book, the assessee had cash in hand of Rs. 22,34,688/- as on 08.11.2016, which was more than the amount deposited. Therefore, the source of the cash deposit stood explained. It was also argued that the Revenue had not brought any material on record to show that the deposit represented any unexplained money from a source outside the business. Accordingly, the Ld. AR prayed that the addition made u/s 69A of the Act be deleted.

15.1 On perusal of the materials placed before us, we find that the assessee is engaged in business where sales were mainly made in cash. The total turnover of the assessee during the year was Rs. 3,51,48,917/-, which works out to an average monthly turnover of about Rs. 29.29 lakh. The assessee consistently explained that the cash deposited in the bank was generated from its regular business sales and that it was deposited periodically into the bank account.

15.2 More importantly, the assessee produced the cash book before the Ld. CIT(A). As per the said cash book, the assessee had cash in hand of Rs. 22,34,688/- as on 08.11.2016. The cash deposit in dispute is only Rs. 17,50,000/-. Thus, the cash available with the assessee as per the cash book was more than the amount deposited in the bank. The assessee had also stated that cash sales continued during the month of November and such cash receipts were also deposited into the bank.

15.3 The Ld. CIT(A) rejected the explanation mainly because the cash book was not produced before the AO and the books of account were rejected. In our considered view, these reasons, by themselves, are not sufficient to treat the entire cash deposit as unexplained money. Rejection of books of account for the purpose of estimating business profit does not automatically lead to a conclusion that the cash generated from the recorded business sales is unexplained. The source of the cash deposit has to be examined independently on the basis of the surrounding facts and material available on record.

15.4 We also notice that neither the AO nor the Ld. CIT(A) has brought any material on record to show that the cash deposited in the bank came from any source outside the business of the assessee. There is also no finding that the turnover declared by the assessee was bogus or that the cash balance of Rs. 22,34,688/- appearing as on 08.11.2016 was generated by introducing any unexplained money. The explanation of the assessee has been rejected mainly because supporting records were considered insufficient. In our view, mere rejection of the explanation, without bringing any contrary material on record, cannot justify an addition u/s 69A of the Act.

15.5 It is also relevant that the cash deposit of Rs. 17,50,000/- is reasonable when compared with the scale of the assessee's business. The assessee had a turnover exceeding Rs. 3.51 crore and average monthly sales of about Rs. 29.29 lakh. Therefore, the deposit of Rs. 17,50,000/- cannot be viewed in isolation merely because it was made during the demonetisation period. The availability of cash as per the cash book and the volume of cash sales provide a reasonable explanation for the source of the deposit.

15.6 Further, the AO had the power to make necessary enquiries from the bank u/s 133(6) of the Act if he had any doubt regarding the nature or source of the deposits. However, no material has been brought on record after carrying out such enquiry to contradict the explanation offered by the assessee. The assessee had specifically raised this contention before the Ld. CIT(A).

15.7 Considering the totality of the facts, we are of the view that the assessee has reasonably explained the source of cash deposit of Rs. 17,50,000/- as arising from its regular business receipts and available cash balance. The Revenue has not brought any positive material on record to establish that the said amount represented unexplained money of the assessee. Therefore, the addition cannot be sustained merely on suspicion or on the ground that the deposit was made during the demonetisation period. Accordingly, we set aside the finding of the Ld. CIT(A) on this issue and direct the AO to delete the addition of Rs. 17,50,000 made u/s 69A of the Act. The ground raised by the assessee is allowed.

Order pronounced in the open court on 5th October, 2026

Sd/- Sd/- SANDEEP SINGH KARHAIL WASEEM AHMED JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore Dated: 5th October, 2026 Vms

Copy to:

ANUGRAHA, 116, AGS LAYOUT, NEW BEL ROAD,, 1 BENGALURU-560094, KARNATAKA

ITO, WARD 6(3)(2), BMTC BUILDOING, KORAMANGALA, 2 BANGALORE, BENGALURU-560095, KARNATAKA

3 THE PCIT / CIT, 4 THE D.R., ITAT, BANGALORE BENCH 5 GUARD FILE

By Order ASSISTANT REGISTRAR / I.T.A.T., BANGALORE

Digitally signed P G by P G RAJANI Date: RAJANI 2026.10.22 15:24:07 +05'30'