The Income Tax Appellate Tribunal, Panaji Bench, has clarified that non-production of books of account and supporting vouchers during assessment proceedings justifies rejection under Section 145(3) of the Income-tax Act, 1961, and permits best judgment assessment. The Tribunal also upheld additions for unexplained cash deposits during demonetization and set a precedent for reasonable profit margin estimation in agricultural commodity trading.
Background & Facts
The Dispute
The respondent, Idrees Mohammed, an individual engaged in trading agricultural commodities including potato, onion, turmeric, chilli, and garlic, filed his income tax return for Assessment Year 2017-18 on 03.11.2017 declaring income of ₹12,46,370. The return was processed under Section 143(1). Subsequently, a search operation under Section 132 was conducted on 06.09.2017 at the premises of M/s Hussain Builders & Developers, where the respondent’s residential address was also covered. A simultaneous survey under Section 133A was carried out on 07.09.2017 at M/s Hussain Cold Storage and M/s Home Spices, where the respondent was a partner. Incriminating material was seized, and statements of the respondent and his partner, Haji Mohammed Ilyas (HML), were recorded.
Key Facts
- The respondent claimed agricultural income of ₹24,53,530 as exempt under Section 10(1).
- He declared business profit at 1.62% of turnover of ₹8,40,30,739, amounting to ₹13,61,299.
- During demonetization (08.11.2016 to 31.12.2016), the respondent deposited Specified Bank Notes (SBNs) totaling ₹1,10,16,175 into HDFC Bank and State Bank of Hyderabad accounts.
- Opening cash balance as of 08.11.2016 was ₹11,12,700 and ₹9,84,214 at Gulbarga and Solapur branches respectively.
- The respondent maintained books of account which were audited, but admitted during hearing that these audited books were lost and could not be produced.
- The Tax Audit Report (Form 3CD) noted in Note 10 that the respondent was engaged in trading, but Point 35 (quantitative details of goods traded) was marked as "not applicable".
- The respondent was registered as a commission agent with the Agricultural Produce Market Committee (APMC), but failed to produce any sales records from APMC.
- The respondent owned 3 acres 4 guntas of agricultural land individually; the rest was held jointly with partners.
Procedural History
- 03.11.2017: Return of income filed for AY 2017-18.
- 06.09.2017: Search u/s 132 conducted at HML’s premises; respondent’s residence included.
- 07.09.2017: Survey u/s 133A conducted at Hussain Cold Storage and Home Spices; incriminating material seized.
- 21.09.2018: Notice u/s 143(2) issued for scrutiny assessment.
- 27.12.2019: Assessment order u/s 143(3) passed by Ld. AO making three additions:
- ₹1,13,04,286 under Section 69A for unexplained SBN deposits.
- ₹22,28,530 for disallowance of agricultural income (reduced from ₹24,53,530 to ₹2,65,000).
- ₹70,43,391 under Section 145(3) for under-reporting of profit (estimated at 10% of turnover).
- 31.01.2020: Appeal filed before Ld. CIT(A).
- 29.05.2023: Ld. CIT(A) deleted all three additions.
- 11.03.2026: Conclusive hearing held before ITAT Panaji.
- 01.04.2026: Judgment pronounced.
Relief Sought
The Revenue sought restoration of all three additions:
- ₹1,13,04,286 under Section 69A for unexplained SBN deposits.
- ₹22,28,530 for disallowance of agricultural income.
- ₹70,43,391 for under-reporting of business profit.
The respondent sought confirmation of the Ld. CIT(A)’s order deleting all additions.
The Legal Issue
The central questions were: (1) Whether unexplained cash deposits of Specified Bank Notes during demonetization can be taxed under Section 69A when the assessee fails to prove source despite having business activity? (2) Whether agricultural income claimed as exempt under Section 10(1) can be disallowed on ad-hoc computation without considering agricultural yield data? (3) Whether rejection of books under Section 145(3) due to non-production of vouchers and audit records justifies best judgment assessment, and if so, what constitutes a reasonable basis for profit estimation?
Arguments Presented
For the Appellant (Revenue)
- Relied on CIT v. Motor General Finance to argue that failure to produce documents justifies adverse inference.
- Cited Raju Ravichandra v. ITO and Venugopal Rao v. ITO to support that SBN deposits during demonetization, when unexplained, constitute unexplained money under Section 69A.
- Argued that the Ld. CIT(A) erred in relying on prior years’ returns for agricultural income, which themselves had been subject to additions.
- Contended that the 10% profit margin was reasonable given the nature of bulk trading in agricultural commodities and that the respondent’s declared 1.62% margin was implausible.
- Emphasized that non-production of books, inventory records, and vouchers rendered the accounts incomplete under Section 145(3), warranting best judgment assessment.
For the Respondent (Assessee)
- Argued that the loss of books was due to the search and survey operations, not wilful concealment.
- Relied on Anantpur Kalpana v. ITO to assert that cash deposits could arise from legitimate business sales.
- Contended that the Ld. CIT(A) correctly deleted the agricultural income addition because the source was undisputed, and the quantum dispute was arbitrary.
- Submitted that the 10% profit margin was excessive and unsupported by industry data, and that the Ld. CIT(A) rightly applied Mysore Fertilisers and Surjit Sing Mahesh Kumar to assess reasonableness.
- Requested telescoping of the agricultural income claim if the SBN addition was upheld.
The Court's Analysis
The Tribunal examined each ground with reference to statutory provisions and judicial precedents.
Regarding the SBN deposits under Section 69A, the Tribunal noted that the respondent admitted to depositing ₹1,10,16,175 in SBNs during demonetization, when such notes ceased to be legal tender for business transactions. The respondent failed to produce any invoices, bills, or APMC records to substantiate sales. The statement of partner HML, recorded during survey and not retracted, corroborated the Revenue’s case. The Tribunal held that the failure to produce evidence triggered the adverse inference under CIT v. Motor General Finance. The Ld. CIT(A)’s reliance on Anantpur Kalpana was misplaced, as that case involved accepted sales records, unlike here. The Tribunal restored the addition of ₹1,13,04,286.
"In absence of audited books, bills & voucher, the bench directed the respondent to produce necessary & convincing documents pertaining alleged sales from the records of 'Agricultural Produce Market Committee'... However, except a certification of registration as commission agent, no or much less documents were laid... This infers that the respondent not only failed but chosen not to adduce any documents to disprove the Revenue's case."
On agricultural income, the Tribunal found both the Ld. AO and Ld. CIT(A) erred. The AO’s ad-hoc computation of ₹10,000 per acre ignored soil quality, cropping patterns, market prices, and joint ownership of land. The CIT(A)’s reliance on prior years’ returns was flawed, as those assessments were also under dispute. The Tribunal held that while the source of agricultural income was accepted, the quantum required a factual, data-driven assessment. Since neither party had access to CACP or ICAR data, and to avoid further litigation, the Tribunal directed acceptance of the declared amount of ₹24,53,530 as exempt, rejecting the addition entirely.
"Neither impugned action of restricting the quantum of agricultural income earned by the Ld. AO can be accepted nor its deletion by the Ld. CIT(A)... neither authority... based their action on any research documents... therefore the opposing actions... were found not much less than arbitrary."
For the profit estimation under Section 145(3), the Tribunal upheld the rejection of books due to non-production of inventory records, vouchers, and the contradictory Form 3CD. The Tribunal cited Dhondiram Dalichand, Bastiram Narayandas, and Kachwala Gems to affirm that non-production justifies best judgment assessment. However, the 10% margin was deemed arbitrary. The Tribunal reviewed industry reports and found that bulk trading in potato, onion, garlic, and turmeric typically yields 8 - 15% net profit. The respondent’s 1.62% was implausible, but 10% was excessive. The Tribunal substituted 8% as a reasonable midpoint, directing the Ld. AO to compute profit accordingly.
"The computation of 10% is ad-hoc and without any rationale for the given facts & circumstances of the case and the industry as a whole... we deem it fit to replace the computation with net margin with 8% of reported turnover."
The Verdict
The appeal was partly allowed. The addition of ₹1,13,04,286 under Section 69A for unexplained SBN deposits was restored. The addition of ₹22,28,530 on agricultural income was deleted, and the declared amount of ₹24,53,530 was accepted as exempt. The addition of ₹70,43,391 was modified: the profit margin was reduced from 10% to 8% of turnover (₹8,40,30,739), resulting in a revised addition of ₹56,34,459 (8% of turnover minus declared profit). The case was remanded to the Ld. AO to recalculate the total income accordingly, with compliance to be completed within 8 weeks.
What This Means For Similar Cases
Non-Production of Books Justifies Best Judgment Assessment
- Practitioners must now argue that failure to produce vouchers, inventory records, or audited books under Section 145(3) is sufficient for rejection, even if loss is claimed due to search/survey.
- Adverse inference under CIT v. Motor General Finance applies if documents are not produced despite opportunity.
- Taxpayers must proactively preserve records or provide credible reasons for non-production.
Profit Estimation Must Be Industry-Specific
- Estimations under Section 144 must be grounded in verifiable industry benchmarks, not arbitrary percentages.
- For agricultural commodity trading, reliance on reports from CACP, ICAR, or State Agricultural Price Commissions is now expected.
- A 10% margin may be excessive for bulk traders; 8 - 15% is a more defensible range.
Agricultural Income: Source vs. Quantum
- The source of agricultural income cannot be denied merely because the quantum is disputed.
- Ad-hoc per-acre computations without agricultural data are arbitrary and liable to be set aside.
- Claimants must maintain records of crop type, yield, and sales, even if exempt, to preempt disputes.
