ITAT Delhi Confirms Rejection of Books of Account and Gross Profit Estimation in Scrap Trading Business: Deepanshu Srivastava Vs DCIT

Overview of the Case

A recent ruling by the Income Tax Appellate Tribunal, Delhi Bench, in the matter of Deepanshu Srivastava Vs DCIT has reinforced several critical principles surrounding the rejection of books of account under Section 145(3) of the Income Tax Act, 1961, estimation of income based on historical gross profit rates, and the taxability of unexplained cash deposits under Section 69A. The Tribunal dismissed both appeals filed by the assessee and upheld additions totalling over ₹1.89 crore across two assessment years.

Background and Nature of Business

The assessee operated a scrap trading business through two proprietorship concerns — Nishi Paper & Print Pack and Baba Industries — and had filed his return of income declaring a total income of ₹23,54,280/- for AY 2021-22. The case was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) mechanism, primarily on the ground that the assessee had made substantial purchases from parties who were either non-filers, had submitted non-business returns (ITR-1 or ITR-2), or had disclosed significantly lower turnover figures.

For AY 2017-18, a separate but related issue involving cash deposits of ₹14,20,500/- made during the demonetisation period was also before the Tribunal. Since both appeals pertained to the same assessee, they were heard together and disposed of through a consolidated order.

Issues Before the Tribunal

The following three principal issues were examined:

1. Whether rejection of books of account under Section 145(3) of the Income Tax Act, 1961 was legally valid
2. Whether estimation of income by applying a higher gross profit rate in the absence of corroborative evidence was justified
3. Whether the addition made under Section 69A for unexplained cash deposits during the demonetisation window was sustainable

Factual Matrix Leading to Assessment

Non-Compliance with Statutory Notices

The Assessing Officer issued multiple notices under Section 142(1) — dated 26/10/2022, 14/11/2022, and 02/12/2022 — directing the assessee to submit details of purchase parties along with supporting bills, vouchers, and payment confirmations. Despite repeated reminders, the assessee failed to provide any such documentation.

Notices were also issued under Section 133(6) to nine purchase parties, including individuals identified by their PANs. None of these parties complied, and the AO concluded that most appeared to be bogus and non-genuine.

Discrepancies Between ITR and Audited Balance Sheet

A significant inconsistency was discovered when the balance sheet submitted as part of the ITR (Part A-BS) was compared with the audited balance sheet attached to the tax audit report in Form 3CD for AY 2021-22:

When asked to explain these glaring differences, the assessee's response was that these were merely typographical errors — an explanation that was rejected as wholly unsatisfactory by both the AO and the CIT(A).

Non-Maintenance of Stock Register

The assessee was directed to furnish quantity-wise and value-wise details of closing stock. No such details were provided. Notably, the tax auditor's own report in Form 3CD recorded the following qualifications:

"Proper stock records are not maintained by the assessee. Valuation of closing stock is not possible. Made on basis of MRL as given to us of 31/03/2021."