Section 44AD Overrides Ad-Hoc 50% Profit Estimation

By CA Vijayakumar Shetty Income Tax Judiciary December 31, 2025

TaxGuru Citation: 2025 taxguru.in 13761
Case Name: Ruksarali Iftikharali Shaikh Vs ITO (ITAT Surat)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Related Assessment Year: 2010-11
Courts: All ITAT, ITAT Surat

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Ruksarali Iftikharali Shaikh Vs ITO (ITAT Surat)

Best Judgment Can’t Be Wild Judgment- 50% Profit Estimation Junked: ITAT Surat Applies 44AD & Cancels Penalty

Scrap Sale ≠ 50% Profit: Section 44AD Rescues Small Trader- When 44AD Applies, 271(1)(c) Falls Flat

In Ruksarali Iftikharali Shaikh vs. ITO, Ward-7, Vapi (ITA Nos.777 & 778/Srt/2025, AY 2010-11; order dated 29-12-2025), the Surat Bench of ITAT granted substantial relief to a small scrap trader by rejecting arbitrary 50% profit estimation and quashing penalty u/s 271(1)(c).

The Assessee had not filed a return for AY 2010-11. Based solely on Form 26AS/TCS data reflecting scrap sales of ₹19.23 lakh to Macleods Pharmaceuticals Ltd., the AO reopened the assessment u/s 147 and, due to non-compliance, completed best-judgment assessment u/s 144 by estimating 50% of turnover (₹9.61 lakh) as income. Penalty u/s 271(1)(c) of ₹1.98 lakh was also levied on this estimated addition. The Ld. CIT(A)/NFAC upheld both the quantum and penalty.

Before the Tribunal, the Assessee contended that his case was squarely covered u/s 44AD, under which income is to be computed at 8% of turnover, and that estimation at 50% had no legal or factual basis. Accepting this plea, the ITAT held that when turnover is known and presumptive taxation applies, AO cannot estimate income at an ad-hoc higher rate without reasons. The Tribunal directed the Revenue to compute income at 8% of ₹19.23 lakh (₹1.54 lakh), which was below the basic exemption limit for AY 2010-11.

Consequently, the Tribunal held that no concealment penalty can survive on a purely estimated income, particularly when the recomputed income itself falls below the taxable threshold. Accordingly, the quantum addition was restricted by applying section 44AD, and the penalty u/s 271(1)(c) was deleted in full. The quantum appeal was partly allowed and the penalty appeal allowed.

FULL TEXT OF THE ORDER OF ITAT SURAT

These two appeals are filed by the assessee against the separate order of the National Faceless Appeal Centre (NFAC), Delhi, (in short ‘the CIT(A)’), dated 23.08.2023 & 23.04.2024, both for the Assessment Year 2010-11 in the proceedings under Section 147 of the Income Tax Act, 1961 (in short ‘the Act’) & u/s. 271(1)(c) of the Act; respectively.