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Facts
The assessee, an individual engaged in processing raw cotton and trading, filed their ITR for AY 2015-16. The case was selected for Limited Scrutiny, and the AO estimated net profit at 3% of gross receipts, completing the assessment under Section 143(3) with certain additions. The CIT(A) upheld the AO's order, leading the assessee to appeal to the Tribunal.
Held
The Tribunal dismissed the assessee's contention that the AO exceeded the scope of limited scrutiny by examining purchases for sales turnover mismatch. However, it remanded the issue of net profit estimation to the AO, directing recomputation based on either the industry average or the assessee's average net profit rate for the preceding three years, and ordered the exclusion of taxes collected on sales from gross receipts.
Key Issues
1. Whether the AO exceeded the scope of limited scrutiny by examining purchases for sales turnover mismatch. 2. Whether the estimation of net profit at 3% was arbitrary, and if taxes collected on sales should be excluded from gross receipts for such estimation.
Sections Cited
143(2), 142(1), 143(3), 145(3), 144
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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Shri Ravish SoodShri Madhusudan Sawdia
(िनधा�रण वष�/Assessment Year: 2015-16) Ms. Yugendra Puppala Vs. Assistant Commissioner of Warangal Income Tax PAN:ABSPP4161E Circle-1, Warangal (Appellant) (Respondent) िनधा��रती �ारा/Assessee by: Shri G. Srinivasa Rao, CA राज� व �ारा/Revenue by:: Shri Waseem UR Rehman, Sr.DR सुनवाई की तारीख/Date of hearing: 04/12/2025 घोषणा की तारीख/Pronouncement: 10/12/2025 आदेश/ORDER Per Madhusudan Sawdia, A.M.:
This appeal is filed by Ms. Yugendra Puppala (“the assessee”), feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”) dated 18.06.2025 for the A.Y. 2015-16.
The assessee has raised the following grounds of appeal:
1. That on the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals), NFAC has erred in not holding the impugned assessment order passed by the Assessing Officer as bad-in-law as the AO had extended the scope of the limited scrutiny without obtaining the prior written administrative approval of the concerned Pr. CIT in violation of CBDT Instructions.
2. That on the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals), NFAC has erred in sustaining the addition made by the AO by estimating the income from business at 3% of gross receipts after arbitrary rejection of books of account u/s 145(3) of the Act.
3. That on the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals), NFAC has erred in sustaining the addition made by the AO towards the gross interest income earned by the appellant of Rs.29,53,498/- without allowing for any deductions towards the expenses incurred in earning the said income.
4. Without prejudice to Ground No.2 above That the Learned Commissioner of Income Tax (Appeals), NFAC has erred in not quashing the impugned assessment order passed by the Assessing Officer u/s 143(3) of the Act instead of passing the same u/s 144 of the Act.
5. The appellant craves leave to add/alter/modify the grounds of appeal as may be required for proper adjudication of the case.”
3. The brief facts of the case are that the assessee is an individual engaged in the business of processing raw cotton into lint and cotton seed and trading in these products under the name of M/s. Omprakash Cotton Ginning Industries. The assessee filed his return of income for the assessment year 2015– 16 on 07.09.2015, declaring a total income of Rs.25,28,380/-. The Page 2 of 6 case of the assessee was selected for Limited Scrutiny under CASS. Accordingly, notices under section 143(2) and section 142(1) of the Income Tax Act, 1961 (“the Act”) were issued by the Learned Assessing Officer (“Ld. AO”). After considering the submissions of the assessee, the Ld. AO estimated the net profit at 3% of the gross receipts of Rs.30,65,83,695/-, which comes to Rs.91,97,511/-. The Ld. AO also made certain other additions and completed the assessment under section 143(3) of the Act on 27.12.2017, assessing the total income of the assessee at Rs.1,27,37,418/-.
4. Aggrieved with the order of the Ld. AO, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A) upheld the order of the Ld. AO and dismissed the appeal of the assessee.
5. Aggrieved with the order of the Ld. CIT(A), the assessee is in appeal before this Tribunal. At the outset, the Learned Authorized Representative (“Ld. AR”) submitted that the assessee is pressing only two issues out of the various grounds raised in this appeal. The first is a legal issue regarding conversion of Limited Scrutiny into Complete Scrutiny without obtaining approval from the competent authority. The second issue relates to estimation of net profit at 3% on the gross receipts of Rs.30,65,83,695/-.
6. On the legal issue, the Ld. AR submitted that the case of the assessee was selected for Limited Scrutiny for examining (i) sales turnover mismatch, (ii) squared-up loans, (iii) unsecured
Page 3 of 6 loans, (iv) tax credit mismatch and (v) interest income mismatch. It was submitted that as far as sales turnover mismatch is concerned, the Ld. AO was required to restrict his verification only to sales. However, the Ld. AO went beyond the scope of Limited Scrutiny and verified the purchases of the assessee, which is not a parameter prescribed for expansion of Limited Scrutiny. Therefore, the Ld. AR submitted that the action of the Ld. AO in examining purchases without conversion of Limited Scrutiny into Complete Scrutiny is illegal.
As regards the second issue, the Ld. AR submitted that the Ld. AO has not given any working, reasoning, or basis for estimating profit at 3% of gross receipts. The estimation is arbitrary and unsupported by industry data or past history of the assessee. Further, the turnover adopted by the Ld. AO includes taxes collected on sales, which should be excluded for the purpose of profit estimation.
Per contra, the Learned Departmental Representative (“Ld. DR”) relied on the orders of the lower authorities and submitted that one of the Limited Scrutiny parameters was sales turnover mismatch, and in order to verify sales turnover, it is necessary to examine the purchase side also. Therefore, the Ld. AO has not exceeded his jurisdiction.
We have carefully considered the rival submissions and perused the material available on record. With regard to the legal ground, we observe that one of the parameters for Limited
Page 4 of 6 Scrutiny selection was sales turnover mismatch. In our considered opinion, verification of sales turnover mismatch cannot be effectively carried out without examining the corresponding purchases. Therefore, the assessee’s contention that verification of purchases falls outside the scope of Limited Scrutiny on the issue of sales turnover mismatch is not acceptable. Accordingly, the legal ground raised by the assessee is dismissed.
10. Coming to the issue of estimation of net profit at 3%, we note that the Ld. AO has not recorded any factual basis, comparative analysis, industry data, or past profit history to justify adoption of 3% as the net profit rate. An estimation cannot be made on an ad hoc or arbitrary basis. Either the Ld. AO should adopt the industry average or the average net profit rate of the assessee for the past three years as the basis for estimation. Therefore, this issue is remanded to the file of the Ld. AO with a direction to recompute the net profit by adopting either (i) the industry average profit rate, or (ii) the average of the assessee’s net profit rates for the immediately preceding three years. We make it clear that if there is any completed assessment for earlier years, the assessed net profit rate should be adopted. As regards the quantum of gross receipts, the Ld. AO is directed to exclude the amount of taxes collected on sales while computing gross receipts for the purpose of estimating net profit. It is needless to mention that the Ld. AO shall provide proper opportunity of being heard to the assessee before completing the assessment. The assessee is Page 5 of 6 also directed to cooperate in the remand proceedings and not to take any unnecessary adjournment.
In the result, the appeal of the assessee is partly allowed for statistical purposes.