The Visakhapatnam bench of the Income Tax Appellate Tribunal ( ITAT ) deleted an incorrect addition made by the assessing officer who mistakenly added declared turnover as unexplained income. The tribunal also lowered the income estimation rate at 4%.
Sri Lakshmi Durga Distributors, the assessee is a partnership firm based in Vijayawada, Andhra Pradesh, that deals in Fast-Moving Consumer Goods (FMCG). The assessee did not file its income tax return for the assessment year 2017-18.
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The Assessing Officer (AO) found the assessee’s bank deposits totaling Rs. 1,42,90,855, with Rs. 9,47,000 in Specified Bank Notes (SBNs) following the demonetization announcement. The AO issued a notice under Section 142(1) of the Income Tax Act, requiring explanations for these deposits.
The assessee did not respond which led the AO to make an ex-parte income tax assessment. The AO referenced the assessee’s VAT returns declaring a turnover of Rs. 1,38,10,152 and estimated the total income of the assessee at 8% of this turnover amounting to Rs. 11,04,812.
Aggrieved, the assessee appealed to the Commissioner of Income Tax (Appeals) challenging the income estimation rate of 8% and the classification of Rs. 9,47,000 as unexplained income. The CIT(A) upheld the AO’s assessment confirming both the 8% income estimation and the addition of Rs. 9,47,000 as unexplained income citing the assessee’s non-compliance with notices.
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With dissatisfaction, the assessee challenged the CIT(A)’s order before the ITAT arguing that the 8% rate of income estimation applied by the AO was excessive and the cash deposits had already been included in the turnover reported in the VAT returns.
On the other hand, the revenue counsel argued that the assessee failed to appear before AO and as well as CIT(A) to present his case so, his appeal should be dismissed.
A single bench led by K. Narasimha Chary (Judicial Member) observed that the cash deposits were already accounted for within the turnover and only Rs. 4,80,703 should remain considered as unexplained deposits. The tribunal deleted the incorrect addition.
Coming to the estimation, the tribunal noted that there was a lack of material evidence to justify an 8% income estimation rate in the assessee’s business and ruled that 4% would be more fair. So, the assessee’s appeal was partly allowed.
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