Mohan Bhaguji Nanaware Vs Ward 1(1) (ITAT Mumbai SMC Bench)
AO Cannot Peel an Onion Trader’s Books & Jump Straight to 8% Profit: Complete Records Must Be Examined Before Invoking Section 145(3) – ITAT Mumbai
Summary: The assessee, an individual, was engaged in the wholesale trading of agricultural produce, particularly onions. He purchased onions from small farmers on a day-to-day basis and transported the produce to the Agricultural Produce Market Committee [APMC], where it was sold to different traders.
The assessee did not file his return within the time prescribed u/s 139(1). Subsequently, the assessment was reopened based upon information concerning substantial cash transactions in his bank account, including cash deposits of ₹4,42,25,550 and cash withdrawals of ₹8,82,290.
In response to the notice u/s 148, the assessee filed his return on 08.02.2024 declaring total income of ₹4,99,440 and turnover of ₹4,74,26,200.
During the reassessment proceedings, the assessee furnished his return, tax audit report, audited balance sheet, profit & loss account, bank statements and various ledger accounts. He explained that the cash deposited in the bank represented sale proceeds generated from the onion-trading business and that the deposits had already been accounted for as sales in the books.
The AO, however, noticed that the assessee had not furnished the purchase and sales ledgers. He also found that the opening stock of ₹2,88,850 and closing stock of ₹3,98,400 appearing in the profit & loss account were not reflected in Form 3CD.
On the strength of these deficiencies, the AO concluded that the books were unreliable and rejected them by invoking section 145(3).
Having rejected the books, the AO estimated the assessee’s net profit at 8% of the declared turnover of ₹4.74 crore. Business income was consequently determined at ₹37,94,096, resulting in an addition of ₹29,29,118.
Before the CIT(A), the assessee explained that the books were duly audited and that no fundamental defect had been identified in the cash book, bank book or financial statements. According to him, failure to maintain a day-to-day quantitative tally of onions could not, by itself, justify rejection of the books.
The assessee emphasised the peculiar nature of the business. Onions were purchased daily from numerous small farmers, transported to the APMC and sold to various traders. The commodity was perishable and was exposed to transit loss, wastage and deterioration. Therefore, maintaining a perfect quantity-wise movement register at every stage was practically difficult for a small trader.
It was also contended that onions constituted agricultural produce exempt under GST. Since the assessee was not registered under the GST law, regular tax invoices of the kind expected in other trading businesses were not generated.
The assessee further submitted that the purchase and sales registers had never been specifically called for by the AO. Those registers were sought to be produced before the CIT(A) as additional evidence because they directly supported the recorded turnover and book results.
The CIT(A), however, upheld the rejection of books and estimation of profit at 8%. According to the CIT(A), the purchase and sales ledgers had not been furnished and there remained a discrepancy concerning disclosure of opening and closing stock in the tax audit report.
Before the Tribunal, the assessee argued that the books could not be rejected without examining all the relevant records. It was pointed out that audited financial statements, the tax audit report, cash book, bank statements and other ledgers had already been produced. The purchase and sales registers were also available and deserved proper examination.
The Tribunal observed that the principal controversy concerned the validity of the rejection of books u/s 145(3) and the consequential estimation of profit at 8%.
It was undisputed that the assessee was an onion trader and had disclosed turnover of ₹4.74 crore. The books had been rejected mainly because of non-production of purchase and sales ledgers and the discrepancy relating to opening and closing stock figures.
At the same time, the record demonstrated that the assessee had furnished substantial accounting material, including audited financial statements, tax audit report, bank statements, cash book and certain ledger accounts. The assessee also claimed that the purchase and sales registers were available and had been sought to be produced before the CIT(A).
The Tribunal held that these records had a direct bearing upon the correctness and completeness of the books and consequently upon the applicability of section 145(3). ([TaxGuru][1])
The estimation of profit at 8% was merely consequential to the rejection of books. Therefore, the estimated rate also required reconsideration after verification of the complete records. The AO could not mechanically apply an 8% rate without first establishing valid grounds for rejecting the book results.
