Biswas Mohd Sher Ali Vs ITO (ITAT Kolkata)
Best Judgment Must Assess Income, Not Entire Business Receipts: ITAT Grants Human Hair Trader Another Opportunity
Facts of the case
The assessee carried on the business of purchasing and selling human hair at Takipur, Rejinagar, a remote village in Murshidabad district, West Bengal. According to his explanation, he purchased human hair in small quantities from hawkers, locally known as feriwalas, and sold it to larger dealers. The sale proceeds were received through banking channels.
The Department noticed receipts of ₹2,34,600 and ₹18,95,300 from M/s. St. Mary’s James Industries in two bank accounts. Since the assessee had not filed a return of income, proceedings were reopened under section 147. The assessment was subsequently completed ex parte under section 147 read with sections 144 and 144B, treating bank transactions as unexplained money under section 69A.
The assessee maintained that he was unfamiliar with the Department’s electronic proceedings and had not received the notices. He also explained that demand for human hair in China and Eastern Asia had fallen because of COVID-19, adversely affecting his business, which was eventually closed.
Dismissal of the first appeal
Before the CIT(A), the assessee challenged the treatment of the entire bank deposits as income without allowing the cost of purchases and other business expenditure. His statement of facts referred to assessed income of ₹2,25,92,569 and a demand of ₹4,10,69,730.
The CIT(A) issued hearing notices, but there was no compliance apart from an adjournment request in response to the first notice. After referring to B.N. Bhattacharjee and Another, 118 ITR 461, and the Bombay High Court decision in Chemipol v. Union of India, the CIT(A) dismissed the appeal for non-prosecution.
The assessee consequently approached the Tribunal, alleging inadequate opportunity and failure to consider the actual nature of his business receipts.
Arguments before the Tribunal
The authorised representative submitted that the entire deposits had been added without allowing any expenditure on the human hair purchased from hawkers and subsequently sold to larger dealers. He requested one further opportunity to place the relevant explanation and evidence before the appellate authority.
The Revenue supported the CIT(A)’s order and sought its confirmation. The dispute therefore involved both the assessee’s failure to participate in the earlier proceedings and the appropriateness of taxing the entire receipts without examining the expenditure associated with the claimed business.
Tribunal’s reasoning
The Tribunal noted that the assessment had been completed ex parte and that the first appeal had been dismissed for non-prosecution. It emphasised that even a best judgment assessment requires income to be computed through a proper exercise of judgment.
In the circumstances presented, the Bench observed that the entire receipts could not be subjected to tax without allowing for expenditure incurred. This observation addressed the need to examine the assessee’s explanation that the deposits represented business sale proceeds involving corresponding purchases.
The Tribunal considered it necessary, in the interests of justice and fair play, to grant another opportunity. However, it did not finally accept the explanation for the bank deposits, quantify allowable expenditure, or determine the taxable profit. Those matters remained open for examination in the restored proceedings.
Decision and directions
The Tribunal set aside the CIT(A)’s order and remanded the matter to the CIT(A) for granting the assessee one further opportunity.
The assessee was directed to comply with hearing notices and avoid unnecessary adjournments. The Tribunal also directed compliance with Rule 46A of the Income-tax Rules, 1962, with an opportunity to the Assessing Officer to be heard, if required.
The appeal was partly allowed for statistical purposes. Accordingly, the order provides a fresh appellate hearing; it does not constitute a final deletion of the addition or a direction to assess a particular profit percentage.
Author’s comments
The order highlights a practical distinction between bank receipts and taxable business income. Where an assessee explains that deposits arise from trading activity, the purchase cost and related expenditure require examination before the receipts are treated as income in their entirety. Nevertheless, merely describing deposits as turnover cannot replace evidence establishing their business character.
In the restored proceedings, the assessee should reconcile the deposits with sales, identify receipts from major dealers, and substantiate purchases from hawkers through available records. The evidence should also distinguish sale proceeds from transfers or other credits. Any additional material must be presented with an appropriate explanation under Rule 46A.
The relief is therefore procedural but significant: it restores an opportunity to establish the correct taxable income, while placing a clear responsibility on the assessee to participate and support his explanation.
Editorial note: Paragraph 3 mentions bank transactions of ₹2,59,25,690, whereas the grounds and statement of facts refer to ₹2,25,92,569. The order does not reconcile these figures; the correct amount should be verified from the assessment records.
Cases Discussed
- B.N. Bhattacharjee and Another (Supreme Court; 118 ITR 461): The CIT(A) referred to this decision while dismissing the appeal for non-prosecution. The Tribunal nevertheless considered restoration appropriate to allow the assessee to substantiate his explanation.
