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Facts
The assessee, a digital camera seller, filed his Income Tax Return for AY 2017-18, declaring an income of Rs. 6,53,179/-. His case was selected for scrutiny to verify cash deposits made during demonetization. The assessee claimed deposits were from business sales but failed to produce complete books of accounts and supporting documents, citing they were with the Sales Tax Department. Consequently, the Assessing Officer rejected the books under Section 145(3) of the Income Tax Act and estimated business income at 2% of the total sales (Rs. 18,60,656/-), which was upheld by the CIT(A).
Held
The Tribunal found the Assessing Officer's estimation of business income at 2% of total sales to be arbitrary and lacking a justifiable basis. Considering the assessee's average net profit ratio of 1.16% from the preceding three assessment years, the Tribunal modified the estimation of business income to 1.16% of the total turnover of Rs. 9,30,32,829/-, resulting in an assessed income of Rs. 10,79,180/-.
Key Issues
Whether the rejection of books of accounts under Section 145(3) was justified, and whether the estimation of business income at 2% of total turnover by the Assessing Officer was arbitrary. Also, whether cash deposits during demonetization could be treated as unexplained credits under Section 68.
Sections Cited
143(3), 270A, 143(2), 145(3), 142(1), 68
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Hyderabad ‘ A ‘ Bench, Hyderabad
O R D E R प्रनत रवीश सूद, जे.एम./PER RAVISH SOOD, J.M.
The present appeal filed by the assessee is directed against the order passed by the Commissioner of Income-Tax (Appeals), National Faceless Appeal Center (NFAC), Delhi, dated 05.03.2025, which in turn arises from the order passed by the Assessing Officer (for short “A.O.”) under Section 143(3) of the Income Tax Act, 1961 (for short “the Act”) dated 27.12.2019 (which as observed by the CIT(A) in his order has been wrongly referred as the appeal against the order passed by the A.O. u/s 270A of the Act, dated.27.12.2019). The assessee has assailed the impugned order on the following grounds of appeal before us :
“1. The Order made u/s 143(3) dated 27.12.2019 is contrary to facts and law. 2. The Assessing Officer erred in not considering the fact of Loss incurred during the current period and making the assumption of estimated average profit. 3. The Assessing Officer erred in consideration of Cash Receipts as Rs.43,40,000/- instead of Rs.18,50,000 which was confirmed by the tax department vide transaction No.6308579785. 4. The appellant craves leave to add, amend to or alter any of above grounds.”
Succinctly stated, the assessee, who is engaged in the business of sale of digital cameras under the name and style of M/s. SVR Digital Shopee, had filed its return of income for A.Y. 2017-18 on 10.10.2017, declaring an income of Rs. 6,53,179/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Section 143(2) of the Act, to verify the cash deposits made by him during the demonetization period.
During the course of assessment proceedings, the assessee furnished the requisite details that were called for by the A.O., viz., Form 3CB, Computation of total income, Profit and Loss Account, Balance Sheet, Ledger Accounts, etc. The assessee on being queried about the source of the cash deposits made during the demonetization period in his bank account, submitted that the same were sourced out of the sale proceeds of his business. The A.O., to verify the aforesaid claim of the assessee, called upon him to produce the books of accounts, sales receipts, bills and vouchers, sale invoices, along with sale ledgers, etc. In reply, it was the assessee's claim that as his books of accounts were lying with the Sales Tax Department, therefore, the same could not be produced. However, the assessee filed before the Assessing Officer the “Audit Report” (up to December 2016), along with the debit vouchers of the expenses.
The A.O., taking cognizance of the fact that the assessee, despite specific directions, had failed to produce books of accounts, sale bills, sale ledgers, bills and vouchers, etc., called upon him to explain as to why his books of accounts may not be rejected under Section 145(3) of the Act and his income be estimated @ 8% of the total sales. Also, the A.O. called upon the assessee to explain as to why the cash deposits of Rs. 43.40 crores deposited by him during the demonetization period in his bank account may not be treated as unexplained cash credit and brought to tax.
In reply, the assessee, vide his reply dated 20.12.2019, submitted that he was maintaining regular books of accounts and that the relevant details of the same had been filed. Also, the assessee, referring to his gross profit/net profit ratio for the last four years, claimed that the same during the year under consideration was well in conformity with those of the preceding years.
Apropos the cash deposit of Rs. 18.50 lacs made in the bank account during the demonetization period, the assessee had submitted before the A.O. that the same were sourced out of his business sale proceeds, the bills in support of which were already placed on record.
The A.O., on a perusal of the reply filed by the assessee in the backdrop of the material available on record, observed that a perusal of the bank statements revealed that the cash deposits in the assessee’s bank accounts were followed up by immediate regular payments to the suppliers/vendors through NEFT and RTGS.
The A.O., in the backdrop of the aforesaid facts, held a firm conviction that as the assessee despite specific direction vide letters dated 16.12.2019 and 19.12.2019, had failed to come forth with the details regarding the sale receipts, bills, and vouchers, etc., thus, held a conviction that the veracity of the income disclosed by the assessee could not be held to be reliable. Accordingly, the A.O. rejected the books of accounts of the assessee under Section 145(3) of the Act and estimated his profit/income from business @ 2% of the total sales of Rs. 9,30,32,829/- i.e., at Rs. 18,60,656/-.
