ITO Vs Singhal Securities Private Limited (ITAT Delhi)
Summary: ITO and Singhal Securities Private Limited filed cross appeals against the NFAC order dated 20.02.2026 for AY 2017-18 arising from the assessment order dated 11.12.2019 under section 143(3). The assessee had declared a loss of Rs.33,37,792/- and its case was selected for scrutiny due to high revenue from operations and absence of scrutiny in the preceding five assessment years. The Assessing Officer rejected the books of account, estimated gross profit at 2% of turnover of Rs.205.43 crore and made an addition of Rs.4.10 crore. The CIT(A) upheld rejection of the books but restricted the gross profit rate to 0.5% of turnover. Before the Tribunal, the assessee challenged the applicability of section 144B and the estimation of profit. The Tribunal held that section 144B did not apply to the assessment in question and that mandatory notices under sections 143(2) and 142(1) had been issued. On the profit estimation issue, the Tribunal noted that the assessee relied on a 560-page paper book containing information concerning its share trading activity, accounting and reporting, while the lower orders were silent on substantial evidence. The Tribunal held that expenses and turnover ratio or absence of corresponding credit entries could not, considering the nature of the assessee’s business, form the basis for rejection of books. It further held that the profit estimation lacked methodical reasoning and was unsupported by past accepted trading results or a proper understanding of the business. Relying on State of Kerala v. C. Velukutty, (1966) 60 ITR 239 (SC), the Tribunal held that estimation could not be based on pure guesswork or caprice. The addition was therefore deleted in full. The assessee’s appeal was allowed and the Department’s appeal was dismissed.
Rejection of books and estimation of profit in online share trading cannot rest merely on mismatch between turnover and bank entries or on arbitrary profit rates; a best-judgment assessment must identify substantial defects and be founded on a rational and business-specific basis.
Facts. The assessee-company was engaged in the business of purchase and sale of listed securities through recognised stock exchanges and a recognised stock broker. It filed its return declaring a loss of Rs. 33,37,792 and reported a substantial turnover of Rs. 205.43 crore. The case was selected for scrutiny primarily because of the high revenue from operations and absence of scrutiny assessment in the preceding five years.
During the assessment proceedings, the Assessing Officer noted that the bank statement produced reflected comparatively negligible direct banking transactions as against the substantial turnover disclosed. The assessee explained that, being engaged in online share trading, the pay-in and payout transactions were routed through its broker and sale proceeds were frequently adjusted against subsequent purchases. It was also explained that the identity of the ultimate buyers and sellers in stock exchange transactions was ordinarily not available to the assessee because transactions were executed through the recognised exchange mechanism.
AO / CIT(A) Findings. The Assessing Officer treated the assessee’s accounts as unreliable, primarily referring to non-compliance during the earlier stages of assessment, non-production of certain primary records, mismatch between the disclosed turnover and banking transactions, and absence of complete supporting details regarding purchases and sales. The books of account were accordingly rejected and the Assessing Officer estimated the gross profit at 2% of the turnover, resulting in an addition of approximately Rs. 4.10 crore.
The CIT(A)/NFAC upheld the rejection of the books of account under section 145(3). However, considering the nature of share trading business, where turnover may be substantial but margins comparatively thin, the CIT(A) reduced the estimated profit rate from 2% to 0.5% of the turnover. Both the assessee and the Revenue consequently filed cross-appeals before the Tribunal.
The assessee also challenged the validity of the assessment by alleging non-compliance with the faceless assessment procedure under section 144B.
ITAT Findings. The Tribunal first rejected the assessee’s challenge based upon section 144B. It observed that the assessment had been completed by the jurisdictional Assessing Officer and was outside the scope of the faceless assessment procedure. The mandatory statutory notices under sections 143(2) and 142(1) had admittedly been issued. Therefore, the Tribunal held that alleged non-compliance with section 144B could not invalidate an assessment where that provision itself was not applicable.
On the substantive issue, however, the Tribunal found substantial merit in the assessee’s case. It observed that rejection of books of account and estimation of income require the existence of substantial defects or discrepancies in the accounts. The nature of the assessee’s business was particularly relevant because online share trading through recognised brokers and stock exchanges operates differently from ordinary trading businesses.
The Tribunal accepted that the absence of corresponding bank credits equal to the reported turnover could not, by itself, establish that the books were unreliable. In share trading, pay-in and payout may take place through the broker, and sale proceeds may be adjusted against further purchases. Similarly, the turnover-to-expense ratio could not automatically constitute a valid basis for rejecting the books without examining the peculiar nature and mechanics of the business.
