Facts of the Case

The assessee, an individual engaged in the country liquor business, filed his return of income for Assessment Year 2017-18 on 04.01.2017 declaring total income of ₹3,97,510. The case was selected for limited scrutiny under CASS on the issue of cash deposits. During assessment proceedings, the Assessing Officer noticed total credit entries of ₹2,02,93,665 in the bank account as against sales of ₹90,64,292 disclosed in the trading account. Finding discrepancies and lack of correlation with Form 26AS and vendors, the Assessing Officer rejected the books of account under Section 145(3) and estimated business income at 8% of total bank credits, assessing income at ₹16,23,490 and initiating penalty proceedings.

In first appeal, the Addl./JCIT(A) partly allowed the appeal by holding that since the estimated profit of ₹12,25,980 (8% of credits) already included declared sales on which net profit of ₹3,97,510 had been offered to tax, the same should be deducted, and only the balance of ₹8,28,470 should be added.

Issues Involved

Whether, after rejection of books and estimation of income under Section 145(3), the business income already declared by the assessee in the return should be deducted from the estimated income to avoid double addition.

Petitioner’s Arguments

The assessee contended that the Assessing Officer erred in estimating income at 8% of total bank credits without giving credit for the profit already declared on recorded sales. It was argued that estimation should apply only to unrecorded turnover and that the declared business income of ₹3,97,510 must be deducted from the estimated figure.

Respondent’s Arguments

The Revenue relied on the orders of the lower authorities and supported the estimation made by the Assessing Officer.

Court Order / Findings

The ITAT Kolkata observed that the assessee had already declared business income of ₹3,97,510 in the return, whereas the Assessing Officer estimated income at ₹12,25,980 without allowing deduction of the declared income. The Tribunal held that estimation after rejection of books cannot result in taxing the same income twice. Accepting the assessee’s contention, the Tribunal directed the Assessing Officer to deduct ₹3,97,510 from the estimated income of ₹12,25,980.

Important Clarification

The Tribunal clarified that where business income is estimated after rejecting books of account, the profit already declared by the assessee must be reduced from the estimated income, as estimation is only a substitute for determination of income and cannot lead to double addition.

Final Outcome

The appeal filed by the assessee was allowed. The Assessing Officer was directed to deduct the declared business income of ₹3,97,510 from the estimated income, and the addition was reduced accordingly.

Source Link- https://itat.gov.in/public/files/upload/1767263086-hZvANf-1-TO.pdf

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