ITAT Raipur: Estimated Commission Additions Invalid Without Rejection of Books

Overview of the Decision

The Raipur Bench (SMC) of the Income Tax Appellate Tribunal in Anil Kumar Jain Vs ACIT has emphatically held that the Revenue cannot make estimated additions towards alleged commission income when the assessee’s books of account have not been rejected under Section 145(3) of the Income Tax Act 1961, nor has an assessment been framed under Section 144.

The Tribunal, dealing with appeals for A.Y. 2018-19 and A.Y. 2019-20, concluded that the Assessing Officer (AO) acted beyond the scope of law by:

  • Accepting the purchases and sales as recorded in the regular books, and simultaneously
  • Making an estimated addition for supposed commission income on the allegation that the assessee was issuing bogus purchase and sale bills.

Relying on binding and persuasive precedents, including:

  • Pr. CIT Vs. Forum Sales (P). Ltd. (2024) 160 taxmann.com 93 (Del.)
  • CIT Vs. Anil Kumar & Co. (2016) 67 taxmann.com 278/386 ITR 702 (Kar.)

the Tribunal reiterated that rejection of books of account is a sine qua non before resorting to income estimation.

Accordingly, the additions were held to be arbitrary and contrary to law, and were deleted for both assessment years.

Background Facts of the Case

Search and Assessment Proceedings

  1. The assessee is an individual engaged in the business of trading in iron and steel, earning both trading and commission income, along with interest income for the relevant assessment years.
  2. A search and seizure action under Section 132 was carried out on the residential and business premises of the assessee on **19.02.2020`.
  3. Consequently, notice under Section 153A was issued. The assessee filed the return of income declaring Rs. 8,13,000/- for A.Y. 2018-19.
  4. In response to statutory notices, the authorised representative regularly attended the assessment proceedings and submitted written explanations and supporting documentation.

Allegation of Bogus Billing and Commission Income

During scrutiny, the AO formed a view that the assessee was allegedly acting as a bill provider for bogus purchases and sales. Without disturbing the quantum of recorded purchases and sales, the AO concluded that the assessee must have earned commission on these alleged accommodation entries and:

  • Estimated a commission income of Rs. 12,58,774/- for A.Y. 2018-19;
  • Treated this amount as additional income over and above the business results reflected in the books.

The AO did not:

  • Invoke Section 145(3) to reject the books of account, or
  • Frame the assessment as a best judgment assessment under Section 144.

First Appeal Before CIT(A)/NFAC

The assessee challenged the estimated addition before the Ld. CIT(Appeals)/NFAC, contending that:

  • The books of account were duly maintained and produced;
  • No specific defects were pointed out by the AO;
  • No rejection of books under Section 145(3) was recorded; and
  • The AO had accepted purchases and sales as genuine but still added alleged commission, which was inconsistent and legally untenable.

However, the CIT(A) upheld the AO’s action, sustaining the commission addition.

The core legal question considered by the ITAT was:

Whether an estimated addition towards commission income can be made when the AO has not rejected the books of account under Section 145(3) and has not invoked Section 144 to make a best judgment assessment?

The assessee’s counsel argued that, in the absence of rejection of books, any estimation of income – whether by inflating profit, disallowing a part of purchases, or imputing commission on alleged bogus bills – is contrary to settled law.