ITAT Allahabad Partly Allows Appeal on Gross Profit Estimation in Demonetisation-linked Assessment

Background of the Dispute

The Allahabad Bench of the Income Tax Appellate Tribunal in Jai Bajrang Gur Bhandar Vs ITO examined whether the Assessing Officer was justified in estimating the gross profit (GP) for AY 2017-18 solely by importing the GP rate declared by the assessee in AY 2018-19.

The assessee is a long-standing partnership firm engaged in wholesale trading of Gur, sugar, dal and allied commodities. For AY 2017-18, the assessee filed its return declaring income of ₹2,38,450. The case was selected for scrutiny under CASS, primarily because of substantial cash deposits during the demonetisation window (09.11.2016 to 31.12.2016).

During assessment, the Assessing Officer:

  • Found that bank credits and debits did not match the turnover declared.
  • Noted that despite sales increasing by more than ₹2 crore in FY 2016-17 as compared to earlier year, the GP remained at 1.76%, identical to FY 2015-16.
  • Detected mismatch in cash-in-hand as on 31.03.2016 between the cash book and the audit report.
  • Observed that only partial records were produced—cash book, ledger and day-to-day sales from 09.11.2016 to 31.12.2016—while sales and purchase vouchers and daily sales records from 01.04.2016 to 08.11.2016 were not furnished.
  • Recorded non-compliance or incomplete compliance with statutory notices.
  • Was unable to verify stock position as on 08.11.2016.

On these grounds, the Assessing Officer rejected the books of account under Section 145(3) of the Income Tax Act 1961 and proceeded to estimate the income.

Additions Made by the Assessing Officer

Post-rejection of books, the Assessing Officer:

  1. Adopted GP at 3.6% – being the rate disclosed by the assessee in the immediately succeeding year AY 2018-19 – and applied this to the turnover of AY 2017-18.

    • Resulting GP addition: ₹12,25,364.

  2. Estimated net profit by applying a higher net profit rate, leading to a further:

    • Net profit addition: ₹5,80,953.

  3. Invoked Section 69A in respect of unexplained cash amounting to:

    • Addition under Section 69A: ₹45,00,000,
    • Taxed at special rate under Section 115BBE.

Order of the CIT(A), NFAC

On appeal, the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre:

  • Confirmed the enhancement of GP by maintaining the estimated GP rate at 3.6% and thereby sustained the addition of ₹12,25,364.
  • Deleted the addition of ₹5,80,953 towards estimated net profit.
  • Deleted the entire addition of ₹45,00,000 made under Section 69A and taxed under Section 115BBE.

While upholding the GP rate at 3.6%, the CIT(A) did not record detailed or independent reasoning for sustaining the GP enhancement, apart from accepting the approach of the Assessing Officer.

The assessee carried the matter further to the ITAT, restricting the challenge only to the sustained GP addition.

Grounds Raised Before the Tribunal

The assessee confined its appeal to the following core objection:

  • The CIT(A) erred in sustaining the addition of ₹12,25,364 which arose purely from application of the subsequent year’s GP rate (AY 2018-19) to the year under appeal AY 2017-18.
  • It was contended that this approach was:
    • Arbitrary and contrary to law;
    • Based on an irrelevant yardstick (subsequent year),
    • Ignoring the assessee’s own past history and comparable data for the concerned year.

Key Factual Submissions by the Assessee

The assessee, through its Authorised Representative, submitted inter alia: