Irayya Shidramayya Hirematha Vs ITO (ITAT Bangalore)
Bengaluru ITAT Deletes Ad Hoc Disallowance of Purchases and Expenses; Estimated Additions Without Identifying Defects Held Unsustainable
The Bengaluru ITAT deleted the addition of ₹43.04 lakh made in a reassessment, holding that the Assessing Officer could not make ad hoc disallowances of 8% of purchases and 10% of business expenses without identifying any specific bogus purchase, unverifiable expense, or defect in the books of account. The assessee, an APMC-registered trader in agricultural produce (onions), had furnished extensive documentary evidence, including purchase and sales registers, cash book, bank statements, APMC licence, vendor ledgers, PAN/Aadhaar details wherever available, URD purchase records, and tax audit report. The Tribunal observed that, although the reassessment was initiated based on information relating to cash deposits, cash withdrawals, and purchase of a motor car, no addition was ultimately made on those issues after the assessee furnished explanations. Instead, the Assessing Officer arbitrarily estimated profits by disallowing purchases and expenses despite accepting the sales. The Tribunal held that if any purchases were considered non-genuine, the Revenue ought to have identified and disallowed only those specific transactions rather than applying a blanket percentage disallowance. It further observed that there is no legal requirement for an APMC trader purchasing directly from farmers to maintain PAN or Aadhaar details of every seller. Finding the disallowances to be wholly ad hoc and unsupported by evidence, the Tribunal directed deletion of the entire addition of ₹43.04 lakh.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. The assessee, IRAYYA SHIDRAMAYYA HIREMATHA has filed this appeal against the order of the CIT(A), NFAC, dated 05.01.2026. The CIT(A) dismissed the appeal against the assessment order passed under section 147 read with section 144B of the Income-tax Act, wherein total income was assessed at ₹48,46,811/- after making an addition of ₹43,03,750/-. The appeal was dismissed ex parte despite the assessee having uploaded the required details online.
2. I have heard Shri Abhishek Arya, Chartered Accountant, for the assessee, and Shri Ganesh R. Ghale, learned Standing Counsel for the Revenue.
3. Briefly, the assessee did not file a return under section 139(1) for AY 2018-19. Based on information regarding cash deposits of Rs. 8,51,000/-, cash withdrawals of 2,39,55,000/- from SBI, and purchase of a motor car for Rs. 16,45,626/-, the case was reopened by notice under section 148 dated 27.02.2024. The assessee filed a return under section 148 on 19.06.2024 in ITR-3, declaring total income of Rs. 5,43,060/-, and the matter was transferred to NFAC for assessment.
4. The assessee, engaged in trading agricultural goods, mainly onions, furnished ledgers, vouchers, bank statements, APMC license, financial statements, URD purchase bills, cash book, bank book, and purchase and sales registers in response to notices under section 142(1). The Assessing Officer nevertheless made ad hoc disallowances of 8% of purchases and 10% of expenses, aggregating to Rs. 43,03,750/- and passed the order under section 147 read with section 144B on 03.03.2025. The assessee appealed before the CIT(A) and filed written submissions with evidence; however, the CIT(A), by order dated 05.01.2026, dismissed the appeal ex parte and confirmed the additions without considering the submissions.
5. The Assessing Officer required the assessee to substantiate purchases through PAN details, sample bills and confirmations, or Aadhaar/other documents where PAN was He noted that purchases of ₹5,27,04,529/- and expenses of ₹8,73,879/- were debited but not fully supported. Though the assessee filed a detailed reply on 09.01.2025 covering purchases, expenses, motor-car depreciation and car-loan interest, the Assessing Officer observed that account copies were uploaded only for purchases of ₹2,15,99,874/-. For the balance purchases, party accounts, sample bills and confirmations were not filed; for expenses, only ledgers were uploaded.
6. The Assessing Officer further noted that the assessee declared net profit of ₹6,46,225/-, or 1.41%, while earlier years showed higher profit rates. Relying also on the tax audit report, which stated that verification of payments exceeding ₹10,000/- otherwise than by account-payee cheque was not possible without details, he estimated income. Considering the assessee’s status as an APMC trader/agent and that sales were recorded against the purchases, he disallowed 8% of total purchases, amounting to ₹42,16,362/-.
7. He also disallowed 10% of expenses of ₹8,73,879/-. Consequently, the returned income of ₹5,43,060/- was enhanced to ₹48,46,810/-, reflecting a profit rate of 8.56%, which the Assessing Officer considered reasonable.
8. In appeal, the CIT(A) noted that several opportunities were granted, but submissions were filed only on 22.11.2025. The appeal was decided on the available record. Reproducing the Assessing Officer’s findings, the CIT(A) held in paragraph 5.1.2 that no effective response was filed despite several hearing notices. The appeal was therefore dismissed for non-compliance and non-prosecution, and the additions were confirmed.
9. We find that the assessee had filed substantial material before the CIT(A),which formed part of the paper book and was not disputed by the Departmental This included written submissions, FY 2017-18 bank statements showing payments through banking channels, the hearing notice dated 11.11.2025 and replies thereto, APMC licence, return filed under section 148 with statement of income and tax audit report, cash book, purchase and sales registers, and vendor ledgers with PAN/Aadhaar details wherever available. These documents supported the genuineness of the transactions undertaken during the year.
10. The assessee submitted that the Assessing Officer arbitrarily added ₹42,16,362/- by disallowing 8% of purchases without evidence or third-party verification, despite purchase ledgers, bank statements, sample bills, APMC license, URD purchase books, PAN/Aadhaar details, land khata extracts and vendor/farmer details for purchases of Rs. 2,15,99,874/-, about 41% of total purchases. Since onion purchases are commonly made directly by farmers under APMC practice, PAN details from every farmer are neither required nor practical. The evidence ought to have been accepted and the purchase claim of Rs. 5,27,04,529/- allowed. The AO also disallowed 10% of expenses of ₹87,388/- without identifying any defect, though vouchers and supporting documents were furnished. Depreciation on the business vehicle and car-loan interest were also disallowed without examining the explanation. Salary and other expense disallowances were made without specific reasons or opportunity to explain. The AO and CIT(A) further estimated profit by comparing the current year’s 1.41% rate with earlier years, ignoring increased turnover, market conditions, fluctuating margins, APMC license and evidence of direct farmer purchases. The CIT(A) also dismissed the appeal ex parte despite timely e-responses and without considering the submissions. The resulting additions are therefore unsustainable.
11. If any purchases were considered unsupported or bogus, the Assessing Officer should have identified and disallowed only those specific purchases instead of applying an ad hoc 8% disallowance to total purchases. No legal requirement was shown for maintaining Aadhaar cards or similar evidence for every seller. The assessee is an APMC-registered dealer, and the purchases resulted in corresponding recorded sales; hence the purchase disallowance is unjustified. The 10% expense disallowance is similarly ad hoc. The profit-rate comparison also fails because the lower authorities did not consider business conditions and fluctuating margins. Further, though reopening was based on cash deposits, cash withdrawals and motor-car purchase, no addition was made to those issues after they were explained. Instead, without disturbing sales, the Assessing Officer disallowed purchases and expenses on an ad hoc basis. CIT(A) also erred in stating that the assessee had not responded, despite adequate material being before him. He should have decided on the appeal on merits, called for a remand report, or given independent The ex parte dismissal is therefore unsustainable.
12. Accordingly, the Assessing Officer is directed to delete the addition of Rs. 43,03,750/- made on account of ad hoc disallowance of purchases and expenses.
13. In the result, appeal filed by the Assessee is allowed.
Order pronounced in the open court on 27.07.2026.