The Tribunal further noted that the assessee had placed substantial documentary material on record, including broker ledger accounts, contract notes and other supporting evidence contained in a voluminous paper book. However, neither the Assessing Officer nor the CIT(A) had meaningfully examined these materials or pointed out specific defects therein. There was also no allegation that the assessee had followed an irregular or inconsistent method of accounting.
Importantly, the Tribunal found that both the Assessing Officer and the CIT(A) had adopted profit rates of 2% and 0.5%, respectively, without any business-specific, past-history-based or methodical reasoning. No comparable cases, accepted past results, industry analysis or other rational parameters had been relied upon for determining the estimated profit.
The Tribunal held that once an assessment is based upon estimation, such estimation cannot be arbitrary. An estimate must have a rational nexus with the material available on record and must be based upon a proper understanding of the nature of the assessee’s business. Since the rejection of books itself was based on superfluous observations and the subsequent profit estimation lacked any rational or methodical foundation, the entire addition was liable to be deleted rather than merely reduced.
Outcome. Assessee’s appeal allowed. Revenue’s appeal dismissed.
The Tribunal deleted the estimated profit addition in its entirety. It held that the addition of Rs. 4.10 crore made by applying a 2% profit rate, and subsequently restricted by the CIT(A) to 0.5%, had no sustainable rational or evidentiary foundation.
Ratio. For rejection of books under section 145(3) and estimation of income, the Revenue must establish substantial and relevant defects in the accounts after considering the nature of the assessee’s business. Mere mismatch between turnover and bank entries, particularly in online share trading where transactions are settled through brokers and adjusted through pay-in and payout mechanisms, cannot by itself justify rejection of books. Further, any best-judgment estimation of profit must be supported by a rational, objective and business-specific basis and cannot be founded upon arbitrary percentages, guesswork or caprice.
Cases Discussed / Relied Upon
- State of Kerala v. C. Velukutty — 1965 (12) TMI 32 – Supreme Court — The Supreme Court laid down the fundamental principle that an estimate in a best-judgment assessment must have a rational basis and cannot be the result of pure guesswork or caprice.
- Action Electricals v. Deputy Commissioner of Income-tax — 2002 (7) TMI 64 – Delhi High Court — Relied upon for the principle that rejection of books depends upon the facts and circumstances of each case and requires consideration of substantial defects in the accounts.
- Shivam Builders Private Limited v. Deputy Commissioner of Income Tax — 2024 (5) TMI 1205 – ITAT Ahmedabad — Considered in relation to rejection of books where the assessee failed to produce books of account and supporting documents sought during assessment proceedings.
FULL TEXT OF THE ORDER OF ITAT DELHI
These cross appeals preferred by the assessee and revenue against the order dated 20.02.2026 of the Ld. National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in DIN & Order No: ITBA/NFAC/S/250/2025-26/1086289852(1)arising out of the order dated 11.12.2019 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by ITO, Ward 23(2) Delhi, for AY: 2017-18.
2. Heard and perused the records. The assessee filed the return declaring loss and the case of assessee was selected for scrutiny for the reasons of high revenue from operations and no scrutiny is last five years. After giving assessee an opportunity of hearing the ld. AO, rejected the books and gross profit was estimated at 2% of the turnover and an addition of Rs. 4.10 Cr. was made to the assessee’s income. Ld. CIT(A) has sustained the rejection of accounts but held that addition be restricted to .5% of the turnover. Thus both the sides are in appeal. As for completeness the relevant part of impugned order of ld. CIT(A), is reproduced below;
“2.1 The appellant is a Company and filed its return of income for the AY 2017-18 on 31.03.2017 by declaring a loss of Rs.33,37,792/-. The case was selected in scrutiny through CASS for the reason of high revenue from operations (including other income) and no scrutiny in preceding five assessment years. Accordingly, notice u/s. 143(2) of the act dated 23.08.2018 was issued to the appellant. Subsequently, the AO had issued notice u/s. 142(1) dated 19.07.2019 & 26.08.2019 and a show cause notice on 20.09.2019. In response to these notices the appellant has failed to furnish any reply or documents.
2.2. Thereafter the appellant was provided final opportunity of being heard vide a show cause notice dated 05.12.2019 with the request to file its submission by 09.12.2019. In response to this notice the appellant has filed reply dated 06.12.2019 &07.12.2019. In this replies the appellant filed basic details, copy of audit report, bank account No. 4505135000002390 maintained with KarusVysya Bank where total credit entries of Rs. 9,10,025/- and debit entries is of Rs. 9,77,416/- in respect of sale purchase parties.
