ITAT Kolkata on Presumptive Taxation and Profit Estimation Beyond Section 44AD Turnover Limit

Background of the Dispute

The Kolkata Bench of the Income Tax Appellate Tribunal examined whether business income could be estimated at 8% of turnover when Section 44AD did not legally apply because the assessee’s turnover exceeded the statutory ceiling of ₹2 crore for the relevant year.

The case, Jitanshu Goswami Vs ITO, pertains to Assessment Year 2017-18 and involves trading in agricultural commodities. The revenue authorities rejected the low profit declared by the assessee due to non-production of books and estimated income at a substantially higher rate. The Tribunal ultimately intervened to moderate this estimation.

Key Facts and Figures

Nature of business and declared results

  • The assessee, an individual, was engaged in trading of agricultural products.
  • For AY 2017-18, he reported:
    • Gross turnover of ₹3,50,68,790/-
    • Net profit of ₹4,55,190/-
    • Effective net profit rate of about 1.297% of turnover.
  • Return of income was filed declaring total income of ₹4,99,260/-.

Issues during assessment

During scrutiny, the Assessing Officer (AO) noted:

  • The net profit percentage was considered abnormally low for the scale of business.
  • The assessee did not produce:
    • Books of account
    • Cash book
    • Supporting records to substantiate the declared profit.
  • Cash deposits of ₹6,34,000/- in Specified Bank Notes (SBNs) were made between 10.11.2016 and 30.12.2016 during the demonetization period.

AO’s approach to income estimation

In the absence of proper books and explanations, the AO:

  1. Rejected the declared profit as unreliable.
  2. Estimated income from business at 8% of turnover:
    • 8% of ₹3,50,68,790/- = ₹28,05,503/-
  3. Made an addition of ₹23,50,313/-
    • (Estimated profit ₹28,05,503/- minus declared profit ₹4,55,190/-)
  4. Treated ₹6,34,000/- deposited in SBNs as unexplained money under Section 69A.
  5. Computed total assessed income at ₹35,04,800/-.

First Appeal Before CIT(A)

Relief and confirmation

The assessee challenged the assessment order before the Commissioner of Income Tax (Appeals). The CIT(A):

  • Deleted the addition of ₹6,34,000/- made under Section 69A, accepting the explanation for demonetization-period deposits.
  • Sustained the addition of ₹23,50,313/- relating to estimation of business income.

Reasoning of CIT(A)

In sustaining the estimation @ 8% of turnover, the CIT(A):

  • Referred to the presumptive taxation scheme in Section 44AD.
  • Treated the 8% net profit as a reasonable benchmark for small business income estimation.
  • Effectively applied principles akin to Section 44AD, even though the AO had not specifically invoked that section in the assessment order.

The assessee remained aggrieved and approached the Tribunal.

Grounds Raised Before the Tribunal

The assessee filed appeal before the ITAT contesting, among others, the following aspects: