INCOMETAX OFFICER, WARD-9(1), HYDERABAD vs. SHARAF RAJU, HYDERABAD

Succinctly stated, the assessee, who is a commission agent in the business of trading in fruits under the name and style of M/s. Manjunath Fruit Company, had filed his return of income for A.Y. ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad 2017-18 on 05.08.2017, declaring an income of Rs. 8,16,710/-. Subsequently, the case of the assessee was selected for “Limited scrutiny” under CASS for verifying large cash deposits made in his bank account during the year. Notice under Section 143(2) of the Act, dated 13.08.2018, was issued to the assessee.

During the course of assessment proceedings, the A.O., observed that the assessee had, during the subject year, made cash deposits of Rs. 6,27,90,765/- in his bank account. The notices issued under Section 142(1) of the Act, wherein the assessee was called upon to put forth an explanation regarding the source of the cash deposits made in his bank accounts, remained uncompiled. Accordingly, the A.O., vide his “Show- Cause Notice” (“SCN”) dated 25.10.2019, called upon the assessee to explain the source of the cash deposits in his bank account, and was informed that in the absence of any explanation the assessment will be framed to the best of the judgment under Section 144 of the Act. However, the assessee even failed to respond to the aforesaid notice. ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad

Thereafter, the A.O., on a perusal of the record, observed that the assessee had in his return of income disclosed a commission income of Rs. 21,77,644/- and bank interest of Rs. 5,664/-. The A.O. observed that the assessee had disclosed a “net profit” of Rs. 7,85,015/- after claiming deduction of expenditure of Rs. 13,98,293/-. Further, the A.O. observed that there were total credits of Rs. 7,82,40,794/- in the bank accounts of the assessee, as under:

The A.O., based on the aforesaid facts, observed that there were cash credits of Rs. 6,27,90,765/- made in the bank accounts ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad of the assessee during the subject year, which thereafter were utilized for making payments through cheque transfers/RTGS transfers to the aforementioned parties. The A.O. was of the view that though the source of the cash deposits and the purpose of the payments made from the said bank accounts were not known, but the same appeared to be the transactions relating to the business activity of the assessee. Accordingly, the A.O., observing that the assessee was in the business of trading in fruits, thus, estimated the net profit/income of the assessee by treating the entire deposits made in his bank accounts as the gross receipts of his business of trading of fruits.

The A.O. observed that the “Profit and Loss account” filed by the assessee along with his return of income for the subject year revealed that he had disclosed a “net profit” of Rs. 7,85,015/- on the total declared receipts of Rs. 21,83,308/-, i.e. profit @ 36% of the total gross receipts. The A.O., observing that the assessee had failed to come forth with any explanation regarding the credits (including cash deposits) made in his bank accounts, determined his income by adopting the net profit @ 36% on the total credits of Rs. 7,82,40,794/- (supra) and estimated his net profit/income at ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad Rs. 2,81,66,687/-. Accordingly, the A.O. vide his order under Section 144 of the Act dated 27.12.2019 determined the income of the assessee at Rs. 2,81,72,349/-.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) called for a “remand report” from the A.O., which reads as under:

Thereafter, the CIT(A) provided a copy of the “remand report” to the assessee for his rejoinder. The assessee objected to the adoption of his profit margin @ 36% of his total gross receipts on the ground that the same was both exorbitant and illegal. Rather, it was the claim of the assessee that he was a commission agent in the fruit trading business, a fact that could be safely gathered ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad from the receipts issued by the Agricultural Market Committee, Gaddi Annaram, Hyderabad, for the period 01.04.2016 to 31.03.2016. The assessee submitted that an analysis of his bank accounts revealed beyond doubt that the deposits made were immediately transferred to third parties. It was, thus, the claim of the assessee that he was a commission agent and not a wholesaler or retailer in the fruit trading business.

The CIT(A) found favor with the contention advanced by the assessee that the A.O. had most arbitrarily and without any basis determined his commission income exorbitantly @ 36% of his gross receipts. The CIT(A) observed that the assessee had, in his financial statements for the subject year, disclosed his commission income at Rs. 21,77,644/- on the total credits of Rs. 7,82,40,794/- that worked out at approximately 3%. The CIT(A), held a firm conviction that it was incomprehensible that the assessee, who was a commission agent in the fruit trading business, would have earned 36% of his gross receipts. However, the CIT(A) estimated the commission income that the assessee would have earned @ 10% of his gross receipts i.e., at Rs. 7,82,40,794/-, and thus, scaled down the addition made by the ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad A.O. to Rs. 78,24,079/-. For the sake of clarity, the observations of the CIT(A) are culled out as under:

Both the assessee and the Revenue, being aggrieved with the order of the CIT(A), have carried the matter in appeal before us.

Shri R. Mohan Kumar, Advocate, learned Authorized Representative (for short “Ld. AR”) for the assessee, at the threshold of hearing of the appeal, submitted that the present appeal involves a delay of 101 days. Elaborating on the reasons leading to the delay, the Ld. AR submitted that the same had crept in for the reason that the assessee, who is 81 years old, a ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad septuagenarian, had, in a bona fide manner, acted upon the advice of his earlier counsel, and on an appeal filed by the Revenue, had filed a “Cross Objection”. The Ld. A.R. submitted that the assessee had, thereafter, on being advised by his present counsel, filed the present appeal against the order passed by the CIT(A), wherein the latter had estimated his income @ 10% of the gross receipts, i.e., still on the higher side.

Per contra, Shri Gurpreet Singh, the learned Senior Departmental Representative (for short “Ld. DR”) did not object to the seeking of the condonation of the delay in filing of the present appeal by the assessee.

We have given thoughtful consideration and are of the considered view that the delay in filing the present appeal had crept in because of bona fide reasons. We say so, for the reason that the fact that the assessee had filed the cross-objection well within the stipulated time period supports our aforesaid conviction. As the delay involved in filing the present appeal had occasioned for bona fide reasons, therefore, we are of the considered view that the same deserves to be condoned. Our ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad aforesaid view is further fortified by the recent decision of the Hon’ble Supreme Court in the case of Vidya Shankar Jaiswal vs. The Income Tax Officer, Ward-2, Ambikapur in Special Leave Petition (Civil) Nos. 26310-26311/2024, dated 31st January, 2025, wherein it was observed that a justice-oriented and liberal approach should be adopted while considering an application seeking condonation of delay. We thus, in terms of our aforesaid observations, condone the delay involved in the filing of the present appeal.

Apropos the merits of the case, we find that the controversy lies in a narrow compass, i.e., quantification of the estimated profit/income of the assessee from his business as that of a commission agent in the trading of fruits.

We may herein observe that it is an admitted fact that the assessee is a commission agent in the trading of fruits. As observed hereinabove, the assessee had for the subject year disclosed a gross commission income of Rs. 21,77,644/-, against which he had disclosed his net income/profit at Rs. 7,85,015/-. Ostensibly, the A.O. lost sight of the material fact that the ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad assessee is a commission agent in the trading of fruits, and had misdirected himself by observing that the “net profit” of Rs. 7,85,015/- disclosed by the assessee on his total/gross commission receipts of Rs. 21,83,308/-, revealed earning of profit @36% of his gross receipts of the trading business. Thereafter, the A.O. treating the total credits of Rs. 7,82,40,794/-, as the gross receipts of the assessee’s business had determined his net profit/income @ 36%, i.e., at Rs. 2,81,66,687/-.

We, though principally concur with the CIT(A) that the assessee, being a commission agent in the fruit trading business, could not have earned a net profit/income of 36% (as adopted by the A.O.), but thereafter, had without any basis estimated his income @ 10% of gross receipts i.e at Rs. 7,82,40,794/-.

We are of the firm conviction that though the process of estimation of the income of an assessee would to some extent involve certain guess work, but, the same we are afraid cannot be allowed to go wild and has to have some logical basis and reasoning. We find that the A.O. had, on a fallacious basis, by misdirecting himself regarding the facts of the case, estimated the ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad income of the assessee @ 36% of his gross receipts. Also, we find that the adoption of the net profit/income element by the CIT(A) @ 10% of the gross receipts of the assessee is also devoid and bereft of any basis or logical reasoning.

We are of the firm conviction that once the A.O. had held the credits made in the bank accounts of the assessee as his gross collections/receipts from his business as that of a commission agent of trading in fruits, then for the purpose of estimating his income, he ought to have either relied upon the profits prevalent in the said trade line; or in the alternative looked into the past records of the assessee.

We find that the Ld. AR has placed on record a “chart” revealing the gross receipts, gross commission, and the gross/net profit disclosed by the assessee for the two preceding and succeeding years, as under : ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad

The Ld. AR had also placed on our record an order of the ITAT, Hyderabad Bench in the case of Amar Chand Adania Vs. The ITO, Ward – 9(3), Hyderabad in dated 03.01.2023, wherein, involving identical facts, the Tribunal had observed that the estimated profit of the assessee in the backdrop of those disclosed by him in the preceding/succeeding years i.e A.Ys. 2014-15 to 2016-17 and A.Ys. 2018-19 to 2021-22, was to be estimated based on the “net profit” rate of 4.9% i.e the highest that was disclosed by him in A.Y 2018-19. We find that by adopting the same basis and reasoning, the net profit/income in the case of the present assessee before us can safely be estimated @ 1.78% i.e., as was disclosed by the assessee for A.Y. 2018-19, as the same is found to be the highest from those of the aforesaid set of preceding/succeeding years. Accordingly, the income of the ITA 824/Hyd/2025 - Sharaf Raju, Hyderabad assessee is estimated @ 1.78% of his gross receipts of Rs. 7,82,40,794/- (supra) i.e., at Rs. 13,92,885/-. We thus, modify the order passed by the CIT(A) and substitute the income (estimated) by him at Rs. 78,24,079/- by an amount of Rs. 13,92,885/-.

Resultantly, the appeal and the cross-objection filed by the assessee are partly allowed, while the appeal filed by the revenue is dismissed.