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Facts
The assessee, engaged in the garment business, failed to file a return of income and maintain books of account for AY 2016-17. The AO reopened the assessment and estimated business income at 8% of bank credits, which was upheld by the CIT(A). The assessee appealed this estimation.
Held
The Tribunal held that while a best judgment assessment is justified in the absence of books of account, the estimation must be reasonable. Given the nature of the garment business and the absence of substantiation, the Tribunal found the 8% estimation too high and the assessee's plea for 2% too low.
Key Issues
Whether the estimation of business income at 8% of bank credits by the AO, in the absence of books of account, was justified and reasonable.
Sections Cited
144, 147, 148, 254, 44AD
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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI S.R. RAGHUNATHA
आदेश /O R D E R
PER S.R.RAGHUNATHA, AM:
The present appeal of the assessee is directed against the order dated 26.06.2025 passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld.CIT(A)”), arising from the assessment order dated 02.01.2025 passed by the National Faceless Assessment Centre (hereinafter referred to as the “AO”) u/s.144 r.w.s 254 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for the Assessment Year 2016-17.
The brief facts of the case, as emanating from the records, are that the assessee is a proprietary concern carrying on the business of garments in the :-2-: ITA No: 2247/Chny/2025 name and style of M/s.Rena Impex. The assessment for the impugned assessment year was reopened by issuance of notice u/s.148 of the Act on 13.03.2020, on the basis of information received by the AO that the assessee’s current account maintained with ICICI Bank reflected credits aggregating to Rs.1,37,78,710/- during the relevant previous year, whereas no return of income had been filed by the assessee.
Subsequently, the assessment was completed u/s.147 r.w.s 144 of the Act vide order dated 28.09.2021, determining the total income of the assessee at Rs.1,37,78,710/-.
Aggrieved by the said assessment order, the assessee preferred an appeal before the Ld.CIT(A), which came to be dismissed ex parte vide order dated 27.09.2023. Thereafter, the assessee carried the matter in further appeal before this Tribunal. This Tribunal, vide order dated 29.01.2024 passed in set aside the first appellate order and restored the matter to the file of the AO with a direction to decide the issue afresh after considering the details furnished by the assessee.
In the set-aside proceedings, the AO issued notices to the assessee and proposed to estimate the business income at 8% of the total credits appearing in the bank account, amounting to Rs.11,02,296/-, for the impugned assessment year. The assessee objected to the proposed estimation and requested the AO to adopt a profit margin of 5% instead of 8%. However, the AO rejected the explanation of the assessee and proceeded to estimate the business income at 8% of the total bank credits, thereby making an addition of Rs.11,02,296/-. Accordingly, the assessment was completed u/s.144 r.w.s 254 of the Act vide order dated 02.01.2025.
Aggrieved by the said assessment order, the assessee preferred an appeal before the Ld.CIT(A). The Ld. CIT(A), vide the impugned appellate order dated 26.06.2025, dismissed the appeal of the assessee, observing that in the :-3-: ITA No: 2247/Chny/2025 absence of books of account, the action of the AO in estimating income at 8% of the total bank credits is in consonance with the presumptive provisions of section 44AD of the Act. The Ld.CIT(A) further observed that the assessee’s claim for adoption of a lower profit margin of 5% was not supported by any corroborative material or documentary evidence. Accordingly, the Ld.CIT(A) upheld the estimation made by the AO.
Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.
The Ld.AR for the assessee submitted that the average net profit ratio of the assessee for the preceding three assessment years works out to approximately 2% and, therefore, the adoption of an 8% profit rate in the impugned assessment year is arbitrary and unsustainable. The Ld. AR accordingly prayed that the profit margin be restricted to 2% instead of 8% as adopted by the AO and confirmed by the Ld.CIT(A).
Per contra, the Ld.DR strongly supported the orders of the lower authorities.
We have carefully considered the rival submissions, perused the material available on record and examined the orders passed by the authorities below. It is an undisputed position that the assessee did not file the return of income for the impugned assessment year and also failed to maintain or produce the books of account before the AO, despite being afforded sufficient opportunities. In these circumstances, the AO was justified in invoking the provisions of section 144 of the Act and proceeding to frame the assessment on the basis of best judgment. Accordingly, the action of the AO in estimating the income of the assessee cannot be faulted in principle.
That said, it is trite law that even in a best judgment assessment, the estimation of income must be reasonable, fair and based on rational considerations, and should not be arbitrary or excessive. In the present case,
:-4-: ITA No: 2247/Chny/2025 the AO has estimated the business income at 8% of the total credits appearing in the assessee’s bank account by placing reliance on the presumptive provisions of section 44AD of the Act. While section 44AD of the Act provides for a presumptive rate of 8% in respect of eligible businesses, we are of the considered view that the said provision cannot be applied mechanically for the purpose of estimating income in every case, particularly where the facts and nature of the assessee’s business warrant adoption of a lower margin.
The assessee is engaged in the business of trading in garments, which is generally characterised by high turnover and comparatively low profit margins. Although the assessee has not been able to substantiate the claim of an average net profit rate of around 2% for the preceding years with cogent documentary evidence, the contention that the margins in this line of business are ordinarily lower than 8% cannot be completely disregarded. At the same time, in the absence of reliable books of account and supporting material for the impugned assessment year, the assessee’s plea for adoption of a net profit rate as low as 2% does not appear to be acceptable.
In our considered opinion, a judicious balance is required to be struck between the stand taken by the Revenue and the claim made by the assessee. Having regard to the nature of the assessee’s business, the magnitude of transactions reflected through the bank account, the fact that income is being estimated in the absence of books of account, and to meet the ends of justice, we are of the view that estimation of net profit at 8% is on the higher side, while adoption of 2% as contended by the assessee would be unreasonably low in the facts of the case. We, therefore, deem it appropriate to restrict the estimation of net profit to 6.5% of the total bank credits for the impugned assessment year.
Accordingly, we direct the Assessing Officer to recompute the addition by applying a net profit rate of 6.5% on the total credits reflected in the assessee’s bank account. To this extent, the order of the Ld.CIT(A) is set aside and the :-5-: ITA No: 2247/Chny/2025 assessment order is modified. As a result, the grounds raised by the assessee are partly allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the court on 09th March, 2026 at Chennai.