Debaraj Sahoo Vs ITO (ITAT Cuttack)
Spare Parts Business, Not a 20% Profit Machine
The background: Bank credits trigger reassessment
The assessee, an ex-army man engaged in a small spare parts business, had not originally filed his return for AY 2017-18. The Department received information concerning substantial credits, including cash deposits, in his bank account and initiated reassessment proceedings by issuing notice under section 148.
In response, the assessee filed a return declaring total income of ₹10,51,336. During assessment, he furnished a trading account and other business particulars.
The accounts disclosed turnover of ₹85,42,021, gross profit of ₹7,68,782, and net profit of ₹6,31,489. The Assessing Officer, however, considered the supporting evidence for expenses inadequate and proceeded to estimate business income. viewOrder-4 viewOrder-4
The Assessing Officer adopts a 20% profit rate
The Assessing Officer estimated profit at 20% of turnover, determining business income at ₹17,08,404. After reducing the net profit already disclosed, he made an addition of ₹10,76,915.
The dispute was therefore not merely about whether particular expenses were supported. It concerned the basis for assuming that this spare parts business earned one-fifth of its turnover as profit.
The assessment also included a separate addition relating to another bank account. A cash deposit of ₹98,000 was treated as unexplained money under section 69A.
Both additions were confirmed by the CIT(A), NFAC, leading to the appeal before the Tribunal. viewOrder-4
The assessee’s objection: The estimate was unrealistic
The assessee argued that the additions were arbitrary and that the authorities had not properly considered his submissions.
His representatives explained that he operated a small spare parts business and had furnished the relevant business details. They contended that a 20% profit margin was unrealistic for this line of business.
They also invoked section 44AD, arguing that the Assessing Officer’s estimate was contrary to the presumptive taxation framework. [TaxGuru](https://taxguru.in/income-tax/section-44ad-presumptive-taxation-business-income-ay-201819.html?utm_source=chatgpt.com)
Regarding the ₹98,000 cash deposit, the assessee explained that it represented past savings and business proceeds. His grievance was that the amount had been separately taxed without properly considering this explanation. viewOrder-4
Revenue relies on the failure to file the original return
The Department defended the additions, emphasising that the assessee had not filed his return before reassessment proceedings were initiated.
It requested that the CIT(A)’s decision be upheld.
The Tribunal nevertheless examined whether the additions had an adequate factual basis. The failure to file the original return formed part of the background, but the Tribunal did not treat that failure as sufficient justification for the particular profit rate or the separate unexplained-money addition.
The Tribunal finds no basis for 20%
After considering the rival submissions, the Tribunal categorically held that there was no basis to estimate profit at 20% of turnover.
It considered the nature of the business, the turnover and the facts of the case, and determined that an 8% profit rate would be reasonable.
This was a substantive modification of the assessment. The Tribunal did not simply return the matter for an unrestricted fresh estimate. It prescribed the rate to be used in recomputing the assessee’s business income.
The ruling therefore demonstrates that an estimate must have a reasonable connection with the business and the available facts. Inadequate expense evidence did not justify the unsupported rate adopted here. viewOrder-4
The ₹98,000 deposit is included in business proceeds
The Tribunal also found no basis for treating ₹98,000 as unexplained money while ignoring the assessee’s explanation.
However, it did not exclude the amount altogether from the computation. It directed that the deposit be treated as part of business proceeds and added to the turnover for applying the 8% rate.
The revised turnover base was therefore ₹86,40,021, comprising the disclosed turnover of ₹85,42,021 plus ₹98,000. Applying 8% gives estimated business income of approximately ₹6,91,202.
Compared with the disclosed net profit of ₹6,31,489, this produces an increase of approximately ₹59,713, subject to the Assessing Officer’s final computation and rounding. This arithmetic illustrates the Tribunal’s direction; the order itself does not state these computed figures.
The result: Recompute income using the specified basis
The Tribunal set aside the CIT(A)’s order and directed the Assessing Officer to recompute income at 8% of the enlarged turnover.
The appeal was described as partly allowed for statistical purposes. Nevertheless, the operative direction clearly replaced the 20% estimate and required the ₹98,000 to be treated as business proceeds rather than separately assessed in full under section 69A. viewOrder-4
Author’s comments: Estimation needs a basis
The decision offers useful support against arbitrary profit estimates. Where expenses are insufficiently substantiated, the resulting estimate should still reflect the business’s nature and circumstances.
An important qualification is that the Tribunal did not expressly rule on every eligibility requirement of section 44AD. Although the assessee invoked that provision, the Bench adopted 8% as a reasonable estimate on the facts. This should therefore not be presented as a universal ceiling on estimated profits.
Equally, the cash deposit was not simply ignored. It entered the turnover base and attracted the prescribed profit rate. The relief came from a reasoned business-income estimate, replacing both an unsupported margin and a separate full-value addition.
FULL TEXT OF THE ORDER OF ITAT CUTTACK
This Appeal is filed by the Assessee against the order of the NFAC, Delhi (‘Ld. CIT(A)’ for short) dated 19.12.2025, passed u/s 250 of the Income Tax Act, 1961 (“the Act”, for short) pertaining to the Assessment Year 2017-18 (Appeal No. NFAC/2016-17/10434518).
2. The brief facts are that the Assessing officer based on information that there were substantial credits including cash deposits in the bank account of the assessee, and that the assessee has not filed return of income for the subject year, issued notice u/s 148 of the Act. In response, the assessee had filed his return of income declaring total income of Rs.10,51,336/-. During the assessment proceedings, the assessee furnished the trading account and other details. The Assessing officer noted that the assessee has shown total turnover of Rs 85,42,021/-, with gross profit of Rs.7,68,782/- and net profit of Rs.6,31,489/- and that the assessee failed to substantiate the expenses with evidence. Hence, the profit was estimated at 20% of the turnover resulting in the impugned addition of Rs.10,76,915/- (17,08,404-6,31,489). The Assessing officer also noted that there was cash deposit of Rs.98,000/- in another bank account and which was subjected to assessment u/s 69A of the Act. Both the additions were also confirmed by the Ld. CIT(A). Aggrieved, this appeal has been preferred before us.
3. The Ld. AR argued that the impugned additions are arbitrary and without considering the submissions of the assessee. It was represented that the assessee was an ex-army man, and was running a small business dealing with spare parts. All the relevant details relating to the business was submitted to the Assessing officer. But the Assessing officer has arbitrarily estimated the income at 20% of the turnover which is contrary to the provisions of section 44AD of the Act. It was also represented that 20% profit in this line of business is unrealistic. It was also represented that the amount of Rs.98,000/- represent his past savings and business proceeds, and without considering the same, impugned addition has been made u/s 69A of the Act. Hence, it was prayed that the impugned additions be deleted.
On the other hand, the Ld. DR argued that the additions were justified considering that the assessee did not file his return of income and requested to uphold the decision of the Ld. CIT(A).
4. We have considered the rival submissions. We are of the view that there is no basis to estimate the profit at 20% of the turnover. We also do not find any basis to consider the amount of Rs.98,000/- as unexplained, ignoring the explanation given by the appellant. Considering the nature of business and turnover, and also the facts of this case, we consider it reasonable to estimate the income of the assessee on a profit at 8% of the total turnover [amounting to Rs. 85,42,021/- plus Rs 98,000/- (to be taken as part of business proceeds)]. As a result, the order of the Ld. CIT(A) is set aside and the Assessing officer is directed to re-compute the income in the manner stated above.
5. In the result, Appeal of the Assessee is partly allowed for statistical purposes.
Order pronounced on 30.09.2026.
