2025 (10) TMI 570 - AT - Income Tax

Appeal partly allowed; income assessed at deemed 8% of cash deposits under section 44AD for livestock and milk business

Venkatesham Avula, Hyderabad. Versus Income Tax Officer, Ward-11 (1), Hyderabad.

ITAT allowed the appeal in part and directed the AO to estimate income at 8% of cash deposits. The tribunal found the assessee's turnover was below Rs.1 ... Estimation of profit - business activity of the assessee in dealing with the livestock and milk - scope of provisions of Section 44AD - HELD THAT:- The turnover of assessee is less than Rs. 1 Crore during the FY. All such deposits are less than the threshold limits of section 44AD of the Act and the assessee is not required to maintain the books, under the provisions of sections 44AD, where the books of A/c are not maintained and not mandated to be maintained, the income is to be estimated at reasonable rate of profit at 8% or 6%. We, therefore, having regard to the business activity of the assessee in dealing with the livestock and milk and while considering the provisions of Section 44AD of the Act, find it just and proper to estimate the rate of profit at 8% as against the profit estimation at 12% done by the learned CIT(A). We, accordingly, direct the AO to estimate the income at 8% of the cash deposits - Appeal of the assessee is allowed in part. ISSUES PRESENTED AND CONSIDERED 1. Whether cash deposits made during the year constitute business receipts for purposes of computing income. 2. Whether the presumptive taxation scheme under Section 44AD of the Income Tax Act applies where turnover (or gross receipts) is below the statutory threshold and books of account are not mandated to be maintained. 3. In the absence of proper books of account, what is the permissible approach to estimate taxable income - i.e., the legal basis for adopting an estimated rate of profit on receipts or deposits. 4. What is the appropriate rate of profit to be applied in the instant facts (contention between 16% adopted by Assessing Officer, 12% adopted by the First Appellate Authority, and 6-8% urged by the assessee/Tribunal) for a business dealing in livestock and sale of milk. 5. Interaction (to the extent relevant) between treatment of certain deposits as unexplained/unaccounted income under Section 69A and taxation under Section 115BBE, and the estimation of business income on the remaining deposits. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether cash deposits constitute business receipts. Legal framework: Income is taxable on business receipts; where an assessee claims deposits represent business receipts, the assessing authority may accept or test that claim against books, records and surrounding facts. Where books are not properly maintained, estimation may be required. Precedent Treatment: No specific judicial precedents were cited or relied upon in the impugned orders. Interpretation and reasoning: The Tribunal accepted the conclusion of the First Appellate Authority that the total cash deposits in the relevant year were business receipts of the assessee. That factual finding was based on the nature of the assessee's trade (livestock and milk) and on the turnover being below the threshold for statutory book-keeping requirements. Ratio vs. Obiter: Ratio - The Tribunal treated the deposits as business receipts for the purpose of estimating income; this factual finding underpinned the estimation exercise. Conclusion: The deposits are to be treated as business receipts for the purpose of estimating taxable income (subject to the exception that certain deposits during demonetization were separately treated under Section 69A/115BBE as explained in Issue 5). Issue 2 - Applicability of Section 44AD presumptive scheme where turnover is below threshold and books are not maintained. Legal framework: Section 44AD prescribes presumptive income (a prescribed percentage of turnover/gross receipts) for eligible small businesses and relieves them from maintenance of detailed books where turnover is within the statutory threshold. If books are not required to be maintained, the provision of estimating income at the statutory presumptive rate (or a reasonable rate where applicable) may guide assessment. Precedent Treatment: No prior authorities were cited to modify, restrict or extend the statutory scheme; the Tribunal applied the statutory principle in a factual matrix. Interpretation and reasoning: The Tribunal noted turnover for the year was below Rs. 1 crore (i.e., within the threshold) and that the assessee was not mandated to maintain books. On that footing, the Tribunal treated the case as one where, absent proper books, an estimation in the nature of presumptive taxation at a reasonable rate is appropriate. The Tribunal therefore invoked the logic of Section 44AD (as the guiding benchmark) to determine a reasonable rate of profit. Ratio vs. Obiter: Ratio - Where turnover is under the statutory threshold and books are not maintained/mandated, the income may appropriately be estimated by applying a reasonable presumptive rate akin to Section 44AD. Conclusion: Section 44AD principles are applicable as a guiding framework to estimate income when books are not maintained and turnover is below the threshold; the Tribunal proceeded to estimate income on that basis. Issue 3 - Permissible approach to estimate taxable income in absence of proper books. Legal framework: Assessing authorities possess the power to estimate income where correct computation is not possible due to absence/defect of books; such estimation must be reasonable, based on relevant material and the nature of the business. Precedent Treatment: None cited; Tribunal relied on statutory scheme and factual