2.3 Although the company eventually submitted limited details, the Assessing Officer found serious discrepancies between the huge turnover declared (Rs.205.43 Crore) and negligible banking transactions, incomplete disclosure of bank accounts, and absence of supporting evidence for purchases, sales, and stock. The explanation that shares transactions were routed through a broker and the statement of the appellant that the details of buyers/sellers were unknown to it, was rejected. Consequently, the books of account were also rejected, gross profit was estimated at 2% of total turnover, and an addition of Rs.4.10 crore was made to the appellant’s income. With this addition, the AO has passed the assessment order u/s.143(3) of the act dated 11.12.2019 and assessed the total income at Rs.4,10,86,788/-.
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4.5 Considering the assessment order, the material available on record, and the written submissions of the appellant. The Assessing Officer has brought on record specific and serious deficiencies in the conduct of the appellant during assessment proceedings, namely persistent non-compliance to statutory notices issued under sections 143(2) and 142(1), nonproduction of primary books of account, failure to furnish complete bank statements despite claiming an exceptionally high turnover of Rs.205.43 crore in the return of income, and absence of basic documentary evidence such as contract notes, broker ledgers, and party wise details to substantiate purchase and sale transactions.
4.5.1 The appellant disclosed a turnover of Rs.205,43,39,418/- with negligible expenses and declared loss, whereas bank statements initially produced reflected credit entries of only Rs.9,10,025/- and debit entries of Rs.9,77,416/-, giving rise to a serious mismatch between disclosed turnover and banking trail. The explanation that share transactions were routed through a broker without maintaining corresponding records has rightly been rejected by the Assessing Officer, as the return of income was duly verified by the director and statutory audit was claimed to have been conducted. In such circumstances, the rejection of books of account under section 145(3) is fully justified, supporting observations taken from the law laid down in Shivam Builders (P.) Ltd. vs. Deputy Commissioner of Income-tax [2024] 163 taxmann.com 196 (Ahmedabad – Trib.)[09-05-2024] “Where during course of assessment proceedings, assessee-builder did not produce books of account and other documents as sought by Assessing Officer, Assessing Officer had rightly rejected books of account of assessee under section 145(3)”.
4.5.2 The Assessing Officer, considering the scale of operations and absence of verifiable evidence, estimated gross profit at 2% of turnover, which cannot be said to be arbitrary or without basis, particularly in light of the appellant’s complete failure to cooperate during assessment proceedings. However, during the appellate proceedings the appellant has made some relevant submissions.
4.6 On perusal of the submissions, the records available and at the same time, keeping in view the nature of the business of share trading, where turnover is characteristically high and margins are comparatively thin, and to strike a balance between the interests of revenue and principles of natural justice, it would be fair and reasonable to restrict the gross profit rate to 0.5% of the declared turnover. Accordingly, while the action of the Assessing Officer in rejecting the books and invoking estimation is upheld, the gross profit is restricted to 0.5% of turnover, and the Assessing Officer is directed to recompute the income accordingly.”
3. Assessee vide appeal has primarily raised the ground no. 1 & 2 in its appeal and the assesse has challenged the assessment order in view of the provision of Section 144B r.w.s 144C of the Act asserting that the assessment order is not passed in accordance with the said provisions as no show cause notice was issued by the AO. In this context, as we go through the assessment order we find that there is no mention of the issuance of such a notice. Assessee has provided copy of show cause notice u/s 143(2) of the Act at page No. 146-147 and at page No. 550 copy of notice dated 19.07.2019 u/s 142(1) has been provided. Similarly, at page No. 553 copy of notice dated 26.08.2019 u/s 142(1) is provided at page No. 557 assesse had provided copy of notice dated 05.12.2019 which is show cause notice wherein there is reference of notice dated 23.08.2018 and subsequent notice u/s 142(1) dated 19.07.2019 and 26.08.2019 and penalty show cause notice u/s 272A(1)(d) dated 20.09.2019 and further show cause notice for ex-parte assessment dated 20.09.2019 and penalty imposed u/s 272A(1)(d) order dated 22.10.2019 and the notice mentions that there is no compliance and in the absence of response of the assesse the assessment has been completed on the basis of material available on record. Thus here the assessment was conducted by the jurisdictional Assessing Officer outside the scope of section 144B and the detailed procedure of section 144B, such as the faceless Assessment Unit procedure, electronic show-cause mechanism, etc., does not apply. The necessary mandatory notices u/s 143(2) and 142(1) of the Act were issued. Therefore, failure to follow section 144B, by itself, cannot invalidate an assessment if section 144B was not applicable to that assessment in the first place.
