Mukhatar Ahamed Shaukat Ali Gotyalakar Vs ITO (ITAT Bangalore Bench)
Books Cannot Be Street-Vended Away u/s 145(3): No 8% Profit Estimation Without First Rejecting Audited Accounts
Summary: The assessee was an individual engaged as a street vendor selling readymade garments. He purchased goods & sold them to customers for cash, which was regularly deposited into his bank account.
The assessee did not file his return of income u/s 139(1) for AY 2018-19. Based on information concerning the cash deposits, reassessment proceedings were initiated & notice u/s 148 was issued.
In response, the assessee filed his return of income. Thereafter, notices u/ss 143(2) & 142(1) were issued seeking details concerning the nature & source of the cash deposits.
Cash Deposits Explained as Daily Business Sales
The assessee explained that the bank deposits represented proceeds from the daily cash sales effected in the ordinary course of his street-vending business.
- audit report in Form 3CB;
- profit and loss account;
- balance sheet; &
- books-based computation of business income.
He also pointed out that returns had been filed for AYs 2019-20 to 2022-23 along with audit reports. Therefore, he requested the AO not to proceed with a best judgment assessment u/s 144.
The AO subsequently issued another notice u/s 142(1) seeking further information relating to the cash deposits. The assessee did not respond to this notice.
AO Estimates Profit at 10%
Due to the failure to furnish the further details, the AO concluded that the source of the cash deposits had not been properly explained. However, instead of treating the entire deposits as unexplained money, the AO accepted them as business turnover & proceeded to estimate the business income.
Invoking s.145(3), the AO estimated the assessee’s net profit at 10% of the total turnover. Credit was granted for the business income already declared by the assessee in his return, and only the difference was added.
The assessee challenged the estimation before the CIT(A). Although several hearing notices were issued, the assessee did not respond. The CIT(A) nevertheless considered the matter on merits & reduced the estimated profit rate from 10% to 8% by drawing guidance from s.44AD.
Jurisdictional Grounds Not Pressed
Before the ITAT, the assessee did not press the grounds challenging the jurisdiction of the AO to issue notice u/s 148. Thus, the controversy before the Tribunal was confined to the legality of the profit estimation.
The assessee argued that the AO had neither identified any defect in the books of account nor recorded dissatisfaction regarding their correctness or completeness. The books had been duly audited & the audit report in Form 3CB did not contain any adverse observation.
Therefore, without formally rejecting the books, the AO could not disregard the declared results & substitute them with an arbitrary net-profit rate.
The assessee further explained that, being a street vendor, he was unable to devote adequate attention to income-tax proceedings & had consequently missed the notices issued electronically by the CIT(A).
A Consistent Tax History Supported the Books
The ITAT examined the assessee’s compliance history. It found that he had filed returns for AYs 2014-15, 2015-16 & 2016-17, supported by audited accounts. Returns for AYs 2019-20, 2020-21, 2021-22 & 2022-23 had also been filed along with audit reports.
Those returns had been accepted by the Department. Therefore, the assessee’s maintenance of regular books & conduct of the street-vending business were not matters arising only in the disputed year.
The Tribunal accepted that the assessee had mistakenly failed to file the return u/s 139(1) only for the year under consideration. After receiving notice u/s 148, he got the accounts audited & filed the return along with Form 3CB, profit and loss account & balance sheet.
There was also no dispute regarding either the assessee’s business activity or the fact that readymade goods were ordinarily sold by him for cash.
Section 145(3) Is Not an Estimation Shortcut
The ITAT explained that s.145(3) can be invoked only where the AO is not satisfied about:
- the correctness or completeness of the accounts;
- the regularity of the accounting method followed; or
- computation of income in accordance with the notified accounting standards.
Only after recording such dissatisfaction & rejecting the books in accordance with law can the AO proceed to make a best judgment assessment u/s 144.
In the present case, no defect whatsoever was pointed out in the audited books. The AO did not dispute any purchase, sale, expenditure or entry recorded therein. He also did not expressly reject the books of account.
The audit report contained no adverse qualification against the assessee. In such circumstances, the declared book results could not be discarded merely because the assessee failed to respond to one of the subsequent notices.
Neither 10% Nor 8% Had Any Factual Foundation
The Tribunal found no logical or evidentiary basis for the AO’s adoption of a 10% net-profit rate. Likewise, the CIT(A)’s substitution of 8% by merely borrowing the rate mentioned in s.44AD was held unjustified.
Section 44AD provides a presumptive taxation mechanism subject to its own statutory conditions. Its percentage cannot be mechanically imported to overwrite the results disclosed in regularly maintained & audited books, particularly when those books have not been rejected u/s 145(3).
The assessee had disclosed a gross profit rate of 6.04% & claimed that the net profit, after business expenses, was reasonable and supported by the audited accounts. In the absence of contrary material, the book results were required to be accepted.
Accordingly, the ITAT set aside the orders of the AO & CIT(A), deleted the addition in full & allowed the assessee’s appeal.
