Case Law Details
Venkata Subba Reddy Karnati Vs ITO (ITAT Hyderabad)
Once Profit is Estimated, No Second Bite! ITAT Hyderabad Deletes ₹31.55 Lakh Addition After Books Rejected in Liquor Business Case
Assessee, an individual engaged in liquor business, filed his return of income for AY 2010-11 declaring ₹2,00,528/-. AO completed assessment by rejecting the books of account u/s 145 and estimating profit at 5% of turnover, thereby determining income of ₹5,17,842/-. No other addition was made at that stage.
Subsequently, based on information that surfaced in the appellate proceedings of one Mr. S.K. Ramthulla, AO formed a belief that Assessee had allegedly made an unexplained cash investment of ₹31,55,000/- outside the books. On this basis, reassessment proceedings u/s 147 were initiated. The reassessment was completed ex parte on 29.07.2013, wherein AO retained the estimated business income, but also made an independent addition of ₹31,55,000/- as unexplained investment u/s 68/69, resulting in assessed income of ₹36,82,842/-.
Assessee appealed before CIT(A), but the appeal was dismissed. Aggrieved, Assessee approached Tribunal and raised a legal ground that once AO rejects the books of account and estimates income, he cannot thereafter make further additions on the same rejected books. Assessee relied on the binding jurisdictional Andhra Pradesh High Court judgment in Indwell Constructions v. CIT (232 ITR 776) which categorically held that when profit is estimated, it is presumed that all defects in books are taken care of and no further addition can be made. Assessee also relied on several other judicial precedents such as Malpani House of Stone (Raj HC), Gian Chand Lakshmi Contractors (P&H HC), Aggarwal Engg. Co. (P&H HC), Banwarilal Banshidhar (All HC), GK Contractor (Raj HC) and ITAT Chennai ruling in ACIT v. S. Moorthy.
Revenue argued that AO can still make separate additions. Before examining merits, Tribunal first considered the delay of 496 days in filing the appeal. Assessee explained that his tax consultant failed to intimate CIT(A)’s order and was unaware of its service. The explanation was not disputed by the DR. Following settled legal principles, Tribunal condoned the delay and admitted the appeal.
On merits, Tribunal observed that AO had already rejected the books and estimated profit at 5%. Once books are rejected & income is computed on estimation, it is now well-settled law that no further addition u/s 68 or 69 can be made from the same rejected books. Tribunal followed the binding decision of jurisdictional High Court in Indwell Constructions and the consistent view taken by various High Courts.
Accordingly, Tribunal held that the addition of ₹31,55,000/- was illegal and unsustainable. It directed the AO to delete the entire addition.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This appeal filed by the assessee is directed against the order of the National Faceless Appeal Centre, Delhi [CIT(A)] dated 07.09.2023 for Assessment Year (AY) 2010-11.
2. Brief facts of the case are that the assessee is an individual dealing with liquor business, filed his Return of Income for A.Y. 201011 on 08.07.2010 declaring income of Rs.2,00,528/-. Against the said Return of Income, the assessment was completed by the Assessing Officer vide order dated 29.06.2017 by rejecting the books of account u/s.145 of the Income Tax Act, 1961 (“the Act”) and estimated the income from the business of liquor at 5% on the turnover. Accordingly, the Assessing Officer assessed the income at Rs.5,17,842/-. Subsequently, based on the information that came into light during the course of appellate proceedings of one Mr. S.K. Ramthulla, the Assessing Officer formed an opinion that the assessee made unexplained investment of Rs.31,55,000/-. Accordingly, the Assessing Officer formed opinion that income had escaped tax. Therefore, notice u/s.147 of the Act was issued to the assessee and in response to the notice u/s.147, the assessment was completed by the Assessing Officer exparte vide order dated 29.07.2013 determined assessed income of the assessee at Rs.36,82,842/-. While doing so, the Assessing Officer made addition of Rs.31,55,000/- by holding that the assessee had given cash of Rs.31,55,000/- to Mr. S.K. Ramthulla outside the books of account.
3. Being aggrieved by the said assessment order, the assessee filed an appeal before the Ld. CIT(A), who vide impugned order dismissed the appeal of the assessee.
4. Being aggrieved by the order of Ld. CIT(A), the assessee is in appeal before this Tribunal. It is contended by the learned counsel for the assessee before us that the Assessing Officer in the original assessment, rejected the books of account u/s. 145 of the Act and estimated the income. He submitted that no further addition can be made by the Assessing Officer relying on the judgment of Hon’ble jurisdictional High Court in the case of Indwell Constructions Vs. CIT 232 ITR 776 (AP) and also the following judgements :
i. Malpani House of Stone Vs. CIT 3395 ITR 386 (Raj)
ii. CIT Vs. Gian Chand Lakshmi Contractors 316 ITR 127 (P&H)
iii. CIT Vs. Aggarwal Engg Co. 302 ITR 246 (P&H)
iv. CIR Vs. Banwarilal Banshidhar 229 ITR 229 (All)
v. CIT Vs. GK Contractor 19 DTR 305 (Raj) and
vi. ACIT Vs. S. Moorthy in ITA No.3091/Chny/2019 (ITAT, Chennai).
5. The Ld. DR, on the other hand, vehemently opposed the contention of learned counsel for the assessee. He further submitted that the Assessing Officer can still make addition to the estimated income and supported the orders of authorities below.
6. I have heard the rival submissions of both the parties. At the outset, I find that there is a delay of 496 days in filing the appeal before the Tribunal. The assessee filed condonation petition seeking condonation of delay on the ground that he was not aware of the order passed u/s. 250 of the Income Tax Act, 1961 (“the Act”) by NFAC since the tax consultant, who was looking after the appeal before the Ld. CIT(A) had failed to intimate the service of the notice. The averments made in the condonation petition remain uncontroverted by the Ld. DR. Therefore, keeping in view of the well settled position of law for the purpose of computing limitation period, I am of the considered opinion that there is reasonable cause to condone the delay of 496 days in filing of the appeal. Accordingly, the appeal is admitted for adjudication on merits.
6.1 The only issue that arises for my consideration is that, as the Assessing Officer rejected the books of accounts, whether the Assessing Officer is entitled to make other additions or not u/s. 68 of the Act. In the impugned assessment order, the Assessing Officer rejected the book results. In original assessment no other addition was made. In the reopening of assessment, the Assessing Officer made addition on account of unexplained investment, etc. it is now settled law that the Assessing Officer having rejected the book results cannot make any other additions.
6.2 Following the precedence of judgements indicated above, I am of the considered opinion that there is no warrant for making any other additions u/s. 68 of the Act. Accordingly, I direct the Assessing Officer to delete the additions made.
7. In the result the appeal of the assessee is allowed.
Order pronounced in the open Court on 10th Oct., 2025.
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