Low-Margin Egg Trading Business – ITAT Ranchi Caps Profit Estimation at 2% in Absence of Books

Background and Core Issue

The Ranchi Bench of the Income Tax Appellate Tribunal (ITAT) in the case of Md. Shahbaz Alam Vs ITO examined the proper rate of profit to be estimated where an assessee engaged in wholesale egg trading had not maintained books of account and significant discrepancies were noticed between bank deposits, supplier’s ledger, and disclosed turnover.

The dispute centered on what percentage of net profit should reasonably be applied to the assessee’s turnover/differential receipts when accounts were not produced and the Assessing Officer (AO) resorted to best judgment assessment.

  • The AO had applied an 8% net profit rate.
  • The CIT(A) scaled it down to 4%.
  • The assessee sought a much lower rate (1%), relying on the inherently low margin nature of egg wholesale trade and past accepted results.

Ultimately, the ITAT held that, considering business realities and departmental consistency, a 2% net profit rate on turnover would be a fair and reasonable estimate for A.Y. 2017-18.

Facts in Brief

Nature of Business and Return Filed

  • The assessee was engaged in wholesale trade of eggs at multiple locations in Jharkhand, namely Simdega, Koderma and Gumla.
  • For A.Y. 2017-18, the assessee continued the same line of business and declared a net taxable income of ₹ 3,31,950/- in the return of income.

Information from Supplier Under Section 133(6)

  • During scrutiny proceedings, the AO noticed that the assessee had shown purchases of eggs aggregating to ₹ 4,03,58,629/- from M/s Venkatarama Poultries Private Limited, Guntur, Andhra Pradesh.
  • To cross-verify these figures, the AO issued a notice under Section 133(6) of the Income Tax Act 1961 to the Manager (Finance) of M/s Venkatarama Poultries Private Limited, calling for the ledger account of the assessee.
  • The supplier complied by forwarding the assessee’s ledger through e-mail.

Verification with Bank Statements

  • Simultaneously, notices under Section 133(6) were also directed to the Branch Managers of ICICI Bank Limited and Axis Bank Limited to obtain bank statements and reconcile them with the turnover and receipts disclosed in the return.
  • On comparison, the AO detected a difference of ₹ 1,88,65,255/- between:
    • the deposits reflected in the assessee’s bank accounts, and
    • the turnover and receipts declared in the income tax return.

Admission of No Books of Account

  • The assessee was called upon to explain this discrepancy of ₹ 1,88,65,255/-.
  • When queried, the assessee:
    • Failed to reconcile or satisfactorily explain the difference, and
    • Admitted that no books of account were maintained for the relevant year.

In view of these admissions and the failure to substantiate the figures, the AO proceeded to estimate income by applying a presumptive profit rate on the receipts/deposits.

Assessment Order – 8% Net Profit Rate Applied

AO’s Approach

  • Considering it as a case of non-maintenance of books and unexplained discrepancy in receipts, the AO treated the differential figure as part of gross receipts.
  • A net profit rate of 8% was applied to the relevant gross receipts/differential amount of ₹ 1,88,65,255/- (and/or overall receipts as worked out by AO).
  • On this basis, the AO determined net profit at ₹ 15,09,220/- and added this as undisclosed income to the assessee’s returned income for A.Y. 2017-18.

The assessee challenged this estimation as being excessive and not reflective of the actual margins in egg trading.

First Appeal Before CIT(A) – Rate Reduced to 4%

Grounds Before CIT(A)

The assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals) [Addl/JCIT(A)-6, Chennai]. The primary contentions were: