RAJESH DHARMICHAND GADIYA,BENGALURU vs. INCOME TAX OFFICER, WARD 5(2)(1), BENGALURU

In this appeal, the assessee has raised the following grounds: - 1. The learned Commissioner of Income-tax (Appeals), NFAC has erred in partially confirming the assessment order passed u/s 144 r.w.s 144B of the Act. The order passed to the extent of confirming the assessment order is bad in law and such order is liable to be quashed. 2. In any case, the learned CIT(A) has erred in confirming the action of Assessing officer in rejecting the books of accounts of the appellant u/s 145(3) of the Act. The conditions precedent for rejection of books of accounts under section 145(3) having not been complied with, the rejection of books as made is to be disregarded. 3. In any case, the learned CIT(A) has erred in confirming the action of assessing officer in resorting to the provisions of section 144 of the Act despite the appellant having replied to various notices issued during the assessment proceedings. The conditions precedent for passing the order u/s 144 of the Act having not been compiled with makes the order void-ab-initio and is liable to be quashed. 4. The learned CIT(A) has erred in partially confirming the addition made by the Assessing officer on account of gross profit earned to 5 percent of total turnover amounting to Rs. 23,34,502/- as against 8 percent. On proper appreciation of facts and circumstances of the appellant and the nature of business carried on, the gross profit as declared by the appellant being correct is to be accepted as such and the gross profit rate as confirmed by the learned CIT(A) is excessive and the same is to be deleted. 5. The appellant denies the liability to pay interest u/s 234B and 234C of the Act. The interest having been levied erroneously is to be deleted. 3. The solitary grievance of the assessee is against the rejection of his books of account under section 145(3) of the Act and estimation of gross profit of 5% of the total turnover as against 2.50% declared in the return of income.

The brief facts of the case are that the assessee is an individual engaged in the business of distributing and trading pharmaceutical products through his proprietary concern, Mayur Pharma Distributors. For the year under consideration, the assessee filed his return of income on 31.12.2022, declaring a total income of Rs. 11,28,910/-. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee has disclosed gross profit of Rs. 23,26,167/-, i.e.

The Assessing Officer (“AO”), vide order dated 18.03.2024 passed under section 144 r.w.s. 144B of the Act, held that the assessee has not provided complete documents such as bills/vouchers, details of purchasers and sellers, evidence of deduction under Chapter VI - A of the Act for verification. The AO further noted that the total credits available in the current account of the assessee's proprietary concern maintained with the State Bank of India is Rs. 3,64,95,276/- as against Rs. 9,16,45,975/- claimed by the assessee. Thus, the AO held that the assessee has effected sales of Rs. 5,66,19,198/- [(9,16,45,975 – 3,65,94,276) + 15,67,499] in cash from non-banking channels. Further, the AO noticed that the opening and closing balances of the said bank account are Rs. 5,19,328/- and Rs. 5,80,094/-, respectively, which further established that the debit and credit amounts of the said account are almost equal, indicating that the assessee booked bogus purchases to suppress profit. Accordingly, the AO held that the threshold limit of Rs. 10 crore for tax audit as per section 44AB for a person carrying on business in case when cash receipt and payment made during the year do not exceed 5% of the total receipt of payment, as the case may be, is not applicable in the assessee’s case since the assessee has incurred less than 95% of the business transaction through banking channel resulting into more than 5% cash transaction from non-banking channels. Accordingly, the AO held that the tax audit was applicable to the assessee as per the provisions of section 44AB of the Act. Since the assessee had violated the mandatory condition of not having the Tax Audit Report as per section 44AB of the Act and was found to have booked bogus purchases, the AO held that the correctness of the books of accounts of the assessee is in doubt under section 145(3) of the Act. Consequently, the AO rejected the books of accounts of the assessee and estimated the gross profit of the assessee at 8% on the disclosed turnover of Rs. 9,32,13,474/-, thereby making an addition of Rs. 70,15,809/-, after giving benefit of disclosed gross profit.

The learned CIT(A), vide impugned order, after taking into consideration the reconciliation submitted by the assessee supported by Form GSTR – 3B returns, bank statements, trading account, noticed that several items such as GST collections, recovery from debtors, capital introduced and other non-trading credits were erroneously considered as turnover by the AO. After removing these non-business components, the learned CIT(A) found that the assessee's actual turnover for the year under consideration is Rs. 9,32,13,374/-, which tallies with the figures disclosed in the return of income and GST filings. The learned CIT(A) held that the reconciliation furnished by the assessee appears consistent, and no contrary evidence is on record. The learned CIT(A) further noted that the assessee’s business activity relates to distribution of pharmaceutical products, wherein profit margins are inherently low and accordingly held that the possibility of earning high margins of 8% of total turnover, as computed by the AO, is unrealistic and inconsistent with industry standards. On the basis that the assessee did not produce complete bills/vouchers and other primary evidence in support of the trading results, the learned CIT(A) considered it fair and reasonable to estimate the gross profit of the assessee at 5% of the total turnover, resulting in estimated profit of Rs. 46,60,669/-. Thus, after giving credit for the declared profit of Rs. 23,26,167/-, the learned CIT(A) directed the AO to make an addition of Rs. 23,34,502/-. Being aggrieved, the assessee is in appeal before us.