Legal Principle
An assessee’s non-compliance with a notice may permit the AO to proceed with the assessment, but it does not automatically authorise arbitrary profit estimation. Audited book results cannot be rejected without identifying specific defects & recording the statutory dissatisfaction required u/s 145(3). Further, the 8% rate prescribed u/s 44AD is not a universal profit benchmark that can be borrowed for every cash-based business.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BANGALORE BENCH
1. This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 25/03/2026 in respect of the A.Y. 2018-19.
2. The brief facts of the case are that the assessee is an individual and not filed his return of income. The assessee is a street vendor and doing the business of selling readymade goods. The assessee purchased the goods and sold the same to the customers for cash and deposited the said cash into his bank account. The assessment was taken up for scrutiny to examine the cash deposits made into his bank account. Thereafter notice u/s. 148 was issued for which the assessee filed his return of income. Subsequent to the filing of return of income, notice u/s. 143(2) was issued. Thereafter, notice u/s. 142(1) was issued seeking the various details. The assessee filed his response to the said notice and explained that the cash deposits are out of the daily sales effected by him. The assessee also submitted that for the A.Ys. 2019-20, 2020-21, 2021-22 and 2022-23, return of income was filed with audit report and therefore requested not to make any assessment u/s. 144 of the Act. The assessee also submitted that along with the return of income, audit report in form 3CB, profit & loss account and balance sheet were also filed. The AO again sought for the information about the cash deposits by issuing a notice u/s. 142(1) of the Act. The assessee had not responded to the said notice. The AO, therefore, concluded that the cash deposits was not properly explained and therefore, proposed to estimate the income on the basis of the net profit rate laid down u/s. 145(3) of the Act and estimated the net profit at 10% of the total turnover and treated the same as income chargeable under the head Profits and gains on business. The AO had also granted deduction of the business income already declared by the assessee in his return of income.
3. As against the said order, the assessee filed an appeal before the Ld.CIT(A). The assessee had not responded to the several hearing notices issued by the Ld.CIT(A) and therefore, the Ld.CIT(A) had considered the issue on merits and refixed the estimation of the profit at 8% instead of 10% by taking the clue from section 44AD of the Act.
4. As against the said order, the assessee is in appeal before this Tribunal.
5. At the time of hearing, the Ld.AR submitted that they are not pressing the ground nos. 2 and 3 in which the jurisdiction to issue notice u/s. 148 was challenged. The Ld.AR further submitted that the AO had not alleged any error or mistake in the maintenance of the books of accounts and also without rejecting the books of accounts, the arbitrary estimation of profit at 8% is not warranted. The Ld.AR further submitted that the assessee had produced the audit report in form 3CB and therefore, without pointing out any defects in the said accounts, the addition could not be made. The Ld.AR also submitted that the non-appearance by the assessee before the Ld.CIT(A) are that the notices sent by the Ld.CIT(A) was not viewed by him and therefore, the order of the Ld.CIT(A) is against the principles of natural justice.
6. The Ld.DR submitted that the assessee had not furnished the details before the AO as well as before the Ld.CIT(A) and therefore, the order of the lower authorities are in order.
7. We have heard the arguments of both sides and perused the materials available on record.
8. The assessee had filed his return of income for the A.Ys. 2014-15, 2015-16 and 2016-17 along with the audit report u/s. 44AD of the Act. Further, for the A.Ys. 2019-20, 2020-21 and 2021-22 and 2022-23 return of income was also filed along with the audit report. The assessment has been completed by accepting the return of income filed by the assessee and therefore, it is a fact that the assessee has maintained the books of accounts and also audited and report has also been filed along with the return of income. Only in respect of the current year, the assessee had mistakenly failed to file the return of income u/s. 139(1) of the Act. There is no dispute with regard to the business activity of the assessee and the mode of sale of the goods dealt with by him. It is the case of the assessee that because of the street vending, he is not able to concentrate on the IT matters and therefore, failed to file the return of income u/s. 139(1) of the Act. Subsequently, on issue of the notice u/s. 148 of the Act, the assessee got his books of accounts audited and filed his return of income along with the audit report in form 3CB. The assessee had also filed the profit and loss account and balance sheet. It is the case of the assessee that he is earning a gross profit of 6.04% and after deducting the expenses, the net profit declared by the assessee would be a reasonable one which is also supported by the audit report.
9. We have considered the said submissions and also the fact that the assessee is a street vendor and in spite of the said fact, he has maintained the books of accounts which was also duly audited and a report in form 3CB was also filed along with the return of income filed by him. In the audit report, nothing has been stated against the assessee and the AO has also not pointed out any mistakes in the maintenance of the books of accounts. Further, the AO had also not rejected the books of accounts. In such circumstances, the book results declared by the assessee could not be ignored when there is no evidence available to disbelieve the books of accounts. Further, there is no logic for estimating the net profit at 10% by the AO and by the Ld.CIT(A) at 8%. The section 145(3) speaks about the non-satisfaction of the assessing officer about the correctness or completeness of the accounts or the regular method of accounting was not followed by the assessee and income was not computed in accordance with the standards notified under sub-section (2) of section 145 and in that circumstances only, the AO can make a best judgment assessment u/s. 144 of the Act. No such allegation was made by the AO and in fact, the assessee had filed audit report in form 3CB. When the assessee is regular in filing his return of income for the previous and subsequent years and also have his books of accounts audited, we do not find that the estimation of the income at 8% is a reasonable one. We therefore, set aside the orders of the lower authorities by deleting the additions made by them.
10. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 28th August, 2026.
