ITAT Amritsar Lowers Profit Estimate from 1% to 0.55% on Liquor Sales

Jaswinder Singh Vs DCIT (ITAT Amritsar)

The ITAT Amritsar adjudicated appeals filed by the assessee against the order of the CIT(A)/NFAC dated 03.06.2025 concerning the assessment proceedings for the years covered by the connected appeals. The assessee, an individual carrying on retail liquor business through a proprietorship concern in Punjab, challenged rejection of its books of accounts and estimation of income by applying a 1% net profit rate.

For the relevant year, the assessee had filed its return declaring total income of Rs.94,13,460/-, including profit of Rs.63,70,099/- from the proprietary business. The business had gross turnover of Rs.139,17,92,236/- and declared net profit at approximately 0.46%. The assessment was completed under Section 143(3) of the Income-tax Act, 1961. The AO rejected the books under Section 145(3), citing, among other matters, non-maintenance of branch-wise sale bills, item-wise stock registers and salary registers, and the declaration of an “Ahata” licence fee without corresponding ancillary revenue. The AO initially applied a 1.50% net profit rate, resulting in an addition of Rs.1,45,06,784/-.

Before the CIT(A), the assessee challenged rejection of the books and the estimated profit. The CIT(A) upheld the rejection under Section 145(3) but, noting that a 1% net profit rate had been applied for the subsequent assessment year under similar facts, restricted the rate to 1%. The CIT(A) consequently sustained the estimated income at Rs.1,39,17,922/- and deleted the remaining addition of Rs.69,58,961/-, while directing that statutory depreciation of Rs.8,95,589/- be allowed.

Before the Tribunal, the assessee submitted that its accounts were audited under Section 44AB and that the liquor business was regulated by the Punjab Excise Department. It contended that stock registers were maintained under government control and submitted to the Excise Department at year-end, while there was no opening or closing stock because the annual licence arrangement resulted in liquidation of stock by the end of the financial year. It also stated that purchases were supported by government transport passes and permit memos, sales prices were regulated, and daily sales were compiled from outlet-level records.

The assessee further argued that purchases and government licence fees constituted approximately 98.12% of total expenditure and that major expenses such as electricity, freight, rent and salary were supported by details submitted during assessment. It also disputed the relevance of interest-free advances, submitting that interest-free funds exceeded the advances made. Reliance was placed on CIT (LTU) v. Reliance Industries Ltd. (2019) 410 TR 466 (SC), as well as decisions concerning rejection of books in liquor businesses.

The assessee relied upon its historical profit rates. For AY 2015-16, the declared net profit rate was 0.17%, while for the year under appeal it was approximately 0.47%. The assessee therefore contended that the declared result was higher than the accepted result of the preceding year and that the books should be accepted.

The Revenue opposed the submissions and relied upon the orders of the lower authorities. It submitted that the assessee had not produced sales registers supporting the cash sales and contended that the CIT(A) had already granted substantial relief.

The Tribunal considered the rival submissions and material on record. It noted that the assessee had regularly declared net income in the range of 0.17% to 0.47%. It also noted the AO’s observations concerning branch-wise sale bills, item-wise stock registers, salary registers and the “Ahata” licence fee. However, the Tribunal observed that the assessee was engaged in retail liquor sales through different branches and that maintaining individual sales details and item-wise stock registers was not practical in view of the volume-based nature of the business. It further noted that purchases were regulated and involved excisable goods.

The Tribunal observed that the assessee’s profit margin was not consistent and was volatile considering the nature of the business. It held that the AO should have adopted a margin after benchmarking it with the similar line of business. Considering the factual matrix and the circumstances of the case, the Tribunal determined that a net profit rate of 0.55% of net sales would be justified.

Accordingly, the Tribunal directed the AO to sustain net profit at 0.55% of net sales and partly allowed the assessee’s appeal. The Tribunal further held that the same findings would apply mutatis mutandis to the other assessment year involved, as the facts were stated to be exactly similar, notwithstanding the assessee having declared a net loss for that year. Both appeals were therefore partly allowed.

Cases Discussed

• CIT (LTU) v. Reliance Industries Ltd. (SC), (2019) 410 TR 466 (SC)
• Hem Raj vs ACIT (Chd Bench), 159 ITD 589
• ITO vs Laxmi Narain Ramswaroop Shivhare (Agra TM), 119 ITD 15
• CIT vs Kamlesh Kumar Jaiswal & Co. (All HC), 42 com 197

FULL TEXT OF THE ORDER OF ITAT AMRITSAR

1. These appeals filed by the assessee are against the order of the Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [“Ld. CIT(A)”, for short] dated 03.06.2025 for the Assessment Years 2016-17 and 2018-19.

2. Since the issues are common and the appeals are connected, hence the same are heard together and being disposed off by this common order.

We take up the assessee’s appeal being ITA No.585/Del/2025 for AY 2016-17 as lead case to adjudicate the issues under consideration.

1. On the facts and circumstances of the case as well as in law, the Learned CIT (A)has erred by upholding the rejection of books of accounts maintained in the regular course of business in the same manner as maintained in the earlier years and duly audited by the Chartered Accountant on the ground :-

(a) that no stock register has been produced without appreciating the fact that stock register is maintained under the control of Government of Punjab as per Government policy and deposited with the Government on the closure of the business i.e. on 31-03-2016 and there is no opening and closing stock.

(b) that in Column No.35 (a) of Form 3CD of the report, no quantitative details have been provided without appreciating the fact that the assessee deals only in one trade i.e. purchase and sale of liquor controlled by the Government especially when there is no opening and closing stock. Accordingly, the amount has been written as Nil as all purchases made have been sold and no defect has been pointed out by the Government as well as by the AO in the same.

(c) that no voucher of the expenses incurred has been filed without appreciating the fact that all expenses are petty expenses for running more than 60 outlets at different places and details of major expenses such as rent, salary and electricity has been placed on record.

(d) that assessee has advanced interest free loan to various parties and at the same time interest has been paid on loan taken from bank whereas as per facts on record, interest has been paid only against loan of Rs.48,54,282/-whereas the assessee was having interest free loan or deposit which are more than the interest free advances.

As such, rejection of books of accounts on these grounds is unjustified and uncalled for, addition made amounting to Rs. 75,47,823/- be deleted.

2. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred by estimating the income by applying Net Profit rate of 1% on the turnover of Rs.136,20,17,458/- by ignoring the history of the case that in the preceding year NP of 0.17% has been accepted against much less turnover of Rs.42,93,28,465/- as per material already on record. As such, addition made of Rs.75,47,823/- by estimating the income in the arbitrary manner is unjustified. The same be deleted. At any rate the sane is on very much higher side.

3. At the time of hearing, ld. AR of the assessee brought to our notice the relevant facts of the case and submitted his submissions. He submitted that the assessee is an individual operating as a retail wine contractor (L-14 and L- 2 licenses) in Bathinda, Punjab. The assessee is running proprietorship concern in the name of M/s Jaswinder Singh & Co. He submitted that the book results of the proprietorship concern are audited and copy of Audited Balance Sheet is enclosed in the PB at Pages- 5-17. He further submitted that the assessee is also a Partner in few Firms i.e Citizen Wines, Gold Star Wines, Oriental Wines, Roller Wines and Advanced Wines. He submitted that assessee filed regular Return of Income (ROI) for AY 2016-17 on 17.10.2016, declaring an income of Rs.94,13,460/- (including profit from proprietor business of Rs.63,70,099) and agricultural income of Rs.3,50,000/- and copy of ITR and computation of income is enclosed in the PB at Pages 1 to 4.

4. Ld. AR further submitted that the case was selected for Complete Scrutiny via CASS, and assessment was completed under Section 143(3) of the Income-tax Act, 1961 (for short ‘the Act’) on 28.12.2018. He submitted that the audited trading account declared a total gross turnover of Rs.139,17,92,236/- and a net profit of Rs.63,70,099/- (representing an NP rate of 0.46%). He submitted that the business was highly volume- driven, operating more than 60 retail outlets scattered across various locations.

5. Ld. AR submitted that the AO rejected the audited books of accounts under Section 145(3) due to non-maintenance of alleged branch-wise sale bills, itemized stock registers, and complete addresses for cash salary payments. Further, the AO noted that the assessee claimed an “Ahata” license fee of Rs.23,60,000/- but declared zero ancillary revenue from bottle sales or venue operations. He further submitted that the AO applied an arbitrary Net Profit rate of 1.50% on gross turnover based on non-confronted third-party cases, resulting in an NP estimation of Rs.2,08,76,883/- and a lump- sum addition of Rs.1,45,06,784/-.

6. He further submitted that in the appellate order dated 03.06.2025, the ld. CIT(A) upheld the Section 145(3) rejection, citing “Nil” entries for stock metrics in Form 3CD and unvouched direct expenses. However, the ld. CIT(A) observed that the AO had estimated the NP rate at 1.0% for the subsequent year (A.Y. 2017-18) under identical facts. Accordingly, invoking the rule of consistency, the ld. CIT(A) restricted the NP rate to 1.0%, thus confirming Rs.1,39,17,922/- and the remaining addition of Rs.69,58,961/- is deleted, and directed the AO to allow statutory depreciation of Rs.8,95,589/- against the net profit estimated at 1%.

6. Ld. AR submitted that against the aforesaid order, the assessee is in appeal before the Tribunal challenging the sustained rejection of books and the remaining addition left by applying NP rate of 1% as against the declared NP rate of 0.46%.

7. Ld. AR submitted that with regard to rejection of books of accounts, the AO as well as CIT(A) has erred in rejecting the books of accounts due to the following key points:

a) Clean Audit Report: The assessee’s accounts were fully audited by a qualified Chartered Accountant under Section 44AB of the Income Tax Act.

b) No Qualification Expressed: The statutory auditor did not pinpoint any operational fraud, material leakages, or financial discrepancies in the main trading systems.

c) Complete Record Submission: Full copies of the audited profit and loss accounts, balance sheets, and tax audit records were successfully submitted during the assessment.

d) End-to-End Monitoring: The retail liquor trade in Punjab is rigorously supervised and regulated by the state excise department at every transaction phase. All stock flows transparently via official Excise Department license memos, eliminating the possibility of unrecorded sales. There is no opening and closing stock and License is issued on yearly basis. The stock registers are regularly monitored by the Excise departments and the same is submitted with the department at the year end. The CIT(A) failed to realize that retail liquor licenses in Punjab are issued annually. Physical stock is fully liquidated by the end of the financial year, making a “Nil” entry in Form 3CD an absolute business reality, not a bookkeeping defect.

e) Inviolable Purchase Records: Total purchases of Rs.63.28 Crores were completely verified by official government transport passes and permit memos.

f) Fixed Price Sales: Every bottle was liquidated strictly at pricing thresholds explicitly prescribed by state government retail rules.

g) Justified Audit Disclosures: Entering “Nil” in Column 35(a) of Form 3CD reflects the structural reality of having no physical inventory left at year-end.

h) Authentic Source Documents: Daily sales entries were mathematically compiled from raw branch “Parchas” (daily outlet slips) reflecting actual retail cash collections.

i) Turnover Figure Accepted: The AO explicitly accepted the absolute validity of the gross sales figure (Rs.139.17 Crores) while attempting the net profit estimation.

j) Minor Cash Vouchers Insignificant: Minor unvouched cash expenses across 60 scattered rural outlets do not justify discarding a Rs.139.17 Crore audited turnover.

k) Ahata Income Misconceived: The lack of independent Ahata revenue cannot invalidate trading books, as the venue cost is a fixed license mandate to operate the retail shops.

l) Valid Core Trading Paper Trail: Major components like government license fees (Rs.73.27 Crores) and purchases are completely backed by statutory documents in the form of tax receipts. Further the Assessee has filed complete details relating to all the expenses during the course of assessment proceedings. Only Purchases and License Fees alone constitutes around 98.12% of the total expenses. Further the major expense under the Indirect exp includes Application Fees which is even paid to the Excise department, Electricity Exp which cannot be doubted and is uncured on all 60 outlets (Details at Pg- 30-31 of PB), Freight Exp which is also directly related to the business, Rent exp which is incurred on account of all 60 outlets (Details at Pg- 30-31 of PB) and Salary Exp for which person wise details was also given (Details at Pg- 32-34 of PB). The exp in percentage to total sales is as under:

m) The CIT(A) raised a new issue regarding m) Alleged Interest Free Advances: interest-free loans versus interest paid on bank loans. But the facts is that the Assessee has neither paid any Interest to the Unsecured Loan parties and has not earned any interest from the parties whom amount is advanced. The Unsecured Loans as raised by the Assessee itself is the tune of Rs.17.47cr. Besides that the Assessee has own capital to the tune of Rs. 3.67cr (Pg-14 of PB). Against total interest free funds of Rs.21.14cr, the amount advanced is only 7.57cr. Reliance in this regard is also being placed in the case of CIT (LTU) v. Reliance Industries Ltd. (2019) 410 TR 466 (SC).

9. Further, ld. AR relied on the following case laws wherein it has been held that the books of accounts cannot be rejected particularly in Liquor cases wherein there is majorly cash sales:

• Hem Raj vs ACIT as reported in 159 ITD 589 (Chd Bench)

“Where Assessing Officer rejected books of account of liquor business due to non-maintenance of sales records, since practice of not issuing bills was prevalent all over country in liquor trade, action of Assessing Officer was not justified'”

• ITO vs Laxmi Narain Ramswaroop Shivhare as reported in 119 ITD 15 (Agra TM)

Assessee-firm was engaged in business of trading in country liquor and IMFL – For relevant previous year, which was first year of assessee’s business, Assessing Officer rejected book results of assessee on ground that all sales were made in cash without proper vouchers supporting sales – Assessing Officer estimated gross profit rate at 5 per cent as against 3.11 per cent shown by assessee- It was found that all purchases by assessee were supported by valid documents and nature of assessee’s business was such that it could not maintain proper sale bills – Accounts of assessee were subject to regular audit – Further, in one of comparative cases cited by Assessing Officer gross profit rate was shown at 2.56 per cent – Commissioner (Appeals) had recorded a finding that there were no significant defects in books of account maintained by assessee – Whether in light of aforesaid factual details, gross profit rate declared by assessee was to be accepted – Held, yes.

