KNP Associates Vs ACIT (ITAT Agra)
The ITAT, Agra Bench upheld rejection of books u/s 145(3) due to material deficiencies—unexplained cash deposits, rent mismatch vis-à-vis agreement (194I exposure) and inconsistencies from 133(6) replies—but held that estimating NP @ 1% was excessive for a wholesale beer trader.
While sustaining book rejection in principle, the Tribunal noted that the AO misconstrued beer business as liquor business (where margins are higher) and that inflated sales cannot logically reduce profits. Considering the business realities, audited records, and deficiencies on record, the Bench moderated NP to 0.50% of turnover (instead of 1%), directing recomputation accordingly.
Resultantly, the appeal was partly allowed—145(3) sustained, but profit rate rationalised to meet ends of justice.
FULL TEXT OF THE ORDER OF ITAT AGRA
1. The appeal in ITA No. 547/AGR/2025 for AY 2020-21, arises out of the order of the ld National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 07.10.2025 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 29.09.2022 by the Assessing Officer, ACIT, Circle-1, Nashik (hereinafter referred to as ‘ld. AO’).
2. The Assessee has raised the following grounds of appeal before me :-
“1. BECAUSE, the impugned Order dated 07.10.2025 passed by the Ld Commissioner (Appeals), NFAC is bad in law as the same has been passed ex-parte without giving proper opportunity of being heard to the Appellant.
2. BECAUSE, the impugned Order passed by the Ld CIT(Appeals), NFAC is bad in law as the same has not been passed in accordance with the provisions of sub section (6) of section 250 of the Act. The Appeal filed by the Appellant has been dismissed for non-prosecution. No findings have been given on merit, therefore, the impugned order is liable to be quashed.
3. BECAUSE, upon the facts and in overall circumstances of the case the order passed by the Id Assessing officer dated 15.03.2024 is bad in law and on facts, as the same has been passed hurriedly without properly appreciating the facts of the case.
4. BECAUSE, upon the facts and in overall circumstances of the case the Id AO has erred in law in invoking provisions of section 145(3) of the Act, as there were no any such conditions exist in this case, as mentioned in sub section (3) of section 145 of the Act.
5. BECAUSE, upon the facts and in overall circumstances of the case, the ld AO has erred in law and on facts in invoking provisions of section 145(3) of the Act. There is no mention in the Assessment order as to which conditions existed in the case of Appellant. Sub section (3) of section 145 states that where the Assessing officer is not satisfied about the correctness or completeness of the accounts or where the method of accounting provided in sub section (1) has not been regularly followed by the assessee. The Id AO failed to mention even a single line as to which limb of sub section (3) was violated by the Appellant. In the absence of specific charge, the invocation of provisions of sub section (3) is bad in law and not enforceable.
6. BECAUSE, upon the facts and in overall circumstances of the case, the ld AO has erred in law and on facts in invoking provisions of section 145(3) of the Act. The Id AO, even after rejecting the books of account by invoking section 145(3) had passed an order under section 143(3) of the Act and the assessment has not been made in the manner provided under section 144 of the Act, as mandated by sub section (3) of section 145 of the Act.
7. BECAUSE, upon the facts and in overall circumstances of the case, the ld AO has erred in law and on facts in invoking provisions of section 145(3) of the Act. The Id AO has drawn an inference that the Assessee had inflated sale in its record to reduce the profit of the firm. Surprisingly the inference drawn by the ld AO is patently invalid, incorrect and unjustifiable. How can increase in sale may have an effect of reduction in profit.
8. BECAUSE, upon the facts and in overall circumstances of the case, the ld AO has erred in law and on facts in invoking provisions of section 145(3) of the Act. The Id AO, even after rejecting the books of account by invoking section 145(3) had accepted the Sale amount disclosed in financial statements and estimated the net profit at 1 percent on declared turnover of Rs. 43,25,48,983.00 in place of 0.15 percent disclosed in audited financial statements.
9. BECAUSE, upon the facts and in overall circumstances of the case, the ld AO has erred in estimating the net profit at 1 percent on declared Sales without assigning any reason and also nothing has been mentioned as to how this figure of 1 percent has been arrived at.
11. The appellant craves leave to add or alter one or more ground (s) during the course of hearing of appeal.”
3. I have heard the rival submissions and perused the materials available on record. The Assessee is a partnership firm engaged in the business of wholesale trading of beer in the name of KNP Associates. The return of income for the assessment year 2020-21 was filed by the Assessee firm on 19-01-2021 declaring total income of Rs 6,50,520. The year under consideration is the first year of business of the Assessee. The Assessee had regularly maintained its books of accounts and got it duly audited by an independent chartered accountant. The total turnover declared by the Assessee for the year was Rs 43,25,48,983. The gross profit declared by the Assessee was 30,78,075, which worked out to 0.71% of turnover. The net profit declared by the Assessee before partners remuneration and interest on capital was Rs 33,77,494, which worked out to 0.78% of turnover. The net profit after partners remuneration and interest on capital was Rs 6,50,515, which worked out to 0.15% of turnover.
