ITAT Deletes ₹9.9 Cr Income Tax Addition Over AO’s Profit Overestimation and Unsubstantiated Loans [Read Order]

The  Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) deletes a 9.9 crore tax addition made by the AO because of the overestimation of profit, misclassification of assets, and lack of evidence

Ruchit Enterprise was run by the assessee, Bhrugesh Dineshbhai Shah, who dealt in chemical trading. In his 2017–18 tax return, he reported ₹6,92,020 in total income. During the scrutiny proceedings, the AO made several additions under Section 143(3) of the Income Tax Act, 1961.

The adjustments included an estimate of 5% gross profit, disallowance of expenses, unexplained credits, and capital work-in-progress. The AO finally determined the total income at ₹9,99,73,873.

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On appeal, the Commissioner of Income Tax (Appeals) partly allowed relief. Later, both the assessee and the revenue then filed cross-appeals before the tribunal.

The department, represented by V. Nandakumar and Kavan Limbasiya, argued that the assessee was given multiple opportunities to furnish supporting documents, but he failed to do so.

The counsels pointed out that there was a lack of details regarding the unsecured loans and their sources. He also added that the assessee didn’t even provide bills or invoices for the capital work-in-progress. According to him, despite repeated chances, the assessee remained non-compliant, forcing the AO to proceed with the additions.

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Meanwhile, Divyakant Parikh, the counsel for the assessee, contended that the additions made per Sections 68 and 69 of the Income Tax Act, 1961, were imposed without sufficient evaluation and were therefore unjustified.

The counsel pointed out that the actual gross profit of the assessee was 1.18% and argued that since the expenses were more and the selling price remained the same, the AO’s profit estimation at 5% and disallowance of expenses at 25% were excessive and cannot be justified.

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The assessee submitted confirmations and Income Tax Returns (ITR) for four parties, totaling ₹13.77 lakh, for the ₹18.77 lakh unsecured loan. The counsel said that this evidence was ignored by the AO for no valid reason.

The counsel also clarified that the ₹15.87 lakh included as unexplained capital work-in-progress was a personal asset incorrectly listed under work-in-progress. The counsel produced the audited balance sheet as evidence to substantiate his claim.

After hearing both sides, the tribunal, led by Senthil Kumar (Judicial Member) and B.R.R. Kumar (Vice President), analyzed the submissions made by both parties.

The bench realized that the reason for reduced profit in the assessee's balance sheet was because of the increased cost and expenses, which had been disregarded by the AO. The bench also noted that the assessee had clearly defined the transactions and loans that the department considered to be unexplained income.

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The tribunal observed the capital work-in-progress classification and concluded that there was no concealment or irregularity involved, only a case of mislabeling already-existing assets.

Since the department failed to provide any material evidence to substantiate the claims of AO, the bench concluded that the additions made by the AO were unnecessary. The bench thus allowed the assessee's appeal and directed the AO to delete the additions made by him.

To Read the full text of the Order CLICK HERE

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