matrix to exercise estimation power. Interpretation and reasoning: The Assessing Officer originally estimated profit at 16% (excluding deposits in demonetisation period) and separately treated demonetisation-period deposits as unexplained under Section 69A and taxed under Section 115BBE. The First Appellate Authority adopted a 12% rate on total deposits. The Tribunal held that given the business activity (livestock and sale of milk), the statutory threshold, and the absence of mandated books, it is 'just and proper' to estimate profit at 8% on total cash deposits. The Tribunal therefore exercised its fact-finding and valuation discretion to select a reasonable rate lower than the AO/CIT(A) determinations, relying on the nature of trade and average margins pleaded by the assessee (assessee had argued margins of 4-6% and cited Section 44AD as indicative). Ratio vs. Obiter: Ratio - In the absence of books and where turnover is below the Section 44AD threshold, the Tribunal may estimate income by applying a reasonable profit rate anchored to the business characteristics; the rate must be just and proper on the facts. Conclusion: The Tribunal directed estimation of income at 8% of total cash deposits of Rs. 53,82,500/-, substituting this rate for the AO's 16% and the CIT(A)'s 12% assessments. Issue 4 - Appropriate rate of profit to be applied (16% v. 12% v. 8% v. 6%). Legal framework: The selection of an estimated percentage of profit is a question of fact and judgment, to be based on the nature of the trade, usual margins, and available material; it must, however, be reasonable and supported by evidence or logical inference. Precedent Treatment: No judicial precedents were relied upon to fix a universal benchmark; the Tribunal applied discretionary assessment principles. Interpretation and reasoning: The AO's 16% rate was premised on disallowing Section 44AD benefits and on excluding demonetization-period deposits (which were separately taxed under section 115BBE). The CIT(A) adopted 12% on total deposits. The assessee contended for a rate in the range of 4-6% (or 6% average), asserting business margins are low. The Tribunal balanced these positions, considered the specific business (livestock/milk), the statutory permissibility under Section 44AD, and the fact that books were not mandated; on that composite, the Tribunal concluded 8% is a just and proper estimate. The decision reflects a fact-driven exercise rather than application of a legal formula; the Tribunal reduced the estimation rate because the nature of the business and pleaded margins warranted a lower figure than adopted by lower authorities. Ratio vs. Obiter: Ratio - The Tribunal's choice of 8% is a binding factual ratio for the parties in this instance: in like factual circumstances (small-scale livestock/milk trader, turnover below threshold, no books), an estimation at 8% was held reasonable. Obiter - The discussion does not establish a universal or formulaic rate for all similar businesses; it is a fact-specific determination. Conclusion: The Tribunal set the estimated taxable income at 8% of total cash deposits (Rs. 53,82,500/-), allowing the appeal in part and directing reassessment on that basis. Issue 5 - Treatment of certain demonetization-period deposits under Sections 69A and 115BBE and their interaction with the estimation exercise. Legal framework: Section 69A permits treating unexplained cash credits as income of the assessee where the assessee fails to explain nature and source; Section 115BBE applies special tax treatment to income determined to be unexplained cash credits in certain circumstances during demonetization-related assessments. Precedent Treatment: The authorities below had characterized deposits during demonetization as unexplained and taxed them under Section 115BBE; the Tribunal noted this treatment in the factual history. Interpretation and reasoning: The AO had treated the entire amount deposited during the demonetization period as unaccounted income under Section 69A and taxed it under Section 115BBE. The Tribunal's order does not disturb the AO's classification of the demonetization-period deposits already dealt with as unexplained and taxed separately; instead, the Tribunal's 8% estimation was directed to apply to the total cash deposits of Rs. 53,82,500/-, reflecting the factual acceptance (by CIT(A) and Tribunal) that deposits are business receipts except where specifically treated under Sections 69A/115BBE. Ratio vs. Obiter: Obiter/Ancillary - The Tribunal did not re-examine the legal correctness of the AO's classification under Sections 69A/115BBE in detail; it proceeded on the record that such treatment had been applied to the demonetization-period deposits and focused on estimating business income for the remaining receipts. The Tribunal's primary ratio concerns estimation under Section 44AD principles. Conclusion: The AO's treatment of demonetization-period deposits as unexplained and taxed under Section 115BBE remains part of the factual matrix; the Tribunal's estimation at 8% applies to the cash deposits as determined on the record, subject to the separate treatment already accorded to demonetization-period amounts. Overall Conclusion / Operative Outcome (fact-specific): The Tribunal accepted that total cash deposits constituted business receipts and, applying Section 44AD principles and a factual appraisal of the low-margin livestock/milk business with turnover below the statutory threshold, substituted the previously adopted rates and directed estimation of income at 8% of total cash deposits (Rs. 53,82,500/-). The appeal was allowed in part. (This determination is fact-specific and constitutes the Tribunal's ratio for these facts.)