ITAT Agra Moderates Profit Rate for Wholesale Beer Trader While Upholding Section 145(3) Invocation
Overview of the Tribunal Decision
The Income Tax Appellate Tribunal, Agra Bench, in the matter of KNP Associates Vs ACIT, delivered a balanced verdict addressing the rejection of books of account under Section 145(3) of the Income Tax Act, 1961. While the Tribunal confirmed that the Assessing Officer was justified in rejecting the maintained books due to material irregularities and unexplained transactions, it simultaneously held that the net profit estimation at 1% of total turnover was disproportionately high for a wholesale beer trading operation. The Bench rationalized the profit margin to 0.50% of turnover, recognizing the distinct nature of beer wholesale business vis-à-vis liquor wholesale operations where margins typically run higher.
Case Background and Factual Matrix
Assessee's Business Profile
KNP Associates operates as a partnership firm conducting wholesale beer trading activities. For the assessment year 2020-21, which represented the inaugural year of commercial operations, the firm filed its return on 19th January 2021, declaring total income of Rs. 6,50,520. The assessee maintained regular books of account and subjected them to statutory audit by a qualified chartered accountant.
Financial Disclosures Made
The firm reported aggregate turnover of Rs. 43,25,48,983 for the relevant year. The gross profit margin stood at Rs. 30,78,075, constituting 0.71% of the declared turnover. Net profit before adjusting for partners' remuneration and interest on capital amounted to Rs. 33,77,494, representing 0.78% of turnover. After accounting for these deductions, the final net profit reduced to Rs. 6,50,515, which translated to merely 0.15% of total turnover.
Assessment Proceedings and Deficiencies Identified
Initial Confusion Regarding Nature of Business
The Assessing Officer initially misconstrued the business operations, incorrectly stating in paragraph 2 of the assessment order that the assessee derived income from liquor business rather than beer trading. However, immediately thereafter, the officer acknowledged that the firm engaged exclusively in wholesale beer trading for Agra District pursuant to license issued by the Excise Department.
Concerns About Low Profit Margins
The Assessing Officer expressed skepticism regarding the exceptionally low net profit rate of 0.15% declared by the assessee. Noting that the firm procures beer from manufacturers and distributes to retail outlets at rates prescribed by the UP Excise Department where Maximum Retail Price remains fixed by regulatory authorities, the officer concluded that profit margins should logically be substantially higher.
Discrepancies Revealed Through Section 133(6) Inquiries
During assessment proceedings, the Assessing Officer dispatched notices under Section 133(6) of the Act to 48 sundry debtors, requesting copies of the assessee's account as maintained in their respective books. The verification exercise revealed significant inconsistencies:
Sapna Gupta (PAN: AHXPG3297M)
The assessee's records showed sales of Rs. 35,39,073 with closing balance of Rs. 6,000. However, in response to Section 133(6) notice, Sapna Gupta categorically denied conducting any business transactions with KNP Associates and stated having no commercial activity whatsoever.
K V Traders (PAN: AARFK3167B)
According to the assessee's ledger, sales to this party totaled Rs. 1,74,69,873 with outstanding balance of Rs. 10,68,988. Conversely, the account statement furnished by K V Traders reflected purchases of only Rs. 1,43,15,215, revealing a substantial variance of over Rs. 31 lakhs, though the closing balance matched.
A R Traders (PAN: AAXFA5707F)
The assessee recorded sales of Rs. 33,69,531 with closing balance of Rs. 1,12,445. The party's books, however, showed purchases amounting to merely Rs. 17,78,886, indicating a difference exceeding Rs. 15 lakhs, while the closing balance remained consistent.
A K Traders (PAN: AAQFA2357L)
The assessee's accounts reflected sales of Rs. 3,36,35,428.82 with closing dues of Rs. 18,481.41. The corresponding entry in A K Traders' books showed purchases of only Rs. 2,33,33,124.41, demonstrating a variance of over Rs. 1.03 crores, though closing balances tallied.
Cash Deposit Irregularities
Examination of the Union Bank of India account statements revealed cash deposits aggregating Rs. 2,56,20,500 during the year. Given that the assessee operated as a wholesaler with all customers maintaining running accounts and receiving goods on credit terms as evidenced from sales ledgers, the Assessing Officer concluded that the source of such substantial cash deposits remained inadequately justified and unexplained.
Rent Agreement Discrepancies and Section 194I Implications
Upon scrutiny of the rent agreement, the Assessing Officer discovered that the contractual rent payable to Smt. Charanjeet Kaur, spouse of Satnam Singh, stood at Rs. 25,000 per month. However, the rent expense ledger maintained by the assessee reflected payments of only Rs. 2,40,000 annually, equivalent to Rs. 20,000 monthly. This indicated that the balance Rs. 5,000 per month remained unrecorded in the books. This omission appeared deliberate to avoid triggering tax deduction obligations under Section 194I of the Act, which mandates TDS on rent payments exceeding Rs. 2,40,000 annually.
Invocation of Section 145(3) by Assessing Officer
Grounds for Book Rejection
Confronted with these material discrepancies, the Assessing Officer determined that the accounting entries made by the partnership firm were unreliable and involved significant monetary amounts. The officer concluded that accurate profit or income could not be deduced from the presented books of account. Consequently, invoking Section 145(3) of the Income Tax Act, 1961, the Assessing Officer rejected both the books of account and the declared book results.
Estimation of Net Profit at 1%
Following book rejection, the Assessing Officer proceeded to estimate net profit, applying a rate of 1% of total turnover. By drawing comparisons with entities engaged in liquor business and relying on certain Tribunal precedents, the officer computed an addition of Rs. 36,74,974 in the assessment finalized under Section 143(3) read with Section 144B of the Act on 29th September 2022.
First Appellate Proceedings Before NFAC
The assessee challenged this assessment order before the National Faceless Appeal Centre (NFAC), Delhi. The CIT(Appeals) upheld the actions of the Assessing Officer, confirming both the rejection of books under Section 145(3) and the consequent profit estimation at 1% of turnover. The appellate order dated 7th October 2025 dismissed the assessee's contentions.
Grounds of Appeal Before ITAT
The assessee approached the Income Tax Appellate Tribunal, Agra Bench, raising multiple grounds challenging various aspects of the lower authorities' orders: