ITAT: Profit Cannot Be Estimated Arbitrarily Merely Because Books Were Not Produced

Tabassum Vs ACIT (ITAT Lucknow)

ITAT: Profit Cannot Be Estimated Arbitrarily Merely Because Books Were Not Produced

The Lucknow ITAT set aside an addition of ₹2.25 crore made by estimating the assessee’s profit at 6% of turnover in a buffalo trading business. The assessee had declared a net profit of only 0.36%, and the Assessing Officer rejected the books of account under section 145(3) because the books could not be produced during assessment proceedings. He thereafter estimated profit at 6% of turnover and made a huge addition.

The Tribunal observed that while the Assessing Officer may have been justified in rejecting the books for non-production, rejection of books and estimation of profit are two separate exercises. Even after rejecting the books, the Assessing Officer was required to consider the assessee’s past results, comparable cases and prevailing profit margins in the same line of business before estimating income. Estimating profit without any such basis resulted in an addition having no nexus with the actual profits realizable in the trade.

The Tribunal also noted that the assessee had subsequently recovered her accounting data and was willing to produce the complete books of account, GST records, bank statements and other supporting material. It held that the CIT(A) ought to have adopted a more liberal approach and examined these records instead of mechanically confirming the addition. Accordingly, the matter was restored to the Assessing Officer for fresh examination, with directions to consider the books and evidence produced by the assessee and then decide the issue in accordance with law. The appeal was allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT LUCKNOW

This is an appeal filed by the assessee against the order of the ld. CIT(A), NFAC passed under section 250 of the Income Tax Act, 1961 dated 17.07.2025, wherein the ld. CIT(A) has dismissed the appeal of the assessee against the order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 for the A.Y. 2023-24 on 18.03.2025. The grounds of appeal are as under:-

“1. Because on the facts and in the circumstances of the case the order of Ld. CIT(A) is bad in law as the rejected books of account of the Appellant on surmises and conjectures by invoking the provisions of section 145(3) of the Income Tax Act. The Ld. AO exercised his jurisdiction arbitrarily and capriciously. The power has not been exercised judicially and is violating the principles of natural justice.

2. Because on the facts and in the circumstances of the case the order of Ld. CIT(A) is bad in law as the Ld. A.O ignored the business model of the assessee.

The books of account were also rejected without having adverse evidence in the possession of the Ld. A.O.

3. Because on the facts and in the circumstances of the case the order of Ld. CIT(A) is bad in law as the Ld. A.O. added of Rupees 2,25,41,711/-/- to the net profit shown by the assessee by applying NP rate of 6% as against 0.36% declared by the assessee on the declared turnover of the assessee and that too by recording incorrect facts and findings and without observing the principles of natural justice and by disregarding the submissions, evidences and material placed on record by the assessee and without providing the adverse material on record.

4. Because on the facts and in the circumstances of the case the order of Ld. CIT(A) is bad in law as that the Ld. A.O. has estimated the net profits of the business of the assessee at Rupees 2,25,41,711/-by ignoring the modus operandi of the business of the assessee and also ignored previous operating results of the assessee as well as the other assessee operating in the same area engaged in similar business activity.

5. Because without considering the facts and in the circumstances of the case the Ld. CIT(Appeals) has erred in law and on facts in confirming the addition of F 2,25,41,711/-without going through merits of the case and the submissions fil by the assessee.

6. Because on the facts and in the circumstance of the case, the order of Ld. CIT(Appeals) has been passed in absolute violation of the principles of Natural Justice, without providing adequate opportunity of being heard and therefore deserves to be declared a nullity.

7. The appellant craves for leave to add, modify, amend or delete any other and further grounds of appeal with permission.”

2. At the very outset, it is observed that the appeal is delayed by 14 days. The assessee has filed an application for condonation of delay, in which it has been submitted that at the time, there was religious unrest in the city of Bareilly, where the assessee was residing, and due to the unrest and various restrictions of movement and also restriction on use of internet, the appeal could not be filed over the portal. The aforesaid caused a delay of 15 days, which was beyond the control of the assessee and therefore, it was prayed that the delay may kindly be condoned. After considering the submissions of the assessee, the delay in filing the appeal is condoned and it is admitted for adjudication.

3. The facts of the case are that the assessee filed a return of income for the assessment year in question showing a total income of Rs. 13,67,810/-. Subsequently, the case was selected for scrutiny for low net profits under certain specific business codes, including other services. The ld. AO issued various notices to the assessee and records that he received part compliance to his notices. Considering the submissions of the assessee, it was noted that the assessee was engaged in the business of purchase and sale of Buffaloes in the name and style of M/s A.K. Traders. She purchased Buffaloes from farmers and producers of animals and sold it to meat processing companies, slaughter houses and wholesalers. She incurred expenditure on purchase, buffalo handling charges and buffalo transportation charges from the Nakasa Market to slaughter house, as well as feeding of the Buffaloes during transit. She had shown a net profit of .36% of turnover, which the ld. AO regarded as very low in this line of business. The Assessing Officer observed that the assessee had not submitted any books of accounts except the trading and profit and loss account and balance-sheet. When she was asked to produce the books, she sought time. Since the further time could not be granted on account of the limitation involved, the assessee was asked to show cause as to why her books of accounts should not be rejected and the income should not be estimated at 8% of the turnover. In response, the assessee submitted that 8% turnover was impossible in this type of business. For this proposition, she relied on the judgment of the ITAT Jaipur Bench in the case of Pappu Qureshi vs. ITO, Ward-4(5), Jaipur where the AO had calculated gross profit @ 5% under section 44AF of the Act against 1.76%, without rejecting the books of accounts and the Hon’ble ITAT had deleted additions saying that the purchase and sale of animals does not technically fall under the category of retail trades of goods and merchandise and the turnover declared was well beyond the prescribed limit under section 44AF of the Act. The assessee further submitted that she had received the complete amount against sales through banking channels and in any case, the rate of profit could not be more than 6% of turnover under the 44AB Scheme. But this was also impossible in this line of business. Copies of other assessment orders of similar cases was submitted by the assessee in support of her contention. However, the AO had held that the assessee had not produced the books of accounts, therefore he rejected the books of accounts and he adopted a rate of 6% of the turnover i.e. he made an addition of Rs. 2,25,41,711/-.

4. Aggrieved with the said assessment order, the assessee went in appeal before the ld. CIT(A). It was submitted that the assessee had participated in the assessment proceedings and provided details and other evidences to support her contention. But she could not provide the books of accounts and in the absence of the same, the AO had not found her explanations to be tenable and considered the rate of 6% of total turnover which was completely fanciful for the assessee to earn in this trade, or for any other assessee who trades in this business. It was further submitted that the assessee had now recovered her tally data and she was ready to cooperate by producing the complete set of books of accounts before the ld. CIT(A), so that the additions which were based on surmises and conjectures could be deleted. It was submitted that the assessee had received all her sale proceeds through banking channels and furthermore, she had also presented before the AO, results of other assessee engaged in the same trade, where their results, which were comparable to that of the assessee, had been accepted after scrutiny. However, the AO had not considered these arguments only because the assessee had not produced the books of accounts. The assessee was now submitting her books of accounts for perusal. It was argued that the entire payment had been received through banking channels, TDS had been deducted under section 194 O of the Income Tax Act and therefore, it could not be presumed that the assessee had not purchased the livestock from farmers / producers of livestock, because the assessee had to fulfill the complete order of sales made by the purchasers. Moreover, the assessee had also produced some affidavits from persons from whom the livestock had been purchased, but these had not been considered. It was not possible to produce affidavits from all the farmers because of the bulky nature, but she generally maintained a separate list of farmers/producers from whom purchases of livestock had been made and there was no reason to doubt these purchases. Furthermore, she had collected identity proof of all persons to whom cash payment had been made against purchases by her and was now submitting the complete details of farmers / producers alongwith UID/Aadhar number, as well as complete addresses of the farmers. It was further argued that since the purchases had been made directly from the producers of livestock, the assessee was allowed to incur the expenditure in cash in terms of Rule 6DD(e) of the Income Tax Rules, 1962. It was further argued that the case of Pappu Qureshi, which had been presented before the ld. AO, was a comparable case but the AO had failed to consider the same. She also relied upon the decision of the ITAT Chandigarh Bench in the case of New Truck Operators Union, G.T. Road, Doraha 1421 vs. ITO, Ward-4, Khanna in ITA No. 455/CHD/2022 in which the ITAT had held that any estimation without considering the past history of the case was not sustainable. It was further argued that the other assessees operating in the same area in whose case the assessment order had been submitted were showing similar results to that of the assessee and therefore, the additions made by the AO were unsustainable. The assessee also raised the plea that the notice under section 143(2) was not issued in accordance with CBDT instructions and therefore, this rendered the proceedings to be void. The ld. CIT(A) considered the submissions made by the assessee. He rejected the plea of the assessee that the notice under section 143(2) was defective in any way and therefore, he dismissed this legal ground. On the issue of estimation of income, the ld. CIT(A) held that once the assessee invokes Rule 46A of the Rules and prays for additional evidence before the ld. CIT(A), then the procedure prescribed in Rule 46A has to be scrupulously followed. Since he was of the view that the assessee’s case did not fulfil the conditions prescribed in Rule 46A of the Rules for additional evidences, he did not admit the additional evidences filed by the assessee. He noted that the case of the assessee was different from that of Pappu Qureshi because in the present case, the books of accounts had been rejected by the AO and therefore, he confirmed the additions made by the Assessing Officer.

5. The assessee is aggrieved with the dismissal of his appeal and has accordingly come in appeal. Sh. Samrat Chandra, C.A. (hereinafter referred to as the ld. AR) appearing on behalf of the assessee pointed out, that before the ld. CIT(A), the assessee had submitted that she was unable to produce her books of accounts before the AO due to certain unavoidable reasons but now that she had recovered her tally account, she was in a position to produce the complete set of accounts. Accordingly, since the matter related to a computer glitch, the ld. CIT(A) should have considered it a case of failing to produce the materials through sufficient cause. The ld. AR pointed out that other than this, the assessee had furnished her financial statements. She had also furnished her bank statements, her GST returns, her 26AS statement and also copies of the ITAT order and assessment orders in several comparable cases to demonstrate that the rate of profit that had been disclosed by her was not unusual in the line of business that she was operating. However, the ld. AO had failed to consider all of these and had arbitrarily fixed her profit at 6% after rejecting the books, only because she could not produce them. The ld. CIT(A) had also refused to consider the same books when they were produced by the assessee and also affidavits produced by the assessee from the persons from whom she had purchased the Buffaloes. He had also failed to consider, that in other cases of comparative nature, the profits had been estimated at a far lower percentage and in line with the assessee’s business results. Accordingly, it was prayed that the action of the ld. CIT(A) was highly arbitrary and the assessee should be given one more opportunity to demonstrate that the profits that had been brought to tax in her hands, were excessive.

6. On the other hand, Sh. Amit Kumar, Sr. DR (hereinafter referred to as the ld. DR) pointed out that Rule 46A lays down certain conditions for admission of additional evidence and the assessee could not show the ld. CIT(A) as to why this additional evidence should be admitted. This was not a case where the ld. AO was preventing her from producing the additional evidence. Nor was there a case where she could not have produced the same on her own. Therefore, his decision to reject the additional evidence was justified and accordingly he prayed that the additions may kindly be confirmed.

7. We have duly considered the facts and circumstances of the case. We note that the rejection of the books of accounts and the estimation of profits are two different issues. In view of the failure to produce the books of accounts, while the ld. AO may have been justified in rejecting the book results, he was most certainly not justified in refusing to consider comparative cases, or the assessees past trading results while estimating the profit from business in her hands. Due to the fact that he did so, the estimated addition bore no relation to the actual profits realizable in the trade, but constituted a mere estimated addition that was without basis. The said addition therefore, cannot be sustained. We note that the assessee submitted before the ld. CIT(A) that she was now in a position to produce the books of accounts, as she had recovered her tally account, where they were entered. Implicit in this is a submission that she was facing difficulty in producing them earlier. Be that as it may, when the evidences presented before the AO had been ignored only because the assessee had not produced the books of accounts, it would have been appropriate for the ld. CIT(A) to adopt a liberal approach and considered the books, before confirming the additions made by the Assessing Officer. Noting the fact that in other comparable cases, the profits from similar business had been estimated at rates comparable to that of the assessee, we deem it appropriate to restore the matter to the file of the ld. AO with a direction to the assessee to produce the complete set of books before the ld. AO to demonstrate that her book results are true and correct and do not justify the additions that have been made by him. The Assessing Officer may thereafter consider the evidence produced and take a fresh decision in accordance with law.

8. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on 11.06.2026.