Bangalore ITAT: No 40A(3) Disallowance on Mere Assumptions- Profit Estimation Without Rejecting Books Quashed

Gajanana Shamanna Talageri Vs ITO (ITAT Bangalore)

Bangalore ITAT: No 40A(3) Disallowance on Mere Assumptions- Profit Estimation Without Rejecting Books Quashed

The Bangalore ITAT deleted additions made under Section 40A(3) and on account of estimated profit, holding that the Assessing Officer cannot make disallowances merely on assumptions or estimate profits without first rejecting the books of account. The assessee, engaged in granite quarrying and trading, had faced reassessment proceedings wherein the AO alleged cash purchases beyond the permissible limit and also estimated net profit at 2% of turnover.

The Tribunal noted that the assessee had produced bank statements, TDS records and ledger extracts demonstrating that payments exceeding the prescribed threshold were made through banking channels. The ledger accounts also showed that no cash payments exceeded the limit under Section 40A(3). Despite these documents being placed on record, neither the AO nor the CIT(A) properly examined them. The ITAT observed that the disallowance was based merely on an assumption that cash payments “might have been” made in violation of the provision.

On the issue of profit estimation, the Tribunal found that the books were duly audited under Section 44AB, no defects had been pointed out, and the books were never rejected. Further, the AO had not relied on any comparable industry data to justify estimating profit at 2% of turnover. In the absence of defects in the books or any objective basis for estimation, the addition was held to be unsustainable.

The ITAT also criticized the CIT(A) for passing a cryptic order without dealing with the evidence and submissions filed by the assessee, holding that such an approach was contrary to the principles of natural justice. Accordingly, the orders of the lower authorities were set aside and the assessee’s appeal was allowed in full

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 08/05/2025 in respect of the A.Y. 2016-17.