Case Law Details
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.
2. The brief facts of the case are that the assessee is an individual and filed his return of income on 17/10/2016. The assessee is extracting and trading in granite blocks. The AO had reopened the assessment and notice u/s. 148 was issued. The assessee filed the details. The AO based on the details available on record, had alleged that the assessee had cash purchases beyond the limit prescribed under the Act. The AO had also alleged that the book profit declared by the assessee is very low and estimated the book profit at 2% on the total turnover. The assessee also submitted various documents but the AO not satisfied with the records, has disallowed 2% of the cash purchases u/s. 40A(3) of the Act. Similarly, the AO had estimated the book profit at 2%.
3. As against the said order, the assessee filed an appeal before the Ld.CIT(A). Even though the assessee had submitted written submissions and several documents, the Ld.CIT(A) in a cryptic order had confirmed the additions. The Ld.CIT(A) had not considered the ledger copies filed, to show that there is no excess payment and therefore there is no violation of section 40A(3) of the Act. The Ld.CIT(A), without discussing the issue in detail, had confirmed the additions.
4. As against the said order, the present appeal has been filed by the assessee, with a delay of 7 days. The assessee also filed an application to condone the said delay of 7 days.
5. We have considered the reasons and the number of days delayed and satisfied that there is a sufficient cause and condoned the said delay and proceeded to decide the appeal.
6. At the time of hearing, the Ld.AR submitted that the assessee is operating the quarry in a remote area and therefore they have to incur the expenses by cash only. The Ld.AR further submitted that in spite of the above said fact, the assessee had not exceeded the limit prescribed u/s. 40A(3) of the Act. The Ld.AR further submitted that the ledger extracts relating to the various expenses were not considered by the Ld.CIT(A) even though the same were filed before him. The Ld.AR further submitted that the books are audited u/s. 44AB of the Act and without finding any error in the books of accounts and also without rejecting the books of accounts, profit margin cannot be estimated. The Ld.AR also furnished the bank accounts details, copies of ITR and the ledger extracts of expenses which were all filed before the Ld.CIT(A) and prayed to allow the appeal.
7. The Ld.DR relied on the orders of the lower authorities and prayed to dismiss the appeal.
8. We have heard the arguments of both sides and perused the materials available on record.
9. We have perused the assessment order from which it is evident that the AO on assumption had come to the conclusion that the assessee might have paid the expenses by cash violating section 40A(3) of the Act. On such assumption, the AO had disallowed the 2% of the expenses u/s. 40A(3) of the Act. We have considered the submissions made by the assessee along with the documents furnished by the assessee. We have also perused the bank statements, TDS payment details and ledger extracts relating to the expenses. The assessee had paid the expenses through banking channel whenever the payment exceeds Rs. 20,000/-. Similarly, the assessee had deducted TDS in appropriate cases. In all other expenses incurred by the assessee, the ledger extracts would indicate that there are no payment exceeding the limit prescribed u/s. 40A(3) of the Act. Even though all the details were furnished by the assessee, the Ld.CIT(A) had not dealt with the said documents. In such circumstances, the order of the lower authorities by disallowing the expenses u/s. 40A(3) of the Act could not be sustained.
10. In respect of the second dispute, the AO had estimated the book profit at 2% and on that basis, addition was made. We have considered the fact that the books were audited u/s. 44AB of the Act and the AO had also not found any mistakes in the maintenance of books of accounts. The AO had also not relied on any data available for the industry to estimate the profit at 2%. Moreover the AO had not rejected the books of accounts for making the estimated addition. When there are no circumstances available before the AO for estimating the profit at 2%, the addition made on that score is also not sustainable.
11. The Ld.CIT(A) also without discussing the issue in detail, had confirmed the addition, which in our opinion is also not in accordance with the principles of natural justice.
12. For all the foregoing reasons, we have no hesitation to set aside the orders of the lower authorities.
In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 03rd June, 2026.
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