- Chemipol v. Union of India (Bombay High Court; Excise Appeal No. 62 of 2009): The CIT(A) referred to this decision in support of dismissal for non-prosecution. The Tribunal set aside the appellate order and directed a further opportunity of hearing.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal filed by the assessee is against the order of the Commissioner of Income Tax (Appeals)-NFAC, Delhi [Ld. ‘CIT(A)’] passed u/s 250 of the Income Tax Act, 1961 [the ‘Act’] for AY 2020-21 dated 26.02.2026.
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 Ld. CIT(A) erred in sustaining the addition of Rs.2,25,92,569/- , as made by the Ld. A.O., u/s. 147/144/144B without a llowing reasonable opportunity to the appellant of being heard.
2. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in passing the order u/s.250 without applying his mind properly in considering the facts of the case that the no tices for hearing either in assessment proceedings or in appeal proceedings were not properly served to the appellant.
3. That on the facts and in the circumstances of the case, the order passed by the Ld. CIT(A) was unjust and contrary to the facts and law.
4. That the appellant craves leave to urge such other ground or grounds before or at the time of hearing of appeal”
3. Brief facts of the case are that t he assessee had received money from M/s. St. Mary’s James Industries for amounts of ₹ 2,34,600/- and ₹ 18,95,300/- respectively in the two bank accounts of the assessee but did not file any return of income. Accordingly, the case was reopened u/s 147 of the Act and the transactions amounting to ₹ 2,59,25,690/- in the three bank accounts were added u/s 69A of the Act to the income of the assessee as unexplained money and the assessment was framed u/s 147 r.w.s. 144 r.w.s. 144B of the Act. Aggrieved with the assessment order the assessee filed an appeal before the Ld. CIT(A) and it was mentioned in the statement of facts as under:
“ The assessee carried on the business of human hair in retail at Takipur, Rejinagar, Dist Murshidabad W.B. which is a remote village of Murshidabad District and not well acquainted with the e- proceedings of Income Tax Department for which the assessee did not receive the notices issued by the department. The learned A.O. did not serve the notices by other means.
As the notices were not received compliance with the notices could not be made by the assessee. The assessee purchased human hair from hawkers (Feriwala) of small amount the same was sold to big dealers. Entire sales prices was received by bank transaction. Margin of profit was very low as the demand for human hair was re duced in the countries of China and Eastern Asia due to COVID’19. The main market of human hair is China and Eastern Asia. So, the demand for human hair was reduced. As a result the assessee suffered losses and the business have been closed. The learned A. O. without allowing reasonable opportunity of being heard the assessee completed the assessment u/s 147 r.w.s. 144 read with section 144B of the Income Tax Act, 1961 on a total income of Rs.2,25,92,569.00 u/s 69A of the I.T. Act, 1961 being the unexplained money and raised a demand of Rs.4,10,69,730.00, which is arbitrary, unjust and bad in law. The learned A.O. has taken entire bank deposits as profit without allowing purchase price and the business expenses which is arbitrary and unjust.”
4. The Ld. CIT(A) issued notice to the assessee, which are mentioned in the appellate order, but there was no compliance except for request for adjournment to the first notice issued. The Ld. CIT(A) has also reproduced the order sheet in the appellate order. The Ld. CIT(A) has referred to the order of the Hon’ble Supreme Court in the case of B.N. Bhattacharjee and Another (118 ITR 461), the order of the Hon’ble Bombay High Court in the case of M/s. Chemipol vs Union of India in Excise Appeal No. 62 of 2009 and dismissed the appeal of the assessee on account of non -prosecution.
5. Aggrieved with the order of the Ld. CIT(A), the assessee has filed the appeal before the Tribunal.
6. Rival contentions were heard and the submissions made have been examined. The Ld. AR submitted that adequate opportunity was not provided to the assessee and the entire deposits in the bank account had been added without allowing any expenditure for the human hair purchased from the hawkers (feriwala) which was sold to big dealers. He requested that one more opportunity may be provided so that the assessee could make proper representation in the appeal filed.
7. The Ld. DR relied upon the order of the Ld. CIT(A) and requested that the same may be upheld.
8. We have considered the su bmissions made, gone through the facts of the case and perused the record and the order of the Ld. CIT(A) and noted that the appeal has been dismissed on account of non- prosecution and even before the Ld. AO the assessment was made ex parte. The Bench was of the view that even in the best judgment assessment order, the income needs to be computed to the best of judgment and the entire receipts cannot be subjected to tax without allowing for any expenditure incurred. Therefore, in the interest of justice and fair play it was considered imperative to grant one more opportunity to the assessee. Accordingly, the order of the Ld. CIT(A) is hereby set aside and the issue is remanded to him for granting one more opportunity to the assessee. The assessee is directed to comply with the notices for hearing and shall not seek unnecessary adjournments and rule 46A of the I.T. Rules, 1962 shall also be followed and an opportunity of being heard ma y be provided to the Ld. AO, if required. Accordingly, the grounds taken by the assessee in the appeal are partly allowed for statistical purposes.
9. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 7th October, 2026.
