Nagimouddin Laskar Vs ITO (ITAT Kolkata)
Books Rightly Rejected for Omitted Turnover, but 8% Profit Cannot Be Estimated Without Past History or Comparable Cases: Kolkata ITAT
The assessee, engaged in business, originally declared turnover of ₹3.34 crore and total income of ₹7.98 lakh. E-verification revealed cash deposits of ₹5.06 crore, substantially exceeding the turnover disclosed in the return.
During reassessment, the assessee admitted that certain sales and purchase invoices had been omitted from the original accounts and GST returns. Revised financial statements were furnished showing:
- turnover of ₹5.90 crore;
- purchases of ₹5.86 crore; and
- substantially the same gross and net profits as originally declared.
The AO rejected the books under section 145(3) and estimated net profit at 8% of the revised turnover, determining business income at ₹47.21 lakh and making an addition of ₹38,86,682. The CIT(A) confirmed the action.
The ITAT held that rejection of the books was justified because the original accounts had admittedly omitted both purchases and sales and therefore did not disclose the correct turnover. The subsequent revision, made only after detection of large cash deposits, also required proper verification.
However, the Tribunal found that the AO had given no objective basis for applying an 8% net-profit rate. Once books are rejected, profit estimation must ordinarily be based on:
- the assessee’s past profit history; or
- comparable cases in the same line of business.
The AO had relied on neither. A general assertion that the industry margin ranged from 6% to 10% was insufficient without supporting material.
The Tribunal also noted that one major supplier, Diamond Textiles, had confirmed purchases of ₹4.42 crore under section 133(6), while confirmations from the remaining suppliers had not been obtained in time.
Accordingly, the CIT(A)’s order was set aside and the matter restored to the AO for de novo assessment after verifying the revised books, vouchers, sales, purchases and supplier confirmations and adopting a properly supported profit rate.
List of Cases Discussed / Relied Upon
- Kachwala Gems v. JCIT 288 ITR 10 (SC)
- Pawan Enterprises v. ACIT 137 ITD 85 (Jaipur)
- CIT v. A. Krishnaswamy Mudaliar
- CIT v. P.V. Kalyanasundaram
- Ramanand Industries Vs ITO (ITAT Jaipur)
- Kamani Oil Industries Pvt. Ltd. Vs DCIT (ITAT Mumbai)
- COMMISSIONER OF INCOME TAX Vs KIRAN INDUSTRIES PVT LTD (HIGH COURT OF GUJARAT)
- CIT vs. Swastik Foods (Himachal Pradesh High Court)
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal filed by the assessee is against the order of the National Faceless Appeal Centre, Delhi [hereinafter referred to as Ld. ‘CIT(A)’] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for AY 2020-21 dated 15.12.2025.
2. The assessee is in appeal before the Tribunal raising the following grounds of appeal:
“1. That on the facts and in the circumstances of the case, the Learned CIT(A) erred in confirming the assessment order passed under section 147 read with section 144B of the Income-tax Act, 1961, which is arbitrary, unjustified and bad in law.
2. That the Learned CIT(A) erred in upholding rejection of books of account under section 145(3) without pointing out any specific defect, discrepancy or falsity in the revised audited books of account and supporting records produced by the appellant.
3. That the Learned CIT(A) failed to appreciate that the revised financial statements were voluntarily furnished during assessment proceedings after reconciliation of omitted invoices and were duly supported by books of account, audit report and confirmations from parties.
4. That the Learned CIT(A) erred in sustaining estimation of business income by applying arbitrary net profit rate of 8% on turnover without any cogent basis, comparable instances or material evidence.
5. That the authorities below failed to appreciate that no material whatsoever was brought on record to establish suppression of profit, bogus purchases or concealment of income and therefore the impugned addition based merely on suspicion, conjecture and surmises is liable to be deleted.
6. That the Learned CIT(A) failed to appreciate that corresponding purchases against the revised turnover were duly available and verified and therefore enhancement of turnover alone could not justify arbitrary estimation of profit.
7. That the Learned CIT(A) erred in ignoring the confirmation received under section 133(6) from Diamond Textiles corroborating the revised purchase figures disclosed by the appellant.
8. That the Learned CIT(A) wrongly relied upon judicial precedents which are distinguishable on facts and not applicable to the case of the appellant.
9. That the Learned CIT(A) erred in confirming levy of interest under sections 234A, 234B and 234C without granting proper relief and credit for taxes already paid by the appellant.
10. That the appellant craves leave to add, alter, amend or withdraw any ground or grounds of appeal at or before the time of hearing.”