The CIT(A), taking cognizance of the fact that the assessee, despite specific directions, had failed to produce complete books of accounts, sales receipts, and invoices to substantiate the declared turnover, thus, did not find any infirmity in the view taken by the A.O. who had after rejecting the books of accounts of the assessee under Section 145(3) of the Act estimated his income @ 2% of the total turnover of Rs. 9,30,32,829/-, i.e., at Rs. 18,60,656/-. Accordingly, the CIT(A) upheld the assessment order and dismissed the appeal. For the sake of clarity, the observations of the CIT(A) are culled out as under :
“4.3 I have gone through the assessment order and record available. In the instant case, the assessee, engaged in the business of selling digital cameras, failed to produce complete books of accounts, sales receipts, and invoices to substantiate the declared turnover. Despite multiple notices under Sections 143(2) and 142(1), the assessee did not provide sale invoices or expenditure vouchers. In the absence of documentary evidence, the AO rightly rejected the books of accounts under Section 145(3) of the Income Tax Act. The assessee deposited 43,40,000/-in bank accounts during the demonetization period but failed to provide any verifiable source of cash. The explanation that the deposits were from cash sales was not supported by sales invoices or proper records. Therefore, the AO was justified in treating the cash deposits as unexplained credits under Section 68 of the IT Act. The declared net profit ratio (0.67%) was significantly lower than the industry trend and past financial years. Due to lack of sales records and proper documentation, the AO estimated the profit at 2% of the total turnover of 9,30,32,829/-, leading to an assessed income of 18,60,656/-. The estimation is reasonable and in line with precedents where books of accounts are unreliable. The AO's assessment is legally valid and supported by facts. The additions made under Sections 145(3) and 68 is upheld, and the appeal is dismissed in full. As claimed by appellant, no books or invoices of purchase and expenditure bills have been uploaded on e-proceeding portal. Whatever is uploaded on 12.02.2025 is corrupt and without any document (Blank submission).
The assessee, being aggrieved by the order of the CIT(A), has carried the matter in appeal before us.
Shri B. Koteswara Rao, C.A., the learned Authorized Representative (for short, “Ld.AR”) for the assessee, at the threshold of hearing of the appeal, submitted that the A.O. had grossly erred in law and on facts of the case in estimating the income of the assessee at an high pitched amount of Rs. 18,60,656/-. Elaborating on his contention, the Ld. AR submitted that as the gross profit/net profit ratio of the assessee for the subject year was much in conformity with those of the last three preceding years, therefore, there was no justification for the A.O. to have drawn adverse inference, much less estimated the same @2% of the turnover i.e. at Rs. 18,60,656/-. The Ld. AR submitted that, in the backdrop of the facts involved in the present case, the impugned addition made by the A.O. by determining the income of the assessee at Rs. 18,60,656/- cannot be sustained and is liable to be vacated.
Per contra, Shri Pavitran Kumar J, the learned Senior Departmental Representative (for short “Ld. DR”) relied upon the orders of lower authorities. The Ld. DR submitted that as the assessee had failed to substantiate his book results by producing the books of accounts, sale bills, etc., therefore, the A.O. had rightly rejected the books of accounts under Section 145(3) of the Act and had fairly estimated his income at the rate of 2% of his total turnover.
We have given thoughtful consideration to the facts involved in the present appeal in the backdrop of the contentions advanced by the learned authorized representatives of both parties.
At the threshold of hearing, we may herein observe that as the assessee, despite having been afforded sufficient opportunity, by the A.O. vide letters dt.16.12.2019 and 19.12.2019 had failed to produce the books of accounts, sale bills, and sales vouchers, etc., therefore, the latter not being able to verify the veracity of the books of accounts had taken a recourse to the provisions of Section 145(3) of the Act and had his book results.
Be that as it may, we are of the firm conviction that the A.O., after rejecting the books of accounts of the assessee, had most arbitrarily estimated his income @ 2% of the total sales of Rs. 9.30 crore. We say so, for the reason that there is no justifiable basis discernible from the record which would reveal that as to what had weighed in the mind of the A.O. while estimating the income of the assessee by adopting the profit rate of 2% to its total sales.
Although, we are not oblivion of the fact that once the books of accounts of an assessee are rejected, then his income has to be estimated, but such an estimation cannot be allowed to go wild and has to have some reasonable basis. Considering the fact that the A.O had before him the gross profit/net profit rates of the assessee for the preceding three years, i.e., A.Y. 2014-15 to 2016- 17, therefore, we are of the view that the A.O. ought to have adopted the same as a yardstick for estimating the income of the assessee. Ostensibly, the assessee had, for the subject year, disclosed a net profit ratio of 0.07% as against the average net profit rate (based on the facts discernible from the record) of the last three years of 1.16%. We thus, based on our aforesaid deliberations, are of the view that, in all fairness, the income of the assessee can fairly and safely be estimated @ 1.16% of his total turnover for the subject year of Rs. 9,30,32,829/-.
We thus, based on our aforesaid deliberations, modify the orders of the lower authorities and substitute the estimation of business income of the assessee, as adopted by the A.O. @ 2%, by 1.16% of his total turnover of Rs. 9,30,32,829 i.e. by an amount of Rs. 10,79,180/-.
Before parting, we may herein observe that, as we have adjudicated upon the subject issue before us based on the “net profit rates” as had been made available by the assessee in his submissions filed before the CIT(A), therefore, the A.O. is at liberty to check the veracity of the same while giving effect to our aforesaid order.
Resultantly, the appeal filed by the assessee is partly allowed in terms of our aforesaid observations.
Order pronounced in the Open Court on 06th August, 2025.