The ITAT accordingly set aside the CIT(A)’s findings and restored the matter to the AO for de novo adjudication. The AO was directed to examine the purchase register, sales register, cash book, bank book, bank statements, audited accounts, tax audit report, stock details and other supporting evidence furnished by the assessee.
After verification, the AO was required to determine afresh whether the statutory conditions u/s 145(3) were satisfied and thereafter compute the assessee’s income in accordance with law.
The appeal was thus allowed for statistical purposes.
Cases Discussed
- Brij Lal Goyal v. Asstt. CIT [2004] 88 ITD 413 (Delhi)
- Inspecting Assistant Commissioner v. Dinesh Tiles Factory [1988] 37 Taxman 357 (Ahd.) (Mag.)
- Pankaj Diamond v. Assistant Commissioner of Income-tax [2010] 5 ITR (Trib.) 469 (Ahmedabad)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI
Present appeal is filed by the assessee against the order dated 10/04/2026 passed by the National Faceless Appeal Centre, Delhi [“Ld. CIT(A)”], for A.Y. 2020-21, on the following grounds of appeal:-
“A. ON GENERAL ASPECT
That the appellant denies his liability to be assessed at total income of Rs.37,94,096/- against returned income of Rs.4,99,440/- and accordingly denies his liability to pay tax and interest demanded thereon.
B. ON THE ASPECT OF REJECTION OF BOOKS OF ACCOUNT
1. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and fact in not considering that the Ld. Assessing Officer has erred on facts and in law in rejecting books of account which have been duly audited and the audit of which has not been disputed by the Assessing Officer at any stage of the assessment proceedings to be invalid and legally untenable. Mere non-filing of the details of stock quantitative details cannot lead to the inference that books of account are not proper and are liable to be rejected.
2. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and fact in not considering that the appellant is carrying on the business of trading in onions. The appellant purchases onions from various small farmers on a daily basis and transports the same to APMC market where it is sold to various traders. This cycle takes place round the year. The cash collected is deposited in the bank periodically. The cash deposited is accounted as sales.
3. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and fact in not considering that agricultural produce is exempted under Goods and Service Tax Act, 2017, therefore the appellant is not registered under the Act. Being unregistered, the appellant is not required to issue a tax invoice for its sales.
4. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and fact in not considering that since the special nature of business made it impossible for the appellant to maintain day-to-day quantitative tally in respect of sales, purchases, receipt and disposal of stock at the farmers/traders levels, it was maintaining accounts on the basis of total collection received and deposited in the bank periodically. It is practically impossible for the appellant, being a small-time trader, to maintain day-to-day quantitative details of the inventory of stock of onions. The inventory at the closing date of the financial year is accounted on the basis of physical stock taking on 31st March. The same is disclosed in the Audit Report issued under Form 3CB/3CD.
5. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and fact in not considering the case law submitted of the Hon’ble Income Tax Appellate Tribunal, Delhi Bench, in Brij Lal Goyal v. Asstt. CIT [2004] 88 ITD 413, wherein it was held that the books of account mean those books of account whose main object is to provide credible data and information to file the tax return. The appellant has been maintaining books in the same manner and has filed a return based on these books. The books of account are also audited.
6. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and fact in not considering that while dealing with assessment, the Learned Assessing Officer ought to have kept in mind the nature of business carried on by the assessee and accordingly should have determined what type of records are necessary which could be maintained by an onion trader. The type of business carried on by the appellant reflected special features attached to the nature of the business which made it rather impossible to maintain day-to-day quantitative tally in respect of the receipt/collection from farmers and disposal of the stocks at APMC market to various traders. Besides, the purchase and sale was always embedded with loss in transit, wastage being a perishable item. Therefore, maintaining inventory of quantitative figures is practically impossible for a small trader.
7. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and fact in not considering that in this case, the Learned Assessing Officer has observed that the qualitative details are not contained in the 3CD, hence books of account cannot be relied on and therefore proceeded to reject the books of account. The appellant’s explanation, cash book and bank book along with bank statements as well as various ledger accounts submitted were rejected summarily. In the notices issued on 24/06/2024, 21/10/2024 as well as in the Show Cause Notice, the Learned Assessing Officer never asked for submission of Sales Register or Purchase Register. The Cash Book which was demanded by the Ld. AO was submitted, was not rejected and no finding was given on the same. The appellant in its reply to the Show Cause Notice had specifically requested the Ld. AO to let it know if any further details were required, which it would be glad to provide. However, without notifying any requirement, the Ld. AO rejected the books of account. Therefore, it was quite clear and obvious that there was no reason to reject either the books of account or to estimate the profit on percentage basis.
8. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and fact in not considering that the appellant prayed before the Hon’ble CIT to consider the Sales Register and Purchase Register uploaded as Exhibit-D as additional evidence, which was never demanded by the Ld. AO and hence not submitted.
9. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and fact in not considering that the appellant in this regard places reliance on the judgment of the ITAT Ahmedabad in Inspecting Assistant Commissioner v. Dinesh Tiles Factory [1988] 37 Taxman 357 (Ahd.) (Mag.), wherein, considering the special nature of the business and the inability to maintain day-to-day quantitative tally, it was held that where the books reflected the true picture, the books of account could neither be rejected nor addition be made thereon.
C. ON THE ASPECT OF DETERMINING PROFIT @ 8%
10. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and fact in not considering that the appellant had filed the audited Profit & Loss Account, Balance Sheet, along with the Audit Report vide Acknowledgement No.565411350310322 issued by the Income Tax e-filing portal. No specific defect in the various expenses claimed by the assessee in the Profit & Loss Account and the ledger account could be pointed out by the Learned Assessing Officer. The rationale for taking 8% as the estimated profit was also not discussed in the impugned order.
11. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and fact in not considering that a similar issue came up before the Tribunal in Pankaj Diamond v. Assistant Commissioner of Income-tax [2010] 5 ITR (Trib.) 469 (Ahmedabad), wherein it was held that where the book results of the assessee were rejected only on the ground that quality-wise details were not maintained and the addition was made merely on estimate basis without bringing on record any material to show that the assessee had earned income in excess of the amount disclosed in the return, rejection of the method consistently followed and consequent addition was not justified. Merely because profit disclosed by other businessmen in terms of turnover differed from the rate of profit disclosed by the assessee would not, by itself, empower the Revenue to add any amount to the income of the assessee.
12. Therefore, the appellant prays that the Learned Assessing Officer has passed the order without any rhyme or substantiated reasons and penalty is levied without going into the details on merits and therefore the same may be directed to be deleted.
13. The appellant reserves the right to add, alter or amend any grounds of appeal during the course of the hearing.”
2. Brief facts of the case are as under.
The assessee is an individual engaged in wholesale trading of agricultural produce, namely onions. The assessee purchases onions from farmers and sells the same in the Agricultural Produce Market Committee (“APMC”). For the year under consideration, the assessee did not file the return of income within the time prescribed u/s. 139(1) of the Act.
2.1. The case was subsequently reopened based upon information relating to cash transactions in the assessee’s bank account, which included cash deposits aggregating to Rs.4,42,25,550/- and cash withdrawals of Rs.8,82,290/-. In response to notice issued u/s. 148 of the Act, the assessee filed return of income on 08/02/2024 declaring total income of Rs.4,99,440/- and disclosed turnover of Rs.4,74,26,200/-.
2.2. During the reassessment proceedings, the assessee furnished, the return of income, tax audit report, balance sheet, profit and loss account, bank statements and various ledger accounts. It was the case of the assessee that the cash deposits represented sale proceeds from its onion trading business and were duly accounted for in the books of account.
2.2. The Ld.AO, however, observed that the assessee had not furnished the purchase ledger and sales ledger and that the opening stock of Rs.2,88,850/- and closing stock of Rs.3,98,400/- reflected in the profit and loss account were not appearing in Form 3CD. On this basis, the Ld.AO held that the books of account were not reliable and invoked the provisions of section 145(3) of the Act.