3. Brief facts of the case are that the assessee had filed the return of income for AY 2020-21 on 18.01.2021 declaring total income at ₹7,98,260/-. The return of income was selected under the E-Verification Scheme, 2021 to investigate cash deposits in the bank accounts of the assessee aggregating to ₹5,06,00,000/-, which far exceeded the declared turnover of ₹3,33,60,497/-. Subsequently, a notice u/s 148 of the Act was issued. During the assessment proceedings, the assessee submitted that the original turnover was understated due to inadvertently omitted invoices and he furnished revised financial statements reflecting the turnover of ₹5,90,14,925/- and purchases of ₹5,86,29,387/-, while keeping the gross and net profits identical to those originally declared. The Assessing Officer (hereinafter referred to as Ld. ‘AO’) observed that the revised books did not present a true and correct picture and rejected the books of account u/s 145(3) of the Act. The Ld. AO thereafter, estimated the business income by applying net profit rate of 8% on the admitted enhanced turnover of ₹5,90,14,925/-, which resulted in the business income of ₹47,21,194/-, and thereby he made an addition of ₹38,86,682/- to the income of the assessee and assessed the total income at ₹46,84,292/- u/s 147 r.w.s. 144B of the Act. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. CIT(A), who noted that the assessee had admitted the original audited books were incorrect and revised them post-reopening with identical profit margins, despite the substantial turnover escalation, which indicated an attempt to cap the tax liability. Relying on judicial precedents, the Ld. CIT(A) held that the Ld. AO was justified in rejecting the books of account u/s 145(3) of the Act and applying a reasonable 8% net profit rate. Accordingly, the Ld. CIT(A) confirmed the action of the Ld. AO and dismissed the appeal of the assessee vide his findings as under:
“7. I have carefully considered the assessment order dated 04.02.2025 passed under section 147 read with section 144B, the grounds of appeal raised in Form No. 35, the detailed written submissions filed by the assessee during appellate proceedings, the remand report from the Assessing Officer and the entire material available on record. Section 145(3) of the Income-tax Act, 1961 empowers the Assessing Officer to reject the books of account where he is not satisfied about their correctness or completeness in presenting the true picture of the income of the assessee. This provision is invocable when material discrepancies are noticed, particularly where the assessee admits to understatements in original accounts only upon confrontation during enquiry proceedings, and subsequent revisions appear tailored to evade enhanced tax liability while retaining identical profitability figures.
8. Where the assessee produces books but the Income-tax Officer is not satisfied that they represent the true state of affairs, he can reject them and make an estimate of income on the basis of material available
9. The Hon’ble Supreme Court in Kachwala Gems v. JCIT 288 ITR 10 (SC) (Source: Supreme Court of India) upheld rejection of books under section 145(3) where quantitative details were incomplete and d iscrepancies persisted despite opportunities, confirming best judgment estimation. Where the assessee produces books but the Income-tax Officer is not satisfied that they represent the true state of affairs, he can reject them and make an estimate of income on the basis of material available
“Thereafter the books of accounts of the assessee were rejected by the Assessing Officer and he resorted to best judgment assessment under Section 144 of the Income Tax Act. The Assessing Officer in the assessment order mentioned some comparable cases and was of the view that the case of the assessee is more or less having similar facts as that of M/s. Gem Plaza where the Gross Profit has been taken as 35.48%
The counsel for the assessee has submitted before us that the Income Tax Authorities wrongly held that appellant has shown bogus purchases, and the books of accounts were wrongly rejected. In our opinion, whether there were bogus purchases or not, is a finding of fact, and we cannot interfere with the same in this appeal. As regards the rejection of the books of accounts, cogent reasons have been given by the Income Tax Authorities for doing so, and we see no reason to take a different view.”
The Assessing Officer was justified in rejecting the books of account under Section 145 and making a best judgment assessment under Section 144.
10. The Hon’ble ITAT Jaipur in Pawan Enterprises v. ACIT 137 ITD 85 (Jaipur) (Source: ITAT Jaipur) confirmed rejection where assessee failed to explain discrepancies in trading account and books did not reflect true profitability.
11. “Further, the assessee could not forward any reasons for the decline in G.P rate as compared to the previous year. In view of the above, and in the absence of production of any qualitative details either in the assessment proceedings or before me, the rejection of books of accounts is upheld.”
The discrepancies pointed out by the Assessing Officer while rejecting the book results have not been satisfactorily explained by the assessee. These precedents squarely support the Assessing Officer’s rejection where, as here, the assessee admits original audited books were incorrect, revises them post-reopening with identical gross profit/net profit despite 77% turnover escalation (3.77% GP on Rs. 3.33 crore vs. 2.13% on Rs. 5.90 crore), audited by same CA, indicating manipulation.
