Facts of the Case

The assessee, Mr. Parmod Kumar, filed his return of income declaring profit from his business activities. For the Assessment Year 2011-12, the assessment proceedings were initiated pursuant to notice issued under Section 148 of the Income-tax Act, 1961.

During the assessment proceedings, the Assessing Officer (AO) noticed cash deposits in the assessee’s bank account. The AO treated the cash deposits as gross business receipts and applied an estimated profit rate of 25% on such receipts. Consequently, an addition of ₹49,83,916 was made to the income of the assessee.

The assessment was passed ex-parte, and the addition was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] without detailed inquiry into the nature of the assessee’s business or past profit history.

Aggrieved by the order of the CIT(A), the assessee preferred an appeal before the Income Tax Appellate Tribunal (ITAT), Delhi Bench. 

Issues Involved

  1. Whether the Assessing Officer was justified in estimating profit at 25% on cash deposits treated as business receipts.
  2. Whether the authorities below erred in confirming the addition without examining the assessee’s past profit history and nature of business.
  3. Whether the assessee was entitled to credit of TDS deducted by the deductors. 

Petitioner’s Arguments (Assessee)

  • The assessment order was passed ex-parte without properly considering the submissions of the assessee.
  • The assessee had regularly filed income-tax returns and declared business income in earlier years.
  • During the relevant year, the assessee suffered a brain hemorrhage, due to which he could not properly conduct his business activities.
  • The AO incorrectly treated cash deposits in the bank account as gross receipts and arbitrarily applied a 25% profit rate, which was excessively high.
  • In earlier years, the declared profit rate of around 2% had been accepted by the department, therefore estimation at 25% was unjustified.
  • The assessee also contended that certain entries such as salary, inter-transfer and contra entries should be reduced from the aggregated receipts.
  • The assessee further submitted that credit of TDS deducted by the deductors should be allowed. 

Respondent’s Arguments (Income Tax Department)

The Departmental Representative (DR) supported the orders of the Assessing Officer and the CIT(A) and opposed the submissions made by the assessee.

The Revenue argued that the estimation made by the Assessing Officer was justified based on the material available during the assessment proceedings. 

Court Findings / Tribunal Decision

The ITAT Delhi Bench, after considering the submissions of both parties and examining the material on record, observed the following:

  • The Assessing Officer treated the cash deposits in the bank account as business receipts and applied a profit rate of 25%.
  • However, before making such estimation, the AO should have examined the past profit history of the assessee and the nature of his business activities.
  • The Tribunal noted that no proper inquiry was conducted by the AO or by the CIT(A) regarding the assessee’s business or comparable profit rates.
  • Since the estimation was made without adequate verification, the orders of the lower authorities could not be sustained.

Accordingly, the Tribunal set aside the order of the CIT(A) and restored the matter to the file of the Assessing Officer for fresh assessment after conducting proper inquiry.

The Tribunal also directed that the AO should consider the past profit history of the assessee and provide adequate opportunity of being heard.

The appeal of the assessee was allowed for statistical purposes. 

Important Clarification by the Tribunal

  • Profit estimation cannot be made arbitrarily without examining past business history.
  • When cash deposits are treated as business receipts, the Assessing Officer must consider the past profit trends and comparable cases before determining the profit rate.
  • Proper inquiry and opportunity of hearing must be provided to the assessee before making additions.

Sections Involved

  • Section 147 – Income Escaping Assessment
  • Section 148 – Issue of Notice for Reassessment
  • Section 145 – Method of Accounting (Relevant for estimation of profits)

Link to download the order -  https://itat.gov.in/public/files/upload/1703835889-ITA%203104%20of%202023%20Parmod%20Kumar.pdf

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