2.3. Having rejected the books, the Ld.AO proceeded to estimate the net profit at 8% of the turnover of Rs.4,74,26,200/-, thereby determining the business income at Rs.37,94,096/- and making an addition of Rs.29,29,118/- under the head “Profits and Gains of Business or Profession”.
Aggrieved by the assessment order, the assessee preferred appeal before the Ld.CIT(A).
3. Before the Ld. CIT(A), the assessee contended that the books were duly audited and that merely because day-to-day quantitative details of onion purchases and sales were not maintained, the books could not be rejected. The assessee explained that, considering the peculiar nature of onion trading, purchases were made on a daily basis from small farmers and the produce was thereafter sold through the APMC. It was also submitted that the cash book, bank book, bank statements and various ledger accounts had been furnished during the assessment proceedings.
3.1. The assessee further submitted that the sales register and purchase register had been produced before the Ld. CIT(A) as additional evidence and that these registers had not specifically been called for by the Ld. AO during the course of assessment proceedings.
3.2. The Ld. CIT(A), however, upheld the rejection of books u/s. 145(3), observing that the purchase and sales ledgers were not furnished before the Ld. AO or before him and that the opening and closing stock figures reflected in the profit and loss account were not endorsed in the tax audit report. The Ld. CIT(A) also upheld the estimation of net profit at 8% of turnover and dismissed the appeal of the assessee.
Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before this Tribunal.
4. The Ld. AR submitted that the rejection of books of account and the consequential estimation of profit at 8% were not justified. It was submitted that the assessee maintained audited books of account and had furnished substantial material before the lower authorities. It was further submitted that the sales register and purchase register, which have a direct bearing on the controversy, deserve to be examined by the Ld.AO. The Ld.AR accordingly prayed that an opportunity may be granted to the assessee to substantiate the book results with all supporting documents.
4.1. The Ld. DR relied upon the orders passed by the authorities below.
We have perused the submissions advanced by both sides in light of the record placed before us.
5. The principal dispute before us revolves around the rejection of the assessee’s books of account u/s. 145(3) of the Act and the consequential estimation of profit at 8% of the declared turnover. It is undisputed that the assessee is engaged in trading of onions and had disclosed turnover of Rs.4,74,26,200/-. The Ld.AO rejected the books primarily for non-production of purchase and sales ledgers and on account of the discrepancy noticed with regard to the opening and closing stock figures in the tax audit report. The Ld.CIT(A) confirmed the rejection on same basis.
5.1. At the same time, the material on record reveals that the assessee furnished audited financial statements, tax audit report, bank statements, cash book and certain ledger accounts during the assessment proceedings. The assessee has also claimed that the sales register and purchase register were available and were sought to be produced before the Ld.CIT(A). These records have a direct bearing upon the correctness and completeness of the books maintained by the assessee and consequently upon the applicability of section 145(3) of the Act.
5.2. In our considered opinion, the issue as to whether the books of account maintained by the assessee deserve to be rejected requires examination of the complete books and supporting records in their entirety. Further, the estimation of profit at 8% is consequential to the rejection of books and, therefore, the same also requires reconsideration after verification of the relevant records.
5.3. Considering the totality of facts and circumstances of the case, we deem it appropriate to set aside the findings of the Ld. CIT(A) on this issue and restore the matter to the file of the Ld. AO for de novo adjudication.
5.4. The Ld. AO is directed to examine the books of account of the assessee along with the purchase register, sales register, cash book, bank book, bank statements, audited financial statements, tax audit report, stock details and such other supporting evidences as may be furnished by the assessee. Thereafter, the Ld. AO shall determine, in accordance with law, whether the conditions prescribed u/s. 145(3) of the Act for rejection of books are satisfied and, consequentially, determine the income of the assessee afresh on the basis of material available on record.
5.5. Needless to say, reasonable opportunity of being heard shall be granted to the assessee before passing the fresh assessment order. The assessee is also directed to furnish all relevant books, registers, supporting documents and explanations as may be called for by the Ld. AO and to cooperate in the proceedings without seeking unnecessary adjournments.
Accordingly, the grounds raised by the assessee stands allowed for statistical purposes.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 11-09-2026
