Penchalaiah Dasari Vs ITO (ITAT Hyderabad)
AO Can’t Blow Hot & Cold: Once Profit Is Estimated, No Further Disallowance: ITAT Hyderabad Deletes Salary & Commission Additions
Hyderabad ITAT ‘B’ Bench, in Penchalaiah Dasari vs. ITO (ITA No.703/Hyd/2025, AY 2018-19, order dated 24.12.2025), partly allowed the assessee’s appeal and settled the well-established principle that the AO cannot make item-wise disallowances after rejecting books and estimating profits.
The Assessee, a commission agent/direct selling agent, declared income of ₹15.90 lakh. The AO, noticing fall in net profit, (i) made 20% adhoc disallowance of salary & wages (₹53.71 lakh), (ii) disallowed entire commission expenditure (₹15.00 lakh), and (iii) simultaneously estimated net profit, making a further addition of ₹6.47 lakh.
While the CIT(A) deleted the profit-estimation addition holding that books were not formally rejected u/s 145, he sustained salary and commission disallowances, observing that those grounds were withdrawn.
The Tribunal found that the AO had in substance rejected the books and resorted to estimation, and therefore could not “blow hot and cold” by again relying on the same books for disallowing expenses. Relying on Indwell Constructions (AP HC) and Prasant Oil Mill (Guj HC), the ITAT held that once income is determined on estimated basis, no further disallowance of individual expenses is permissible.
Accordingly, the ITAT deleted the disallowance of salary & wages (₹53.71 lakh) and commission (₹15.00 lakh) and sustained only the estimated profit addition of ₹6.47 lakh, directing the AO to recompute income accordingly.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
