Case Law Details
DCIT Vs S. H. Mumtazuddin Times Pvt. Ltd. (ITAT Kolkata)
The ITAT Kolkata considered the Revenue’s appeal against the order of the CIT(A), which had reduced an addition made by the Assessing Officer (AO) from ₹3,41,61,192 to ₹64,05,223 by estimating the assessee’s net profit at 1.50% of turnover. The Revenue also challenged the admission of additional evidence under Rule 46A of the Income-tax Rules, 1962. The assessee filed an application under Rule 27 of the ITAT Rules, 1963, contending that even the reduced addition was unsustainable since the AO had estimated income without rejecting the books of account.
The Tribunal first held that the Rule 27 application was maintainable, as the assessee had raised a legal issue decided against it by the CIT(A), despite not filing a separate appeal.
The assessee had filed its original and revised returns for AY 2017-18, and the case was selected for scrutiny. During assessment proceedings, there was part compliance with notices issued under Sections 143(2) and 142(1). The AO completed the assessment under Section 143(3) by estimating the income at 8% of the total turnover, resulting in an addition of ₹3,41,61,192.
In appeal, the CIT(A) examined the average net profit rate for AYs 2014-15 to 2020-21, computed it at 1.06%, and applied a rate of 1.50%, thereby sustaining an addition of ₹64,05,223 instead of the addition made by the AO.
The Tribunal observed that it was undisputed that the AO had estimated the income without rejecting the books of account. It held that estimation of income is permissible only after rejecting the books of account. Where the books are accepted, estimation of income cannot be sustained. Referring to the Supreme Court decision in CIT v. A. Krishnaswami Mudaliar (53 ITR 122), the Tribunal noted that estimation of income requires rejection of the books of account and a finding that the accounts do not correctly reflect the true state of affairs. It further observed that, having accepted the books of account, the AO could not estimate unaccounted turnover or profit.
Accordingly, the Tribunal set aside the order of the CIT(A), directed the AO to delete the addition, allowed the assessee’s Rule 27 application, and dismissed the Revenue’s appeal as infructuous.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal preferred by the revenue is against the order of the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (hereinafter referred to as the “ld. CIT(A)”], dated 27.06.2025 for the Assessment Year (AY) 2017-18.
2. The revenue has filed this appeal challenging the deletion of addition by ld. CIT(A) of Rs.2,77,55,969/- as against the addition made by the Assessing Officer (In short, ‘the AO’) of Rs.3,41,61,192/- by estimating the income of the assessee by applying 8% on the total turnover. The revenue has also challenged the admission of additional evidences by the ld. CIT(A) in violation of Rule 46A of Income-tax Rules, 1962.
3. The assessee has also filed an application under Rule 27 of ITAT Rules, 1963, by raising the following grounds:
“1. That on the facts and in the circumstances of the case, Ld. CIT(A) erred in estimating the net profit at the rate of 1.50 percent i.e. Rs.64,05,224/- of the total turnover of Rs.42,70,14,904/- as income of the respondent company during the relevant assessment year.
2. That on the facts and in the circumstances of the case, Ld. CIT(A) erred in confirming the estimation of net profit by AO without rejecting the books of accounts of the respondent company.
3. That the respondent craves leave add, alter, adduce or amend any ground or grounds on or before the date of hearing.”
4. Since the assessee has raised a legal issue under Rule 27 of ITAT Rules, 1963 that the ld. CIT(A) has erred in estimating the net profit @1.50% of total turnover, thereby sustaining addition of Rs.64,05,224/- on estimation basis without rejecting the books of account of the assessee-company.
5. We have heard rival submissions and perused the materials available on record. We find that the application filed under Rule 27 of ITAT Rules, 1963 on the issue, which is decided against the assessee for which the assessee has not preferred any appeal, is maintainable. Accordingly, we admit the application filed by the assessee under Rule 27 of ITAT Rules, 1963, challenging the assessment order on the ground that the estimation of income without rejecting books of account.
6. Brief facts of the case are that the assessee-company had filed its return of income on 31.10.2017, declaring total income of Rs.75,27,370/-under normal provisions of Act and income of Rs.35,90,791/- u/s 115JB of the Act. The return was revised by the assessee on 16.02.2018, declaring total income of Rs.73,86,510/- under normal provisions of the Act and showing income of Rs.35,90,791/- u/s 115JB of the Act. The case was selected for scrutiny under CASS and notices u/s 143(2) and 142(1) of the Act were issued to the assessee, but there was part compliance to the said notices and the AO computed the estimated the income @ 8% and therefore, estimated the income at Rs.3,41,61,192/-, and added the same to the income returned by the assessee thereby assessing the income at Rs.4,15,47,702/- in the assessment order framed u/s 143(3) of the Act on 24.12.2019.
7. In the appellate proceedings, the Ld. CIT(A) after taking into account the arguments and contentions , computed the average net profit rate from A.Y.2014-15 to 2020-21, @1.06%. The ld. CIT(A) thereafter applied @1.50% thereby sustaining the addition of Rs.64,05,223/- as against the addition made by the AO of Rs.3,41,61,192/-.
8. After hearing the submissions and perused the materials available on record, we find that undisputedly the income of the assessee was estimated by the Ao by applying @8% on the total turnover when there was part compliance on the part of the assessee. It is also disputed that during the assessment proceeding, the AO has not rejected the books of account and estimated the income of assessee by applying @8%, which is not permissible under the Act. In our opinion, where the income is estimated , the books of account are to be compulsorily rejected, failing which the addition made by the AO by estimating the income cannot be sustained. The Hon’ble Supreme Court in CIT v. A. Krishnaswami Mudaliar (53 ITR 122) has categorically held that estimation of income is permissible only after rejecting the books of account and recording a finding that the accounts do not correctly reflect the true state of affairs. This settled legal position has been consistently followed by various High Courts and Tribunals. Thus, having accepted the books of account as such, the Assessing Officer could not estimate the unaccounted turnover or profit. Consequently, we set aside the order of ld. CIT(A) and direct the AO to delete the addition. The application filed by the assessee under Rule 27 of ITAT Rules, 1963 and ground raised therein are allowed.
9. The appeal of the revenue challenging part deletion by ld. CIT(A) becomes infructuous in view of allowing the grounds raised by the assessee under Rule 27 of ITAT Rules, 1963. Consequently, the appeal of the revenue is dismissed.
10. In the result, the application under rule 27 is allowed and appeal of the revenue is dismissed.
The order is pronounced in the open Court on 25/06/2026.
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