When books of accounts are rejected and profits are estimated, no separate disallowance can be made on basis of entries in books
In a recent judgment, ITAT Amritsar has held that when books of accounts are rejected and gross profit is estimated at a percentage on sales, it is not open to the AO to rely upon the same rejected books of accounts, to make separate additions and or disallowance on other heads of expenditure.
ABCAUS Case Law Citation:
4790 (2025) (10) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming addition made by the Assessing Officer (AO) u/s 68 of the Act, on account of unsecured loan treated as income from undisclosed sources despite the fact that the AO had rejected the books of account under section 145(3) of the Act and profit was estimated.
The appellant assessee was a partnership firm with the main object of trading in beer and wines (alcoholic liquor for human consumption). The business was carried out under license granted by the State Excise authorities and the excise license was granted in the name of an individual partner holding 25% share in profits and losses of the partnership firm.
The purchases of goods namely Medium Liquor and Indian Made Foreign Liquor, were made from excise bonded warehouse under control of State excise authorities and goods were sold on wholesale to other retailers and also on retail basis to general customers (over the counter) as off shop sales.
The said purchases had also been made against the PAN of one individual partner and TCS u/s 206C(1) of the Act had also been deducted by the respective sellers on such sales duly reflected in form 26AS against the said individual partner’s PAN.
However, neither any return of income had been filed by the assessee in normal course u/s 139(1) for the year under appeal nor any return filed in response to notice u/s 142(1) of the Act, even though the assessee had made cash deposit in its bank account which included deposits made during the demonetization period.
In absence of any books of accounts being maintained and in absence of any tax audit report being uploaded u/s 44AB, and in absence of any supporting purchase invoices, bills and vouchers, and other documentary evidences, the assessment was completed on the basis of “draft return” filed by the assessee before the AO in course of assessment proceedings, containing figures of gross sales and other incidental figures of direct and indirect expenses, all without any supporting documentary evidences.
The AO determined the gross profits (from liquor business) @ 10% of gross Sales and allowed indirect expenditure to arrive at the taxable net profits. However, apart from above, the AO made a further addition on account of unsecured loans as reflected in the said draft return and a further addition being the amount reflected under the head “Partners Capital” both u/s 68 of the Act.
Before the Tribunal, the assessee submitted that in absence of any books of accounts and in absence of any return of income and audited balance sheet being actually filed , the figures contained in the so called draft return, both liabilities and assets were all hypothetical and imaginary and this case was a case of no books and in absence of any such books of accounts it is the net profit that was to be estimated on gross sales ( at a fair rate ) and no further additions on any other heads are legally possible.
In support of his argument the assessee relied on the jurisdictional high court where it was held that in cases where books of accounts are rejected the AO cannot rely upon any entry in the books of accounts for making any addition. The assessee also relied upon the judgment of Rajasthan High court where the Hon’ble court had observed that no separate addition can be made u/s 68 of the Act 61 on account of unexplained cash credit after rejection of books of accounts invoking provisions of section 145(3).
The Revenue contended that there is nothing in law which prevents the AO in appropriate cases in taxing both the cash credit (the source and nature of which is not satisfactorily explained) and the business income estimated after rejecting books of the assessee , and in support of his argument the Department relied on the decision of the Hon’ble Supreme court.
The Tribunal noted that that the entire assessment was based on figures supplied by the assessee in the form of a draft return , in course of assessment proceedings and the only authentic figures available are that of the purchase made by the assessee from various bonded warehouse dealing in IMFL and beer, which was evident from the income tax portal in form 26AS against which TCS are collected by the sellers u/s 206C(1) of the Act, purchase figure and the figure of state excise duty paid against which sales are disclosed by the assessee.
The Tribunal further observed that no return of income had been filed neither u/s 139(1) nor u/s 142(1), no regular books of accounts had been maintained, no tax audit was done and no further documentary evidences produced / filed, therefore the concept of a draft return in income tax proceedings was legally not tenable. Moreover, taking a very logical view, the unsecured loan figure as appearing as liability was offset by the cash in hand in the so called draft return, which could only be termed as imaginary, and same was the case of partners capital and fixed assets, because no such assets actually existed and the business carried on for only one financial year had already closed down.
The Tribunal observed that in judicial pronouncements of High Courts, i.e. Andhra Pradesh, Allahabad, Karnataka, Punjab and Haryana and Gujarat High Court it has been held that when books of accounts are already rejected and recourse has been taken to section 145(3) of the Act , and gross profit has been estimated at fair percentage on sales, it is not open to the AO to rely upon the same rejected books of accounts, to make additions and or disallowance on other heads of expenditure.
The Tribunal opined that in the instant case net profit rate of 2.5% will meet the ends of justice, and accordingly, AO was directed to take the business profits from liquor trading @ 2.5 % of gross sales.
Following the law laid down by judicial pronouncements the Tribunal held that in the absence of regular books of accounts the possibility of any credit entries in books does not arise and all deposits in bank were explained to have come out of sale proceeds of trading business and as such separate additions u/s 68 of the Act on account of unsecured loans and partners capital as reflected in draft return cannot be sustained.
Accordingly, the additions on account of unsecured loans and partners capital, were deleted.
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