12. The assessee’s own admission in reply dated 22.10.2024 (para 4.2.6 of assessment order) that “some invoices were mistakenly not considered in accounts as well as while filing the GST return” establishes original audited books, ITR and GST returns did not reflect true turnover, justifying reopening under section 148 and rejection under section 145(3). This admission surfaced only post-notice confronting Rs. 5.06 crore cash deposits exceeding declared Rs. 3.33 crore turnover. Revised P&L/Balance Sheet (Ack. No. 673459940311024 dt. 31.10.2024 by same CA Banerjee Sarkar & Co.) suspiciously retains gross profit Rs. 12,56,766/- and net profit Rs. 8,34,512/- despite admitted sales jump from Rs. 3.33 crore to Rs. 5.90 crore, prima facie evidencing fabrication to cap tax liability.
13. Verification under section 133(6) confirms purchases from Diamond Textiles at Rs. 4.41 crore (exceeding ITR Rs. 3.47 crore), validating higher turnover but not manipulated profitability. No purchase invoices, revised GST returns or complete supplier confirmations filed despite repeated opportunities (notices dt. 01.10.2024, 15.10.2024, SCN dt. 07.01.2025). 8% net profit rate on admitted turnover (Rs. 47,21,194/-) reasonable for cloth trading (industry norm 6-10%). Assessee’s reliance on CIT v. A. Krishnaswamy Mudaliar and CIT v. P.V. Kalyanasundaram inapplicable, as those involved no admitted defects/revisions; here discrepancies confessed justify rejection per Pawan Enterprises (supra). Interest under sections 234A/B/C correctly computed post-SAT credit Rs. 90,000/-. All grounds fail.
14. In view of the aforesaid facts, statutory provisions and binding judicial precedents, the Assessing Officer’s rejection of books under section 145(3), estimation at 8% GP and addition of Rs. 38,86,682/- to business income are upheld. Total income stands confirmed at Rs. 46,84,292/- with tax and interest demand Rs. 19,54,770/-. Penalty proceedings under section 270A(9) for misreporting stand approved.
15. In the result, the appeal filed by the assessee is dismissed.”
4. Aggrieved with the order of the Ld. CIT(A), the assessee has filed the appeal before the Tribunal.
5. Rival contentions were heard and the submissions made have been examined. The Ld. AR submitted that the assessee had voluntarily reconciled the business records and discovered that certain sales and purchase invoices had inadvertently been omitted while preparing the original accounts and GST returns and, therefore, the revised audited financial statements were furnished before the Ld. AO which were supported by the books of account, the audit report and confirmations from the parties as one of the major suppliers, viz., Diamond Textiles confirmed the transactions aggregating to ₹4,41,56,986/- in response to the notice issued u/s 133(6) of the Act. Though the turnover and purchases were revised, however the gross profit and the net profit originally disclosed remained substantially unchanged. The Ld. AO, however rejected the books of account and determined the business profit. It was stated that the books of account were rejected without pointing out any specific defect, discrepancy or falsity as the assessee could not properly submit the reasons for omission of both the turnover as well as the purchases. The Ld. AR requested that the assessment may be remanded before the Ld. AO. The Ld. DR relied upon the order of the Ld. CIT(A) and requested that the same may be upheld.
6. We have considered the submissions made, gone through the facts of the case and perused the record and the order of the Ld. CIT(A). The Ld. AR submitted that since the accounts could not be explained properly, one more opportunity may be provided to the assessee to explain the discrepancy by producing the proper books and vouchers as the Ld. AO has not disputed the purchases and the purchases from the other 3 parties out of the 4 to whom notices u/s 133(6) of the Act were issued could not be confirmed in time despite the assessee assuring the Ld. AO on 12.01.2025 that the other parties would confirm the same as soon as possible. The letter in this regard is mentioned at page 17 of the assessment order. Thus, in our considered view, as the turnover was not correctly reported and the assessee submits that both the purchases as well as the sales were omitted to be included; therefore, the books of account were liable to be rejected. However, the Ld. AO has not given any justification for the application of the net profit rate as once the books of account are rejected, either the past history of the case has to be considered for estimating the profit or the profit shown in similar line of business can be applied. That being so and the Ld. AO not having done so, the Bench was of the view that one more opportunity of being heard may be provided to the assessee. Therefore, in the interest of justice and fair play, the order of the Ld. CIT(A) is hereby set aside and the restore the matter back to the file of the Ld. AO for de novo assessment after providing due opportunity to the assessee. Hence, all the Grounds of appeal are partly allowed for statistical purpose.
7. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 19th August, 2026.
