Bengaluru ITAT Deletes ₹43.04 Lakh Ad Hoc Disallowance: No Identified Defects, No Valid Addition

Overview of the Dispute

In a significant ruling favouring an APMC-registered agricultural commodities trader, the Income Tax Appellate Tribunal, Bengaluru Bench, has set aside an addition of ₹43,03,750/- made during reassessment proceedings. The Tribunal held that blanket, percentage-based disallowances of purchases and business expenses — made without pinpointing any specific bogus transaction or concrete defect in the books of account — cannot withstand legal scrutiny. The ruling reaffirms a well-established principle: revenue authorities must identify particular deficiencies before rejecting books of account and estimating income on an ad hoc basis.

Background and Facts of the Case

The Assessee and His Business

The assessee in this matter, Irayya Shidramayya Hirematha, was engaged in the trading of agricultural produce, primarily onions, and held a valid licence under the Agricultural Produce Market Committee (APMC) framework. For Assessment Year 2018-19, no return was originally filed under Section 139(1) of the Income Tax Act, 1961.

Trigger for Reassessment

The case was reopened through a notice under Section 148 dated 27.02.2024, based on specific pieces of information that had come to the notice of the Assessing Officer:

  • Cash deposits of ₹8,51,000/- into a bank account
  • Cash withdrawals amounting to ₹2,39,55,000/- from State Bank of India
  • Purchase of a motor vehicle valued at ₹16,45,626/-

In response, the assessee filed a return of income under Section 148 on 19.06.2024 in ITR-3, declaring total income of ₹5,43,060/-. The case was subsequently transferred to the National Faceless Assessment Centre (NFAC) for completion of assessment.

Documents Furnished by the Assessee

The assessee cooperated fully with the reassessment proceedings and placed extensive documentary evidence on record in response to notices issued under Section 142(1). The documents furnished included:

  • Purchase and sales registers for the relevant financial year
  • Cash book and bank book
  • Bank statements for FY 2017-18 reflecting payments routed through banking channels
  • APMC licence establishing the assessee's registered status as an agricultural produce trader
  • Vendor ledgers along with PAN and Aadhaar details, wherever available
  • Unregistered dealer (URD) purchase records and bills
  • Financial statements and tax audit report
  • Land khata extracts and farmer/vendor identification details for purchases aggregating ₹2,15,99,874/- (approximately 41% of total purchases)

Despite this substantial volume of supporting material, the Assessing Officer proceeded to make ad hoc disallowances.

The Assessing Officer's Additions

Disallowance of Purchases

The Assessing Officer noted that total purchases of ₹5,27,04,529/- were debited in the books. While the assessee submitted account copies and supporting documents for purchases worth ₹2,15,99,874/-, the Assessing Officer found that for the remaining purchases, party account copies, sample bills, and confirmations had not been filed. He also observed that the tax audit report acknowledged difficulty in verifying cash payments exceeding ₹10,000/- made otherwise than by account-payee cheque, as vendor details were incomplete.