ITAT Deletes Estimated Income Addition as AO Failed to Reject Books of Account

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) has ruled in favour of S.H. Mumtazuddin Times Pvt. Ltd. and deleted an estimated income addition made by the Income Tax Department for the Assessment Year 2017-18.

The company had originally filed its income tax return declaring an income of around Rs.73,86,510. During scrutiny, the AO claimed that the company had not fully complied with notices issued during the assessment. The AO, while not rejecting the books of account of the company, estimated profit at 8% of the gross turnover of Rs. 42,70,14,904 and added Rs. 3,41,61,192 to its taxable income.

The company challenged the addition before Commissioner of Income Tax (Appeals). The CIT(A) noted that the average profit margin of the company for several years was only 1.06% and reduced the estimated profit rate to 1.50% and restricted to Rs.64,05,224.

However, the company had also filed an application before the ITAT under Rule 27 of the ITAT Rules stating that even the reduced addition was legally not sustainable as the AO had not rejected the company’s books of account before estimating the income.

The Tribunal accepted this argument of law. It held that under established law an Assessing Officer has no power to estimate profits unless he first rejects the books of account by recording reasons why they are unreliable. The Bench relied upon the decision of the Supreme Court in CIT v. A. Krishnaswami Mudaliar (53 ITR 122) which clearly states that estimation of income is permissible only after the books are rejected.

The tribunal stated that “having accepted the books of account as such, the Assessing Officer could not estimate the unaccounted turnover or profit.” Consequently, it set aside the CIT(A)’s order and directed the Assessing Officer to delete the entire addition.

As a result, the Revenue’s appeal against the relief granted by the CIT(A) became infructuous and was dismissed.