Venkatesh Govindappa Vs DCIT (ITAT Bangalore)
Audited Books Cannot Be Rejected Without Identifying Specific Defects; Bangalore ITAT Sets Aside 5% Profit Estimation
The assessee operated three liquor bars and had purchased liquor worth ₹5.13 crore from Karnataka State Beverages Corporation Ltd. Although the accounts reflected a loss, the AO rejected the books under section 145(3) and estimated net profit at 5% of turnover, principally because the stock register and cash book were allegedly not produced.
The assessee explained that the statutory stock registers were issued and authenticated by the Excise Department and had to be surrendered to it upon renewal of the liquor licences. He specifically requested the AO to obtain the registers directly from the Excise Department under section 133(6). The assessee also stated that the cash book was voluminous and offered it for inspection at his premises.
The ITAT observed that the assessee’s books were duly audited under section 44AB, and the tax auditor had confirmed maintenance and verification of the cash book, sales register and other records. Neither the audit report nor the AO identified any specific defect in the accounts. Further, no adverse action had been taken by the Excise Department concerning stock maintenance.
The Tribunal held that the AO could not reject the books merely because the physical stock register was with the Excise Department or because the cash book was voluminous. The AO should have inspected the records or obtained the stock register directly from the Excise Department. Therefore, the rejection of books and estimation of profit at 5% of turnover were held unjustified.
Regarding ₹1.80 lakh reflected in Form 26AS as an incentive from a liquor manufacturer, the assessee had sought transaction details from the company but had not received a response. The ITAT restored this issue to the AO for fresh verification after considering the company’s reply and other relevant evidence.
Accordingly, the orders of the lower authorities were set aside, and the issues were restored to the AO for fresh adjudication in accordance with the Tribunal’s findings. The appeal was allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 14/01/2026 in respect of the A.Y. 2018-19.
2. The brief facts of the case are that the assessee is an individual doing the business of liquor and filed his return of income on 01/11/2018 and declared a loss. The case of the assessee was selected for scrutiny under CASS and notice u/s. 143(2) was issued. Thereafter, notice u/s. 142(1) was issued. The AO based on the 26AS statement, found that he has paid total amount of Rs. 5,12,85,697/- for the purchase of the liquor from Karnataka State Beverages Corporation Ltd. on which the TCS of Rs. 5,13,023/ – was collected. Since the assessee had shown a low income and the assessee had made payment of expenses in cash, details were sought for by the AO by issuing notice u/s. 142(1) of the Act. The assessee also filed his reply and explained that he is having three liquor bars and also the cash book is a voluminous one and therefore it could not be furnished physically and requested for deputing some officer for verification. The assessee also explained the circumstances under which the stock book was not made available to him since the every stock book should be attested by the Excise Inspector of the Excise Department, Mysore and each and every page has to be stamped by the said authority. The assessee also submitted that the accounting year for the Excise Department is 1st July to 30th June and while renewing the excise license, the assessee has to necessarily surrender his stock book to the Excise Department and thereafter after granting the renewal, the Excise Department will issue a fresh stock register with their attestation. Therefore, the assessee submitted that the stock book related to the period ending 30th June, 2017 and 30th June, 2018 were already surrendered before the Excise Department and therefore the same could not be furnished before the AO. The assessee also requested the AO to issue summons to the Excise Department u/s. 133(6) for production of the stock book. The assessee, anyhow, furnished the other details as sought for by the AO. Insofar as the two receipts shown in form 26AS, the assessee submitted that the receipt of Rs. 1,80,000/- from Anheuser Busch Indev India Ltd. is the incentive given by the liquor manufacturers based on the details available with the Karnataka State Beverages Corporation Ltd. for which the assessee has no knowledge about the same and therefore addressed a letter to the said company for furnishing the details for the said payment and undertook to furnish the same as and when the company has furnished the details. The other payment of Rs. 37,500/- from Crown Beers India Pvt. Ltd. was for the rent given by the said company for providing the space for the display of their products and the same was accounted in the books of accounts under the head incentives. The assessee had also relied on the P&L account wherein the said incentives were properly recorded. The assessee also furnished the copy of the acknowledgment for sending the TDS returns. In respect of the allegation that the interest was not reflected in the books of accounts, it was submitted by the assessee that the said interest was not at all received by him. The AO without considering the said reply, had stated that the assessee had not furnished the cash book as well as the stock register for verification of expenses. The AO, therefore, concluded that in spite of the increase in the turnover, the loss declared by him could not be taken as a genuine one and estimated the profit at 5% of the total turnover after rejecting the books u/s. 145(3) of the Act. Similarly, the AO had added the incentive received from the Anheuser Busch Indev India Ltd. as income since the assessee had not furnished the details. Similarly, the interest receipt was also taken as income.
3. As against the said order, the assessee filed an appeal before the Ld.CIT(A). The assessee had raised several grounds on merits and submitted that the AO had not granted sufficient opportunity to the asse ssee to produce the details and also submitted that the invocation of section 145(3) is not correct. The assessee also submitted that sales register were produced before the AO but without considering the said details, the AO had arbitrarily made the assessment. The Ld.CIT(A) considered the said grounds but not satisfied with the same, had confirmed the assessment.