During the hearing, the learned Authorised Representative (“learned AR”) submitted that before the learned CIT(A), the assessee filed additional evidence and furnished purchase bills, bank statements, Form GSTR – 3B and sale bills. In support of this contention, the learned AR placed on record the acknowledgement of documents filed before the learned CIT(A) during the appellate proceedings. Further, the learned AR placed on record the year-wise details of turnover, profit and profit ratio. Accordingly, the learned AR submitted that the gross profit @2.50% declared by the assessee during the year under consideration is in line with the profit earned in preceding and subsequent years.

On the other hand, the learned Departmental Representative vehemently relied upon the orders passed by the Revenue Authorities.

We have considered the submissions of both sides and perused the material available on record. In the present case, it is undisputed that for the year under consideration, the assessee, being engaged in the business of distribution and trading of pharmaceutical products, filed his return of income and declared a gross profit of 2.5% on a total turnover of Rs. 9,32,13,475/-. Since, for the year under consideration, the assessee did not furnish the Tax Audit Report as per section 44AB of the Act, the AO rejected the books of accounts of the assessee on the basis that the banking transactions are less than 95% of the business transactions. Further, the AO also held that the assessee has booked bogus purchases to suppress the profit. Accordingly, the AO rejected the books of account of the assessee under section 145(3) of the Act and computed the gross profit of the assessee at 8% of the total turnover. In the further appeal, the learned CIT(A), after taking into consideration documents filed by the assessee along with the detailed reconciliation, accepted the contention of the assessee that the actual turnover for the year under consideration is Rs. 9,32,13,374/-, which tallies with the figures disclosed in the return of income and GST filings. The learned CIT(A) further noted that in the line of trade in which the assessee is involved, the possibility of earning a high margin like 8% of total turnover is unrealistic and inconsistent with industry standards. On the basis that the assessee did not furnish complete bills, vouchers and other primary evidence in support of the declared trading results, the learned CIT(A) rejected the gross profit rate of 2.5% on total turnover declared by the assessee and instead estimated the gross profit at 5% of the total turnover. During the hearing, the learned AR submitted that all the details were furnished by the assessee before the learned CIT(A) by way of an application for seeking admission of additional evidence and, in this regard, placed on record a copy of the acknowledgement of documents filed before the learned CIT(A). Further, the learned AR placed on record the following year-wise details of turnover, profit and profit ratio: -

Thus, the learned AR submitted that the gross profit ratio of 2.50% declared under the year under consideration is consistent with the gross profit ratio declared in other years.

From the perusal of the record, it is evident that the learned CIT(A) accepted the turnover declared by the assessee and the Revenue has not challenged the findings of the learned CIT(A). It is further evident from the record 6 that for the year under consideration, the assessee did not get his books of account audited as per section 44AB since more than 95% of business transactions were done through banking channels and the turnover was less than Rs. 10 crore. We find that the learned CIT(A) did not raise any dispute and accepted the contentions of the assessee on these aspects. However, the learned CIT(A) proceeded to estimate the gross profit of the assessee at 5% of the total turnover as against the gross profit rate of 2.5% declared by the assessee. From the year-wise profit ratio details for the assessment years 2018-19 to 2025-26, as submitted by the learned AR, we find that the assessee earned gross profit in the range of 1.50% to 2.96%. We also find that the AO recorded that, in the immediately preceding assessment year, the assessee declared a gross profit ratio of 2.31%. Thus, it is evident from the record that the Revenue Authorities did not estimate the gross profit ratio of the assessee in a scientific manner and ignored the profit declared and accepted by the Revenue in the assessee’s own case in earlier and subsequent years. In our considered view, the average profit declared by the assessee in the earlier and subsequent years provides a guiding parameter for determining the income of the assessee in the absence of audited books of accounts. In this regard, gainful reference can be made to the decision of Hon’ble Supreme Court in Brijbhusan Lal Praduman Kumar vs. CIT, reported in (1978) 115 ITR 524 (SC), wherein the Hon’ble Supreme Court held that the authority making a best judgment assessment must make an honest and fair assessment of the income of the assessee, and though arbitrariness cannot be avoided in such estimate, the same must not be capricious but should have a reasonable nexus to the available material and the circumstances of the case.

Thus, considering the rate of profit declared by the assessee in the earlier and subsequent years, we are of the considered view that the gross profit rate of 2.50% on total turnover as declared by the assessee is reasonable and sufficient, taking into account the line of business of the assessee in which the profit margins are inherently low, which aspect is also not disputed by the learned CIT(A). Since there is no document showing any change in the business activity of the assessee in the earlier and subsequent years, the gross profit ratio of 2.50% of total turnover as declared by the assessee is accepted, and the findings of the learned CIT(A) in estimating the gross profit ratio of the assessee without considering the profits declared in earlier and subsequent years are set aside. Accordingly, the impugned addition is deleted, and the grounds raised by the assessee are allowed.

In the result, the appeal by the assessee is allowed. Order pronounced in the open court on 21-Oct-2026.