ITAT Bangalore Sends Back 8% Profit Estimation on ₹3.79 Crore Turnover for Fresh Examination

1. Background of the Dispute

The case Patio Vs ITO (ITAT Bangalore) relates to Assessment Year 2020-21 and concerns the legality of estimating business income at 8% of turnover under Section 44AD where:

  • The assessee is a partnership firm engaged in interior works and office furniture supply to corporate customers.
  • Turnover for the relevant year was approximately ₹3.79 crore.
  • The assessee did not file the original return within time.
  • The return was later filed only in response to a reassessment notice under Section 148.
  • Audited financial statements and a tax audit report under Section 44AB were on record.
  • The assessee declared net profit below 8% of turnover (about ₹15.75 lakh).

The central controversy before the ITAT Bangalore was whether the Assessing Officer (AO) could adopt an 8% profit rate, with reference to Section 44AD, without examining the underlying books of account, particularly when:

  • The turnover exceeded the ₹2 crore ceiling for Section 44AD for AY 2020-21.
  • No specific defect in the books had been pointed out on record.

2. Chronology of Events

2.1 Non-filing of Original Return and Reopening

  • The assessee, a partnership firm in the interior and furniture business, did not file its return of income for AY 2020-21 within the prescribed time.
  • Based on information relating to TDS and GST turnover, the Department flagged the case as one involving unreported transactions.
  • A notice under Section 148 dated 28 March 2024 was issued under the risk-management framework, initiating reassessment proceedings.

2.2 Return Filed in Reassessment and Declared Results

In response to the Section 148 notice:

  • The assessee filed a return of income on 29 June 2024.
  • It declared total income of approximately ₹15.75 lakh.
  • The turnover disclosed was about ₹3.79 crore (₹37,933,176 as per the assessment order narration).
  • The accounts were audited and accompanied by:
    • A tax audit report under Section 44AB; and
    • Audited financial statements.
  • The financials reflected:
    • Gross profit of about ₹45.65 lakh (₹4,564,673); and
    • Net profit of about ₹15.75 lakh (₹1,575,533) after debiting expenses.

The assessee contended that, as books were regularly maintained and audited, the AO should accept the returned income in the absence of any demonstrated defects.

2.3 Assessment Order Under Section 144 r.w.s. 147

The AO proceeded to complete reassessment on an ex parte/best judgment basis, citing:

  • Non-filing of the original return.
  • Limited remaining time to complete reassessment proceedings.
  • Alleged non-furnishing of complete supporting documentation for expenses and income computation.

Key aspects of the assessment order:

  • The AO observed that the assessee reported a turnover of ₹37,933,177.
  • The assessee disclosed profit of ₹1,575,533.
  • The AO noted that the assessee had not, according to him, furnished the tax audit report under Section 44AB at the relevant time and had not produced books and vouchers explaining the results, particularly when profit was below 8%.
  • Invoking Section 44AD, the AO estimated income at 8% of turnover at ₹3,034,654.
  • Since the assessee had declared profit of ₹1,575,533, the difference of ₹1,459,121 was added as income.

The order also narrates an addition of ₹40,59,121 at one place, which the summary notes as a numerical inconsistency vis-à-vis the stated 8% calculation and difference figure. That aspect is left for reconciliation in the remand.

The assessment was framed under Section 144 read with Section 147.

3. First Appeal Before CIT(A) – NFAC

The assessee challenged the assessment before the National Faceless Appeal Centre (NFAC), contending mainly:

  • Books of account were duly maintained and audited.
  • The AO had not rejected the books under Section 145(3) nor identified any defect or discrepancy.
  • Application of Section 44AD was incorrect because the turnover exceeded ₹2 crore, the then threshold for AY 2020-21.
  • Even if an estimate was to be made, it should not be at 8% in a service-cum-supply business with audited results.

However, the CIT(A) upheld the AO’s action, reasoning that: