Case Law Details
Prabakar Reddy Vs ITO (ITAT Hyderabad)
ITAT Hyderabad: 12.5% Profit Estimation on Bank Credits Excessive; Income Restricted to 4% in Absence of Evidence
In this case, the assessee, engaged in facilitating sale of bananas, faced reassessment where the AO treated entire bank credits of ₹2.52 crore as turnover and estimated profit at 12.5%, making an addition of ₹26.58 lakh over the income already declared. The CIT(A) upheld the addition.
Before the ITAT, the assessee contended that he was merely a commission agent and the bank credits represented pass-through amounts belonging to farmers, not his turnover. However, the Tribunal noted that no supporting evidence such as confirmations, agreements, or documentation was furnished to substantiate this claim.
While rejecting the commission agent argument due to lack of proof, the ITAT held that estimation of profit at 12.5% was arbitrary and excessive, especially without any comparable cases or material on record. Relying on earlier Tribunal decisions in similar fruit/vegetable trade, it held that a reasonable profit rate would be 4%.
Accordingly, the Tribunal directed the AO to estimate income at 4% of total bank credits, granting partial relief to the assessee.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This appeal is filed by Shri Prabakar Reddy Yarrabolu (“the assessee”), feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”) dated 06.01.2025 for the A.Y.2017-18.
2. The assessee has raised the following grounds of appeal:
3. The brief facts of the case are that the assessee is an individual who had not filed any return of income for Assessment Year 2017–18. On the basis of information available with the Learned Assessing Officer (“Ld. AO”), it was noticed that the assessee had deposited substantial cash in his bank accounts during the year under consideration. Accordingly, reassessment proceedings under section 147 of the Income Tax Act, 1961 (“the Act”) were initiated in the case of the assessee. Subsequently, an order under section 148A(d) of the Act was passed on 27.03.2024 and notice under section 148 of the Act was issued by the Ld. AO on the same date. In response thereto, the assessee filed return of income declaring total income of Rs.4,93,664/-. During the course of assessment proceedings, the Ld. AO observed that the total credits in the bank accounts of the assessee aggregated to Rs.2,52,16,931/-. The Ld. AO called upon the assessee to explain the source of such deposits. However, not being satisfied with the explanation furnished, the Ld. AO estimated business profit at the rate of 12.5% the entire bank credits of Rs.2,52,16,931/-. Accordingly, profit was computed at Rs.31,51,123/-. Since the assessee had already declared business profit of Rs.4,92,266/-, the balance amount of Rs.26,58,857/- was added to the income of the assessee. Accordingly, the assessment was completed by the Ld. AO under section 147 read with sections 144 and 144B of the Act vide order dated 28.02.2025, determining the total income of the assessee at Rs.31,52,521/-.
4. Aggrieved by the order of the Ld. AO, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT (A) confirmed the addition made by the Ld. AO.
5. Aggrieved with the order of the Ld. CIT (A), the assessee is in appeal before this Tribunal. At the outset, the Learned Authorized Representative (“Ld. AR”) submitted that the only issue which is pressed by the assessee out of the ground of the appeal is the addition of Rs.26,58,857/- made by the Ld. AO. The Ld. AR further submitted that the assessee is engaged as a commission agent in the business of facilitating sale of bananas on behalf of farmers. It was submitted that the assessee receives sale proceeds from purchasers and, after deducting his commission, remits the balance amount to the farmers. The Ld. AR contended that the entire credits in the bank account do not represent the turnover or income of the assessee, but merely pass-through amounts belonging to the farmers. It was submitted that the assessee earned gross commission income of Rs.11,61,010/- during the year and after deducting expenses, offered net income of Rs.4,92,266/- in the return of income. It was further submitted that the Ld. AO, without appreciating the nature of business of the assessee, wrongly estimated profit at 12.5% on the entire bank credits, which is arbitrary and excessive. Accordingly, the Ld. AR prayed before the Bench to delete the addition made by the Ld. A.O.
6. In alternate submission, the Ld. AR further submitted that even if estimation is to be made, a reasonable rate should be adopted. In this regard, reliance was placed on the decision of this Tribunal in the case of ITO Vs. Y. Jaya Prakash in ITA No.1693/Hyd/2012 dated 10.05.2013, wherein under similar circumstances profit was estimated at 4% of turnover. Accordingly, it was prayed that income may be estimated at 4%.
