Draft Return Unrealistic, Books Absent: ITAT Deletes S.68 Additions, Estimates Liquor Firm’s Net Profit at 2.5% of Gross Sales [Read Order]

The Income Tax Appellate Tribunal (ITAT), Chandigarh Bench, in for the Assessment Year 2017-18, partly allowed the appeal of the assessee, a partnership firm engaged in trading alcoholic liquor for a single financial year (FY 2016-17).

The appeal challenged the CIT(A)’s order, which had upheld additions made by the AO under Section 68, despite reducing the estimated net profits from the business.

The firm, Raj Kumar & Co., had neither filed a regular return of income under Section 139(1) nor maintained proper books of accounts under Section 44AB. During assessment, a “draft return” submitted by the firm contained hypothetical figures of gross sales, unsecured loans, partners’ capital, cash in hand, and fixed assets.

The AO treated unsecured loans (Rs. 43.50 lakhs) and partners’ capital (Rs. 5.89 lakhs) as unexplained credits under Section 68 and added them to the total income. CIT(A) reduced net profits from 7.48% to 5% of gross sales but upheld these additions.

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On appeal, the Tribunal observed that the draft return figures were largely imaginary and unsupported by documentary evidence. Only purchases from bonded warehouses, excise duty deposits totalling Rs. 4.89 crores, and gross sales of Rs. 9.92 crores could be verified.

The Tribunal emphasised that once books of accounts are not maintained or are rejected, no addition can be made relying on entries in such books, citing judicial precedents including CIT vs Dulia Ram (P&H HC) and PCIT vs Kandla Steel Pvt Ltd (Gujarat HC).

It further noted that the draft return, being unaudited and speculative, could not form the basis of any addition under Section 68.

The Tribunal observed that the cash deposited in the firm’s bank account during FY 2016-17 (including Rs. 18.07 lakhs during demonetization) was adequately explained by the proceeds from sales of liquor, and there were no actual loans or capital introduced beyond individual partners’ contributions. Therefore, the additions under Section 68 were deleted, as they were based on entries with no physical or legal existence.

Relying on comparable cases of similar liquor trading businesses in the state, the two-member bench comprising Manoj Kumar Aggarwal (Accountant Member) and Udayan Dasgupta (Judicial Member) held that a net profit rate of 2.5% of gross sales fairly reflected taxable business income.

The AO was directed to recompute total income using this estimate. The Tribunal emphasised that, when books of accounts are rejected, hypothetical entries in draft returns cannot be used to inflate taxable income.

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