ITAT Hyderabad cuts profit rate on bank deposits from 12.5% to 4% in absence of supporting evidence

Background of the dispute

The matter in Prabakar Reddy Vs ITO (ITAT Hyderabad) concerns reassessment based on substantial cash deposits in bank accounts and the extent to which such bank credits can be treated as business turnover for estimating income.

The assessee, an individual engaged in the business of facilitating sale of bananas, had not filed a return of income for Assessment Year 2017–18. During information-based scrutiny, the Assessing Officer noticed large credits in the assessee’s bank accounts and initiated reassessment proceedings under Section 147 of the Income Tax Act 1961.

Subsequently, an order under Section 148A(d) was passed on 27.03.2024 and notice under Section 148 was issued on the same day. In response, the assessee furnished a return declaring total income of Rs. 4,93,664.

During reassessment, the central controversy arose around:

• Whether the entire bank credits of Rs. 2,52,16,931 could be treated as turnover of the assessee, and
• What profit rate should reasonably be applied for estimation of income where books and evidence are not fully reliable or not filed.

Assessment proceedings and addition by the AO

Treatment of bank credits as turnover

During the course of reassessment, the Assessing Officer (“Ld. AO”) examined the bank statements and found aggregate credits of Rs. 2,52,16,931.

The assessee was asked to explain the nature and source of these deposits. Not being satisfied with the explanation and in the absence of complete supporting evidence, the Ld. AO proceeded on the footing that:

• Entire bank credits represented business turnover of the assessee, and
• Income should be estimated on that turnover at a flat profit rate.

Profit estimation at 12.5%

On this basis, the Ld. AO:

• Applied a net profit rate of 12.5% on the bank credits of Rs. 2,52,16,931,
• Computed business income at Rs. 31,51,123, and
• Since the assessee had already declared business profit of Rs. 4,92,266, the difference of Rs. 26,58,857 was added as additional income.

The assessment was framed under Section 147 read with Sections 144 and 144B vide order dated 28.02.2025, determining the total income at Rs. 31,52,521.

First appeal before CIT(A)

The assessee challenged the assessment before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (“Ld. CIT(A)”).

Key aspects before the Ld. CIT(A):

• The assessee’s stand that he was operating as a commission agent in the banana trade,
• The contention that bank credits were largely amounts belonging to farmers, merely routed through his bank account, and
• The claim that only the commission element represented his real business receipts.

The Ld. CIT(A), however, upheld the approach of the Ld. AO, confirming:

• Treatment of entire bank credits as turnover, and
• Application of 12.5% profit rate on such turnover.

The addition of Rs. 26,58,857 was thus sustained.

Appeal before ITAT Hyderabad

Aggrieved by the order of the Ld. CIT(A), the assessee approached the Income Tax Appellate Tribunal, Hyderabad Bench.

At the hearing, the assessee, through the Learned Authorised Representative (“Ld. AR”), narrowed the dispute and pressed only one effective issue:

The challenge to the addition of Rs. 26,58,857 made by estimating profit at 12.5% on the entire bank credits.

Assessee’s submissions before the Tribunal

The Ld. AR made, in essence, two sets of arguments: