Case Law Details
Mahabubsaheb Husensab Ronad Vs ITO (ITAT Bangalore)
Bangalore ITAT: Gross Profit Cannot Be Estimated Merely by Averaging Earlier Years Without Rejecting Books of Account
Summary: The ITAT Bangalore allowed the assessee’s appeal and set aside the orders of the lower authorities. The assessee, engaged in wholesale and retail trading of live chickens, was selected for scrutiny to examine large cash deposits during the demonetization period and a decrease in profitability despite higher turnover. The Assessing Officer accepted the explanation regarding cash deposits and found that the assessee had sufficient cash balance from livestock sales. However, the AO estimated the gross profit at 10.61% by averaging the gross profit rates of AYs 2016-17, 2017-18 and 2018-19 and made an addition, despite accepting the books of account. The Tribunal observed that the assessee’s business had commenced in AY 2016-17 with lower turnover and that turnover and gross profit had increased over subsequent years. It held that there was no valid reason to estimate gross profit by averaging three assessment years, particularly when the AO had accepted the books of account, found no defects therein, and had not rejected the books before making the estimation. Accordingly, the Tribunal held that the estimated addition lacked valid grounds and allowed the assessee’s appeal.
Bangalore ITAT deleted an addition made by estimating the assessee’s gross profit solely on the basis of the average GP rate of three assessment years. The assessee, engaged in the wholesale and retail trade of live chickens, had been selected for scrutiny due to large cash deposits during demonetisation and an apparent decline in profit margin. The Assessing Officer accepted the explanation regarding cash deposits and found no defects in the books of account. However, he enhanced the gross profit by adopting the average GP of AYs 2016-17, 2017-18 and 2018-19, resulting in an addition.
The Tribunal held that once the books of account were accepted and no defects were pointed out or the books rejected, the AO could not arbitrarily estimate profits merely because the GP rate was lower than an earlier year. It also observed that AY 2016-17 was the assessee’s first year of business with lower turnover, while the subsequent year’s results showed increased turnover and improving profitability, making the comparison adopted by the AO inappropriate. Accordingly, the addition based on estimated gross profit was deleted and the assessee’s appeal was allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 28/12/2025 in respect of the A.Y. 2017-18.
2. The brief facts of the case are that the assessee is a firm and running a proprietary concern dealing in the wholesale and retail trading of live chickens. The assessee’s case was selected for scrutiny under CASS to examine the issue of large cash deposits during demonetization period and abnormal increase in sales with a decrease in profitability as compared to preceding years. Notice u/s. 143(2) and 142(1) were issued. The assessee filed his response to the notice issued u/s. 142(1) and also filed copy of the bank statements and other documents to show that the deposits are from the sale of livestock. The AO considered the said submissions as well as the documents and accepted that the assessee had sufficient cash balance to deposit the same during the demonetization period. Thereafter the AO had considered the gross profit and net profit earned by the assessee during the year and compared the same with the assessment years 2016-17 and 2018-19 and alleged that there was a sudden increase in the turnover whereas there is a decrease in the gross profit rate compared to the A.Y. 2016-17. The assessee’s submission that the A.Y. 2016-17 being the first year of his business, there was a less turnover. The assessing officer had stated that the assessee had not given any valid reasons for lower gross profit when compared with A.Y. 2016-17 and therefore the assessing officer had calculated the gross profit by averaging the 3 years gross profit and arrived the gross profit at 10.61% as against the gross profit declared by assessee at 6.41%. On that basis, the AO had calculated the income and added the extra income arrived based on the gross profit adopted at 10.61%.
3. As against the said order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) had, without discussing the issue on merits, had dismissed the appeal on the ground of non-appearance of the assessee. The said order was challenged before this Tribunal and the Tribunal had set aside the said ex-parte order of the Ld.CIT(A) and remitted the same to the file of the Ld.CIT(A). The Ld.CIT(A), thereafter, decided the appeal on merits and confirmed the orders of the AO.
4. As against the said order, the present appeal has been filed by the assessee.
5. At the time of hearing, the Ld.AR submitted that the AO had satisfied about the cash deposits during the demonetization period and also satisfied himself about the books of accounts maintained by the assessee. Later on, the AO had taken the gross profit as an yardstick and estimated the income based on the comparison of the gross profit earned during the first year of business, which is not correct. The Ld.AR also submitted that the AO had compared the gross profit of earlier A.Y. 2016-17 and not considered the higher gross profit earned during the A.Y. 2018-19. Further, the Ld.AR submitted that when there is no defects in the maintenance of books of accounts and the books were also audited, without any other material defects, the addition made by the AO is an arbitrary one and liable to be set aside. The Ld.AR also filed a written submissions and also the case law compilation and prayed to allow the appeal.
6. The Ld.DR submitted that the assessee had not given any valid reasons for the lesser gross profit declared during the A.Y. and therefore the AO had rightly made the addition by comparing the gross profits of the other two A.Ys.
7. We have heard the arguments of both sides and perused the materials available on record.
8. We have gone through the assessment order in which the AO had taken up the case of the assessee for scrutiny for examining the cash deposits during the demonetization period and also about the decrease in the profit margin. The assessee had properly maintained the books of accounts and records and demonstrated before the AO that the cash deposits made during the demonetization period is correct and the said fact was also accepted by the AO. Thereafter, the AO had taken the lesser gross profit shown in the current year and compared the said gross profit with the A.Y. 2016-17 as well as 2018-19 and on that basis, the AO had estimated the gross profit for the current year at 10.61%. We don’t know why the AO had not considered the fact that the assessee is in the business from A.Y. 2016-17 with a lesser turnover and during the current A.Y. he has improved the volume of turnover and earned a gross profit of 6.41%. When we compare the gross profit earned during the subsequent A.Y. 2018-19, the assessee had shown a higher gross profit at 8.33% and also declared a higher turnover than the current A.Y. The said facts would establishes that the assessee, year-by-year, had earned a higher income and the gross profit also increased proportionately. In such circumstances, there is no valid reason for the AO to estimate the gross profit at 10.61% by taking the average of the three A.Ys. gross profit. Further, as discussed earlier, the AO had satisfied with the maintenance of the books of accounts and in fact, does not find any mistake in the books of accounts, in order to estimate the gross profit. The AO had also not rejected the books of accounts before making the addition by way of estimation. In such circumstances, the addition made by the AO is not at all required and also it does not have any valid grounds for making the said additions.
9. We, therefore, agree with the ground raised by the assessee and set aside the orders of the lower authorities.
10. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 13th July, 2026.
Author Bio
