Net Profit Declared By Assessee to Be Accepted by AO If He Didn’t Dispute Audited Financial Statement | ITAT

Case Details: Gopal Jaiswal vs. Income-tax Officer - [2023] 156 taxmann.com 398 (Kolkata-Trib.)

Judiciary and Counsel Details

• • Dr Manish Borad, Accountant Member & Sonjoy Sarma, Judicial Member
  • Siddharth Agarwal, A/R for the Appellant.
  • Amitava Sen, Addl. CIT for the Respondent.

Facts of the Case

The assessee, an individual engaged in business, e-filed its return of income. The case of the assessee was selected for limited scrutiny through CASS because large amounts of cash were deposited in bank accounts. The Assessing Officer (AO) issued notices under sections 143(2) and 142(1) and called for the details of the bank account.

In response, the assessee furnished a detailed statement explaining the source of cash sales made during the year. The AO accepted the details but noticed that the assessee had filed ITR-3, claiming it to be a non-account case despite a turnover of approximately Rs. 14.28 crores. The AO applied Section 44AD and estimated net profit at 8% of gross receipts, adding to the assessee’s income.

On appeal, CIT(A) confirmed the additions of AO, and the matter reached the Kolkata Tribunal.

ITAT Held

The Tribunal held that the assessee had achieved a turnover of Rs. 14.28 crore during the year, and in the preceding year, the total turnover was Rs. 16.20 crore. The net profit rate declared in the audited financial statement for the year under appeal was 2.5% against 1.26% in the preceding financial year.

Regarding section 44AD, the same relates to a special provision for computing profits and gains of business on a presumptive basis in the case of an eligible assessee engaged in an eligible business. As per the Explanation to section 44AD, eligible business consists of

(i) any business except the business of plying, hiring, or leasing goods carriages referred to in section 44AE; and

(ii) whose total turnover or gross receipts in the previous year does not exceed an amount of two crore rupees.

Because the assessee’s turnover was Rs. 14.29 crore, the provisions of section 44AD cannot be applied in the assessee’s case. Regarding estimating profits, complete details of the audit report under section 44AB were available, wherein the assessee stated that it was covered under section 44AB and that a Chartered Accountant had audited books of account.

The facts were very much available in the income tax return copy placed before the AO. He ought not to have directly resorted to the provisions of section 44AD. He should have examined the tax audit report and, if necessary, should have converted the limited scrutiny to complete scrutiny. He then conducted the assessment proceedings to examine the complete books of account. If any discrepancy could have been noticed, then the estimation of profits could have come into the picture.

The assessee maintained proper audited books of account. Without disputing the audited financial statement, the AO unreasonably estimated a net profit rate of 8%, while the declared rate by the assessee was 2.5%. Accordingly, the additions were deleted.