7. Per contra, the Learned Departmental Representative (“Ld. DR”) relied on the orders of the lower authorities. He invited our attention to the page no. 23 of the assessment order and submitted that though the assessee claimed to be a commission agent, he failed to substantiate such claim by producing any supporting evidence either from farmers or purchasers. It was submitted that no confirmations, agreements, or documentary evidence were furnished to establish that the bank credits were merely pass-through amounts. Therefore, the Ld. AO was justified in treating the entire bank credits as business turnover and estimating income thereon. Accordingly, it was contended that there is no infirmity in the orders of the lower authorities.
8. We have heard the rival submissions and perused the material available on record including the case law relied upon. We have also gone through the assessment order and the order of the Ld. CIT(A). On perusal of the same, we find that the Ld. AO has treated the entire credits in the bank accounts amounting to Rs.2,52,16,931/- as business turnover of the assessee. However, while estimating profit at 12.5% of such turnover, the Ld. AO has not brought on record any comparable cases in similar line of business nor any material to justify adoption of such high rate. At the same time, we note that the assessee has claimed himself to be a commission agent handling sale proceeds on behalf of farmers. However, no documentary evidence such as confirmations from farmers or purchasers, agreements, or any other supporting material has been placed either before the lower authorities or before us to substantiate such claim. Therefore, in absence of any supporting evidence, the claim of the assessee that he is merely a commission agent cannot be accepted.
9. Having said so, we find merit in the contention of the assessee that estimation of profit at 12.5% is excessive and not supported by any comparable instance. We have gone through the para no. 11 of the decision of this Tribunal in the case of ITO Vs. Y. Jaya Prakash (Supra), which is to the following effect:
“11. We find that the assessee’s nature of business is selling fruits and vegetables and buying from the farmers directly and transported in tractors in smaller units, pooled from various places and dispatched in bulk to various places. We confirm the Order of the CIT(A) in adopting the percentage of margin at 4% for the following reasons:
1. The customary practice predominantly present is cash and carry basis, without any formal bills and therefore, it is only a matter of estimate which can be adopted. The assessee has adopted net profit which comes to about 2% of gross turnover. However, it seems to be very low and 4% can be a reasonable amount of profit in such trade.
2. The fruits being perishable in nature, the assessee at most of the times have to dispose of the goods on lower rates and also sometimes has to throw away. Hence, the profit margin cannot be as high as 8%.
3. The fruits business is highly competitive in nature and based on the prevailing market rates, the assessee has to sell the goods with lower margins. Hence, the CIT(A) holding the percentage of margin at 4% is justified.
4. Sometimes, due to crop failure, the assessee has to loose the advances given to the farmers, which reduces the profit of the assessee.
5. Hence, the assessee has to correlate the mode of transport and the transporter fixes the rates at the eleventh hour based on the availability/demand; they charge higher rates. The activity being predominantly labour oriented, expenditure like food during loading and unloading and also expenditure appealing to their habits has to be incurred. Hence, expenditure has to be necessarily incurred.
6. Wastage due to degrading, rotten, quantity discounts, freebies, take home goodwill gestures, fluctuations in rates etc., would cumulatively eat away margins. In case of packing materials, most of the time, gunnies etc., are purchased from unorganized dealers, farmers and at times reimbursed to hamalies.
7. To conclude, production of bills and vouchers is highly impractical in this line of activity and the factors which have an impact on the profit has been discussed in in our opinion, the point no.1 to 6 above. Hence, in our opinion, the percentage of profit is to be treated at 4% is reasonable and hence, we confirm the Order of the CIT(A).”
10. On perusal of the above, we find that under similar circumstances relating to trading of fruits and vegetables, estimation of profit at 4% of turnover has been allowed by this Tribunal. Therefore, considering the totality of facts and circumstances of the case, and in the interest of justice, we deem it appropriate to direct the Ld. AO to estimate the income of the assessee at the rate of 4% of the total bank credits of Rs.2,52,16,931/-.
11. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Open Court on 24th April, 2026.
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