4. As against the said order, the assessee is in appeal before this Tribunal.
5. At the time of hearing, the Ld.AR submitted that the AO had failed to know that the assessee had maintained the books of accounts which were duly audited u/s. 44AB of the Act and a report was also filed before the authorities and therefore, without pointing out any mistake in the maintenance of books of accounts, the estimation of net profits at 5% of the total turnover is not in accordance with law and liable to be set aside. The Ld.AR further submitted that even though the assessee had explained the reasons for not producing the stock book, the AO without appreciating the said facts, had observed that the assessee had not produced the stock book. The Ld.AR further submitted that if the AO is not satisfied with the said reply, he could have called for the records from the Excise Department by issuing notice u/s. 133(6) of the Act which the AO had failed to do so and therefore, the estimated additions are not warranted. The Ld.AR also submitted that the assessee had sent a letter to the company who has paid the incentives and the company had not responded till the assessment has been completed and relied on the letter sent by the assessee enclosed in paper book page numbers 36 to 38 and prayed that the same need not be taken as an income. The Ld.AR had not pressed ground no. 4 and therefore, prayed to consider the other grounds and to allow the appeal.
6. The Ld.DR relied on the order of the AO and also the observation made in page 5 of the order wherein the AO had mentioned that the assessee had not maintained the books of accounts and therefore prayed to dismiss the appeal.
7. We have heard the arguments of both sides and perused the materials available on record.
8. The assessee had raised totally 27 grounds in which several grounds were raised about the rejection of the books of accounts u/s. 145(3) of the Act. Similarly, several grounds were raised in respect of the incentive received by the assessee which was reflected in form 26AS. For the sake of convenience, we are deciding the issues independently which will answer to the several grounds raised on the same issue. Therefore, we are not adjudicating the appeal by ground-wise but decided the appeal on issue- wise.
9. We have also perused the assessment order in which the AO had rejected the books of accounts u/s. 145(3) of the Act. We do not find any adverse findings about the maintenance of the books of accounts by the AO. In fact, the assessee had explained the reasons for not producing the stock book and also prayed the AO to issue summons u/s. 133(6) of the Act to the Excise authorities to produce the stock book. It is a fact that the Excise Department will give the stock book with their endorsement and at the end of the Excise year, the assessee has to necessarily hand over the stock book and in turn, they will receive the new stock book from the Excise Department. Further, the Excise Department is having full control about the stocks maintained by the assessee and any defects in the maintenance of the stock would be viewed by them very seriously. No such action was taken by the Excise Department which shows that the assessee had maintained its stock in a pucca manner. Even though the assessee had requested the AO to get the details from the Excise Department by issuing summons to them but unfortunately, the AO without giving any finding to the said request, had simply alleged that the assessee had not furnished the stock book, which in our view is not correct.
10. The next allegation made by the AO is that the assessee had not maintained the sales ledger for the sale of liquor. He further alleged that only after the show cause notice issued by the AO, the assessee had prepared the sales register in respect of three bars. We have also considered the said allegation made by the AO and found that the assessee had maintained the books of accounts which was also audited and a report was also furnished to show that the books were maintained properly. The audit report does not point out that the assessee had not maintained the sales register and in such circumstances, the said allegation made by the AO is also without any basis.
11. The another allegation made by the AO is that the cash book was not produced by the assessee even though the AO had issued notice for furnishing the same. We have already stated about the audited books of accounts and the audit report filed by the assessee and the auditors have not found any shortcomings in the maintenance of the books of accounts and in that circumstances, the AO’s allegation that the assessee had not maintained the said cash book is devoid of merits. Further, we have also considered the fact that the assessee had informed the AO about the voluminous of the cash book and prayed to depute an officer for verification of the same in their premises by relying on section 131(1)(d) of the Act which the AO had failed to do it or not even communicated his decision on the request made by the assessee. Our view is also supported by the report in form 3CD given by the auditor in which the auditor had accepted that the assessee had maintained the cash book and they have also examined the said cash book. In such circumstances, without having any other evidences, the AO cannot simply allege that the assessee had not maintained the cash book and prepared the same after the notice has been issued.
12. By stating the above said reasons, the AO had estimated the net profit at 5% of the total turnover by rejecting the books of accounts u/s. 145(3) of the Act as against the loss declared by the assessee. We do not find that the reasons stated by the AO for rejecting the books of accounts u/s. 145(3) is correct in view of the fact that the books were audited and also a report has been filed in which the auditors had accepted that the assessee is maintaining the books of accounts which were also examined by them and in that circumstances, there is no valid reason for rejecting the books of accounts and making an estimation.
13. In any event, the AO has not verified the stock book, cash book and sales register before estimating the income at 5% of the turnover. We have observed from the audit report, the assessee is maintaining all the records which were examined by them and on that basis, report has been given by them. We have also considered the reasons for not producing the stock book before the authorities. We have also satisfied that the cash book and sales registers are maintained by the assessee but the AO had not accepted the same by citing some technical defects. In such circumstances, we are of the view that the AO has to consider the records produced by the assessee or issue summons to the Excise Department to produce the stock book and thereafter complete the assessment. We have already stated in this order that the assessee is maintaining cash book as well as sales register and therefore the estimation of income at 5% of the turnover is not required.
14. Insofar as the amounts reflected in form 26AS, it is the case of the assessee that the amount has been given by the liquor manufacturers as incentive and the assessee has no knowledge about the same and therefore sought for the details from the said companies. The assessee had also produced a copy of the letter addressed to the said company. The assessee also submitted that they have not received any reply from the said company and undertook to furnish the reply to the AO as and when the assessee had received the details from the companies and thereafter suitable reply would be filed to the said query. We have also considered the copy of the letters filed in the paper book at page numbers 36 to 38 and satisfied that the assessee had took efforts to obtain the details from the said companies. In such circumstances, we are of the view that this issue also requires reconsideration from the end of the AO and we therefore, direct the AO to consider the replies received from the said companies and thereafter decide the issue on merits in accordance with law. We, therefore, set aside the orders of the lower authorities and remit these issues to the file of the AO for fresh adjudication keeping in mind the findings given in our order.
15. In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 20th August, 2026.
