8% Profit Estimation on Deposits in Undisclosed Bank Accounts Arbitrary for Electronics Trading Business: ITAT Restricts Addition by Applying 3% Net Profit Rate [Read Order]

The Income Tax Appellate Tribunal (ITAT), Ranchi Bench has held that an 8% profit estimation on deposits made in undisclosed bank accounts of an electronics trader was excessive and arbitrary, reducing the estimated profit rate to 3% considering the nature of the business and prevailing profit margins.

The Tribunal partly allowed the appeal and directed that profit from the undisclosed business activity be computed at 3% of the deposits routed through the undisclosed bank accounts instead of 8% as estimated by the CIT(A).

The assessee Sunil Kumar Sawa proprietor of Universal Hi-Tech was engaged in the business of trading electronic goods. He had originally filed his return declaring an income of ₹2.37 lakh. During assessment proceedings the Revenue discovered transactions in two undisclosed bank accounts. The assessment underwent multiple rounds of litigation including an earlier remand by the Tribunal.

The Assessing Officer treated deposits in the undisclosed bank accounts as representing unaccounted business transactions and made additions towards estimated net profit, peak credit and interest income earned on the accounts.

On appeal the CIT(A) observed that no books of account had been maintained for the undisclosed segment of the business and, applying an approach akin to Section 44AD of the Income Tax Act, estimated profit at 8% of the total deposits of ₹6.14 crore. The appellate authority consequently sustained an addition of ₹49.14 lakh as profit from undisclosed business activities.

The assessee stated that the estimation was wholly unjustified as his audited books for the disclosed business consistently reflected net profit margins ranging between 2% and 2.4%. It was further argued that no material had been brought on record to establish that transactions routed through the undisclosed bank accounts generated profits at a substantially higher rate.

The Bench comprising George Mathan (Judicial Member) and Ratnesh Nandan Sahay (Accountant Member) noted that while the CIT(A) had considered the peculiar facts and difficulties arising from the absence of books for the undisclosed business, the application of an 8% profit rate was on the higher side. Taking into account the nature of the electronics trading business, the volume of transactions and the realistic profit margins prevalent in such trade, the Tribunal held that a 3% profit rate would meet the ends of justice.

Accordingly, the addition was directed to be recomputed by applying a 3% profit rate in place of 8% granting substantial relief to the assessee.

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