AO's Estimation Approach Invalid When Books Accepted: ITAT Deletes Ad Hoc Income Tax Additions on Purchases and Expenses [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai, held that ad hoc income tax additions made on purchases and expenses cannot be sustained in the absence of any defects in the assessee’s audited books of accounts. Deleting additions exceeding ₹9.5 crore, the Tribunal ruled that the Assessing Officer’s (AO) estimation at five percent was contrary to law since the books were neither rejected nor found unreliable.

The appellant, West Coast Fine Foods (India) Pvt. Ltd., is engaged in the trading of aquatic animal feed and related products, as well as trading of farm-raised shrimps, which are purchased from farmers and sold to processing houses for export. The company also operates retail stores under the brand name “Seafood Mart by Cambay Tiger.”

For the Assessment Year 2017-18, the assessee filed its return of income declaring ₹1.54 crore. During scrutiny under Section 143(3) of the Income Tax Act, 1961, the AO made ad hoc disallowances of ₹9.23 crore (five percent of total purchases) and ₹28.07 lakh (five percent of business promotion, cold storage, office, repairs, and transport expenses), alleging inadequate supporting evidence.

The Assessee represented by Piyush Chhajed & Sumit Mantri contended that the additions were unsustainable since no defects were pointed out in the audited financial statements, nor were the books of accounts rejected. It was argued that payments for purchases and expenses were routed through banking channels and duly recorded.

The absence of Permanent Account Numbers (PAN) for some small-scale shrimp farmers, forming less than two percent of total purchases, was explained as a practical difficulty owing to the unorganized nature of aquaculture businesses. It was emphasized that ad hoc disallowances based on presumptions are not permissible under the provisions of the Income Tax Act, 1961.

The Revenue Authorities represented by Arun Kanti Datta argued in support of the Assessing Officer’s action, stating that the assessee failed to furnish complete supporting evidence, particularly PAN details for all suppliers. It submitted that the disallowance at five percent was reasonable and relied on the Karnataka High Court ruling in Tata Coffee Ltd. v. DCIT (2020) to justify the estimation approach.

The Revenue also sought restoration of the disallowances reduced by the Commissioner of Income Tax (Appeals) [CIT(A)] from five percent to two percent.

The Bench comprising Beena Pillai, Judicial Member and Girish Agrawal, Accountant Member held that ad hoc disallowances could not be sustained when the assessee’s books of accounts were neither rejected nor found defective. It observed that the AO had not disputed the genuineness of purchases or expenses and failed to invoke Section 145(3) before resorting to estimation under Section 144 of the Act.

The Tribunal relied on the assessee’s extensive paper book comprising 1,045 pages, including purchase details, supplier addresses, sample invoices, quantitative stock records and tax audit reports in Forms 3CA and 3CD, which collectively substantiated the claim that purchases and expenses were genuine.

Referring to precedents such as PCIT v. Forum Sales Pvt. Ltd. (2019) and PCIT v. R.G. Buildwell Engineers Ltd. (2018), the Bench ruled that additions based purely on estimates without rejecting books are contrary to law.

Accordingly, the entire disallowance was deleted, dismissing the Revenue’s appeal as infructuous.

Consequently, allowing the assessee’s appeal.

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