Suman Sharma Vs ITO (ITAT Bangalore)
“No Rejection of Books, No Guesswork Additions” – ITAT Slams Ad-Hoc Profit Estimation & Deletes Family Loan Addition u/s 68
In a significant ruling favouring small businesses, the Bangalore ITAT held that once the Assessing Officer has not rejected the books of account, he cannot proceed to make purely ad-hoc profit estimations merely because the net profit ratio declined. The Tribunal deleted an addition made by enhancing profit by 1% of turnover, observing that suspicion over self-made vouchers or fall in GP/NP cannot substitute concrete evidence.
The assessee, a timber trader, had explained that due to increased competition she introduced free delivery services, resulting in higher freight, unloading and conveyance expenses. The AO, however, doubted certain expenses because some vouchers were self-made, lacked vehicle details, or contained repetitive petrol entries, and estimated additional income on an ad-hoc basis.
The Tribunal held that mere decline in profit rate cannot justify addition unless supported by tangible evidence of suppression of income or inflation of expenses. It observed that in small and medium businesses, internal vouchers are common and tax authorities cannot sit in judgment over commercial decisions like providing free delivery services to retain customers. Importantly, the Bench noted that the AO had neither rejected the books nor brought any comparable industry data or scientific basis for the 1% enhancement. Accordingly, the addition was deleted as being based only on “suspicion and surmises.”