• CIT vs Kamlesh Kumar Jaiswal & Co. 42 com 197 (All HC)

“Assessee was a liquor contractor – Assessing Officer observed that assessee had disclosed gross profit rate on lower side – So, he rejected books of account and made addition on estimate basis – Tribunal deleted said addition – Whether since addition was made on estimate basis and estimation is a question of fact, no substantial question of law was emerging from impugned order – Held, yes – Whether, therefore, appeal filed by revenue was to be dismissed at admission stage – Held, yes (Paras 7 & 8] [In favour of assessee)”

10. Further, the ld. AR submitted that GP/NP Chart in the case of the Assessee for the past few years is as under:

11. He submitted that from the above chart it can be seen that, the net profit rate during the year under consideration is higher as compared to the earlier years. So, in the above background it is requested that the book results of the Assessee may be accepted and the addition may be deleted.

12. At the time of hearing, ld. AR was directed to submit the chart showing the rate of profit declared to the Department in the earlier assessment years. The same is submitted by him and for the sake of brevity, the same is reproduced below :-

JASWINDER SINGH C/O GOLD STAR WINES

CHART SHOWING THE RATE OF PROFIT DECLARED TO THE DEPARTMENT

The assessee is engaged in the business of Country Liquor, taking contract in auction, for which there is fixed quota and particular licence fee and further the purchase and sale rate are also fixed.

Note: In Assessment Year 2017-18, it was a case of gross loss since the turnover is only 42% (approx) as compared to earlier year as the contract was very bad and licence fee was very heavy and, thus, it is requested that the minimum net profit rate be applied looking into the past history of the case.

13. In view of his above submissions, he pleaded that the audited books of accounts of the Assessee be accepted in their entirety and the Assessee’s past financial history clearly establishes that the declared Net Profit (NP) rate of 0.46% for the year under consideration is significantly higher than the NP rate O.17% reported in A.Y. 2015-16. He submitted that given that the retail liquor trade is highly volume-driven and stringently monitored by the state excise department, the lack of year-end physical inventory and minor cash vouchers are structural business realities rather than bookkeeping defects. Since the core trading expenses-consisting of verified purchases and statutory government license fees- constitute 98.12% of the total expenditures, there is no rational basis to discard the audited books. He submitted that supported by settled judicial precedents across the liquor industry, the book results deserve full acceptance, and the ad-hoc estimation sustained by the lower authorities must be set aside.

14. On the other hand, ld. DR of the Revenue relied on the orders of the lower authorities and submitted that the assessee had not submitted any sales registers in support of its cash sales. He also submitted that the Ld CIT(A) had reasonably given substantial relief in this case and objected to the submissions of the Ld AR.

15. Considered the rival submissions and material placed on record. We observed that the assessee is regularly filing the ROI and declares the net income in the range of 0.17% to 0.47%. The AO after verification of books observed that the assessee had not maintained the branch wise sale bills, item wise stock registers and salary registers. Further observed that the assessee claimed an “Ahata” license fee of Rs.23,60,000/- but declared zero ancillary revenue from bottle sales or venue operations. On careful consideration, the assessee sells the liquor on retail basis in different branches and it is not practical to maintain the sales details and individual item wise stock registers. The volume of sales and purchases are controlled and it is highly volume based. The purchases are regulated and excisable goods. We noticed that the assessee is not declaring the profit on regular margins rather it is volatile, considering the complications in this line of business, In our view, the AO should have adopted the margin after bench marking the same from the similar line of business. Considering the factual matrix and peculiar case in hand, in our view, for the sake of equity, the profit of 0.55% on net sales will justify in this case. Accordingly, we direct the AO to sustain 0.55% of net sales as the net profit. Accordingly, the grounds raised by the assessee are partly allowed.

16. Since the facts in AY 2017-18 are exactly similar to Assessment Year 2016-17, even though, the assessee had declared net loss in this year, however, our above findings in AY 2016-17 are applicable mutatis mutandis in Assessment Year 2017-18. Accordingly, the appeal filed by the assessee for AY 2017-18 is partly allowed.

17. In the result, both the appeals filed by the assessee are partly allowed.

Order pronounced in the open court on this 23^RD day of July, 2026.