4. Then coming to the appeal of department, admittedly the appellant assessee company is engaged in the business of purchase and sale of listed securities on online portal of recognized stock exchanges through the recognized well known stock broker and member M/s Globe Capital Market Limited, of NSE and BSE. The Id. Assessing Officer has estimated GP rate @2% of total turnover of Rs. 205,43,39,418/- however, there is no indication that on what parameters or assumptions of profit in the business of purchase and sale of shares, ld. AO has quantified the profits. As per the assessee, copy of ledger account of appellant assessee in the books of the broker along with all the contract notes of transaction carried out containing the all the necessary information along with all other supporting documents was filed before Id CIT(A) as no such information was asked for by ld. Assessing Officer and not even a single defect was pointed out by the Id. CIT (A) in the same. The Id CIT(A) too has restricted the profit margin arbitrarily at.5% by upholding the rejection of the books of accounts. The case of assessee is that in stock market pay in and payout is made by/to broker. There is hardly any banking transaction for the reason that consideration of sale of shares was adjusted with the further purchases of shares made by the appellant assessee company. Banking transactions are verifiable form the ledger account in the books of the broker. Regarding allegation of the Id. Assessing officer that no detail of party wise purchase and sale of shares is furnished, in this connection it was submitted that ld. Assessing Officer failed to appreciate that in online stock market trading of shares, no one can have the knowledge of person by whom shares are purchased which is sold by assessee and the person by whom shares are sold and purchased by appellant assessee.
5. A conjoint reading of section 144 and 145 of the Act indicate that the AO wields an authority to make additions on the basis of estimation of income upon fulfillment of the conditions mentioned in Section 145(3) of the Act. Once the AO is satisfied about the existence of irregularities in the books of account as per Section 145(3) of the Act, it shall proceed in the manner provided under Section 144 of the Act. Thus, Section 145(2) of the Act empowers the assessing officer to make a best judgment assessment when he is not satisfied about the correctness or completeness of the accounts of the assessed but at the same time it is not possible to categorise various types of defects which may render rejection of books of account of an assessed on the ground that the accounts are not complete or correct. Each case has to be considered on its own peculiar facts, having regard to the nature of business. Reliance for this proposition is placed on the decision of Hon’ble Delhi High Court in Action Electricals vs Dy. CIT [2002]258ITR188(DELHI). Thus where the rejection of books of accounts has to made by the A.O some observations or some substantial discrepancies in the books of account need to be pointed then assessment has to be u/s 144 of the Act. However, here assessment is completed u/s 143(3) of the Act. Thus appears to be inherent defect in the manner AO has passed made the additions in the impugned order.
6. In the case before us, we find that assessee relies a voluminous paper book running upto 560 pages containing all the necessary information about the nature of share trading activity of the assessee, its accounting and reporting. It is certified that most of these were flied before the ld. AO or ld. CIT(A). However, both the orders are silent on these substantial evidences.
7. We thus find substance in contention that the given the nature of business of assessee, expenses and turnover ratio or lack of corresponding credit entries to the turnover, cannot have been basis of rejection of books of accounts. There is no allegation that the method of accounting has not been regularly followed by assessee more so when one of the reasons for scrutiny was that in past five years there has been no scrutiny assessment.
8. We find that both the authorities below have proceeded to reject the books and then made the addition attributing possible profit but have failed to substantiate the same with any methodical reasoning. Profit estimation has to be by thoroughly understanding the nature of business activity. There is nothing on assessee’s past accepted trading results as basis for estimating income.When same has not been done and rejection of books is done with superfluous observation, the addition on profit estimation cannot be sustained. In this context the Hon’ble Supreme Court decision in State of Kerala v. C. Velukutty, (1966) 60 ITR 239 (SC) comes to rescue of assessee where Hon’ble Court laid down the classic principle that an estimate must be based on a rational basis and cannot be the result of pure guesswork or caprice. Thus, in given facts and circumstances, we are of considered view that impugned addition made by ld. AO deserved to be deleted and not just reduced, as done by ld. CIT(A).
9. We are thus inclined to sustain ground no. 3 and 4 in the appeal of assessee. The appeal of assessee is allowed and as a consequential effect the appeal of department stands dismissed.
Order pronounced in the open court on 31.08.2026
