Case Law Details
In Ruksarali Iftikharali Shaikh vs. ITO, Ward-7, Vapi (ITA Nos.777 & 778/Srt/2025, AY 2010-11; order dated 29-12-2025), the Surat Bench of ITAT granted substantial relief to a small scrap trader by rejecting arbitrary 50% profit estimation and quashing penalty u/s 271(1)(c).
The Assessee had not filed a return for AY 2010-11. Based solely on Form 26AS/TCS data reflecting scrap sales of ₹19.23 lakh to Macleods Pharmaceuticals Ltd., the AO reopened the assessment u/s 147 and, due to non-compliance, completed best-judgment assessment u/s 144 by estimating 50% of turnover (₹9.61 lakh) as income. Penalty u/s 271(1)(c) of ₹1.98 lakh was also levied on this estimated addition. The Ld. CIT(A)/NFAC upheld both the quantum and penalty.
Before the Tribunal, the Assessee contended that his case was squarely covered u/s 44AD, under which income is to be computed at 8% of turnover, and that estimation at 50% had no legal or factual basis. Accepting this plea, the ITAT held that when turnover is known and presumptive taxation applies, AO cannot estimate income at an ad-hoc higher rate without reasons. The Tribunal directed the Revenue to compute income at 8% of ₹19.23 lakh (₹1.54 lakh), which was below the basic exemption limit for AY 2010-11.
Consequently, the Tribunal held that no concealment penalty can survive on a purely estimated income, particularly when the recomputed income itself falls below the taxable threshold. Accordingly, the quantum addition was restricted by applying section 44AD, and the penalty u/s 271(1)(c) was deleted in full. The quantum appeal was partly allowed and the penalty appeal allowed.
FULL TEXT OF THE ORDER OF ITAT SURAT
These two appeals are filed by the assessee against the separate order of the National Faceless Appeal Centre (NFAC), Delhi, (in short ‘the CIT(A)’), dated 23.08.2023 & 23.04.2024, both for the Assessment Year 2010-11 in the proceedings under Section 147 of the Income Tax Act, 1961 (in short ‘the Act’) & u/s. 271(1)(c) of the Act; respectively.
2. There was a delay of 632 days and 389 days respectively in filing of the two appeals. The assessee has filed an affidavit explaining the reason for delay. It is submitted that the assessee was based in a remote location and started his business in scrap trading during the year. He was not maintaining the books of accounts and was entirely dependent upon his Counsel for compliance in the Income Tax proceedings. It is submitted that neither the Counsel has made any compliance before the AO as well as the appellate authority nor the order of the Ld. CIT(A) was brought to the knowledge of the assessee. Further, the assessee was not acquainted with the Income Tax Portal and also not regular in accessing his email account. All these factors had contributed to the delay in filing of the two appeals. Though, we are not fully convinced with the explanation of the assessee, considering the merits of the case, we deem it proper to condone the delay in filing of the two appeals.
3. Brief facts of the case are that the assessee did not file his return of income for A.Y. 2010-11. The AO had received information that TCS was made an amount of Rs.19,23,479/-received by the assessee on account of sale of scrap to M/s. Macleods Pharmaceuticals Limited. On the basis of this information, the case of the assesse was reopened by issue of notice u/s.148 of the Act dated 31.03.2017. In the course of assessment, no compliance was made by the assessee. Therefore, the AO had treated 50% of the receipt being Rs.9,61,740/- as income of the assessee. The assessment was completed u/s.144 r.w.s. 147 of the Act on 30.11.2017 at total income of Rs.9,61,740/-. Penalty proceeding u/s.271(1)(c) of the Act was also initiated in respect of this addition.
4. Thereafter, a separate penalty order was passed levying penalty of Rs.1,98,298/- u/s.271(1)(c) of the Act vide order dated 11.05.2018.
5. Aggrieved with the orders of the AO, the assessee had filed an appeal before the First Appellate Authority against both the assessment order as well as the penalty order, which was decided by the Ld. CIT(A) vide the impugned orders and the appeal of the assessee was dismissed.
6. Now, the assessee is in second appeal before us. The following grounds have been taken in these two appeals:
ITA No.777/Srt/2025
“1. LD. CIT[A], NFAC, Delhi has erred in law and on fact to confirm A.O.’s addition of Rs.9,61,740/- ignoring the fact and law that in retail trading business, net profit stipulated u/s 44AD of the Act would be 8% of turnover, consequently 50% net profit estimated by the A.O. is against the settled position of law even in the assessment u/s 144 of the Act.”
ITA No.778/Srt/2025
“1. LD. CIT[A], NFAC, Delhi has erred in law and on fact to upheld A.O.’s penalty order for levy of penalty of Rs.1,98,300/- ignoring the fact that the A.O. has levied penalty on estimation addition of Rs.9,61,740/- being 50% of gross payment reflected in Form 26AS.”
7. Shri Rajesh Upadhyay, Ld. AR of the assessee submitted that the assessee was new in business, hence no compliance could be made either before the AO as well as before the Ld. CIT(A). He explained that the turnover of the assessee was covered under the provision of Section 44AD of the Act. Apart from the receipt of Rs.19,23,479/- on account of sale of scrap to M/s. Macleods Pharmaceuticals Limited, the assessee had no other income. The Ld. AR explained that as per provision of Section 44AD of the Act, the assessee was liable to be taxed on income @ 8% of the turnover, which was below to taxable limit of the assessee. Therefore, no return of income was filed by the assessee. He further submitted that considering the turnover of the assessee and the fact that the assesse was covered under the provisions of Section 44AD of the Act, the AO was not correct in estimating the income @ 50% of the turnover and also not correct in imposing the penalty in this respect.
8. Per contra, Shri Ajay Uke, Ld. Sr. DR supported the orders of the lower authorities. He submitted that no compliance was made by the assessee either before the AO or before the Ld. CIT(A).
9. We have considered the rival submissions. It is true that the assessee did not make any compliance either before the AO or before the Ld. CIT(A). Nevertheless, the fact remains that the only information available with the AO was receipt of Rs.19,23,479/- by the assessee towards sale of scrap, on which TCS was made. Considering the turnover of the assessee, the case was squarely covered under the provision of Section 44AD of the Act. Under the circumstances, the AO was not correct in estimating the income from sale of scrap @ 50% of the turnover. The AO has not given any reason for estimating the income of 50% on the receipt of sale of scrap of Rs.19,23,479/-. Therefore, the addition as made by the AO is found to be without any basis and not justified at all. Considering the fact that the assessee’s case was covered u/s.44AD of the Act, the Revenue is directed to work out the income @ 8% of the turnover.
10. Accordingly, the appeal of the assessee in respect of quantum addition is partly allowed.
ITA No.778/Srt/2025
11. With regard to penalty imposed u/s.27 1(1)(c) of the Act, the quantum of penalty was worked out on estimated income of Rs.9,61,740/- by applying the profit rate of 50% on the turnover. It is a settled position that no penalty is leviable on the estimated income, particularly when no basis for estimation has been given. We have directed to work out the income by applying profit rate of 8% of the turnover of Rs.19,23,479/-, in accordance with the provision of Section 44AD of the Act. Accordingly, by applying this rate, the profit earned by the assessee would work out Rs.1,53,878/-, which is below the exemption of Rs.1,60,000/- for the A.Y. 2010-11. Considering this fact also, no penalty u/s.271(1)(c) of the Act can be levied in the present case. Accordingly, the penalty levied by the AO u/s.271(1)(c) of the Act is cancelled.
12. The appeal of the assessee is allowed.
13. In the combined result, the appeal in ITA No.777/Srt/2025 is partly allowed, whereas the appeal in ITA No.778/Srt/2025 is allowed.
This Order pronounced on 29/12/2025
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