The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that where business income is estimated by applying a profit rate to the assessee’s turnover, a separate addition in respect of cash deposits forming part of the business sale proceeds cannot survive. 

The bench of Judicial Member Pawan Singh and Accountant Member Jagadish has directed the Assessing Officer (AO) to estimate income at 11% of turnover of ₹1.42 crore instead of applying a 20% rate to bank credits and making an additional ₹6 lakh addition for cash deposited during the demonetisation period.

The ruling was delivered by the “J(SMC)” Bench comprising Judicial Member Pawan Singh and Accountant Member Jagadish in an appeal concerning Assessment Year 2017-18. The appeal challenged an order passed by the CIT(A)/NFAC on April 17, 2026. The Tribunal heard and pronounced its decision on August 25, 2026. 

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The dispute arose from the assessment of a taxpayer engaged in the business of sale of country-made liquor through a proprietorship concern, M/s Suraj Country Bar.

During the assessment proceedings, the AO noticed cash deposits of ₹6 lakh in old currency notes during the demonetisation period. After obtaining information regarding the cash deposits made during the financial year, the AO treated the bank credits as representing the assessee’s turnover and proceeded to estimate business income at 20% of the receipts. 

The total credits appearing in the bank account were ₹92.73 lakh. After excluding the ₹6 lakh demonetisation-period deposit, the AO applied a 20% profit rate to the remaining ₹86.73 lakh and consequently made an addition of ₹17.34 lakh.

Apart from the estimated business income, the AO separately added the ₹6 lakh deposited during demonetisation. The CIT(A) subsequently confirmed the AO’s action. 

The assessee challenged both components of the assessment before the Tribunal.

The assessee contended that the estimation of profit at 20% was arbitrary and excessive and had been made without reference to comparable cases, books of account or industry norms.

It was specifically argued that the AO had proceeded on bank credits without first establishing that every credit represented business turnover. According to the grounds of appeal, the assessee had declared total business sales of ₹1.42 crore, purchases of approximately ₹1.28 crore and gross profit of ₹11.33 lakh. 

Before the Tribunal, the assessee’s counsel submitted that the business had total sales of about ₹1.42 crore against purchases of ₹1.28 crore. It was argued that income offered at 8% on a presumptive basis had been accepted in Assessment Years 2018-19 and 2025-26.

The assessee therefore maintained that the 20% estimate adopted by the AO was substantially on the higher side and that an 8% estimation was within the accepted norm under Section 44AD of the Income Tax Act. 

A significant issue before the Tribunal concerned the separate addition of ₹6 lakh relating to old currency notes deposited during demonetisation.

The assessee argued that the amount was not unexplained money but represented sale proceeds from the liquor business. It was submitted that once business income had been estimated on turnover, the same business receipts could not again be subjected to a separate addition.

The assessee pointed out that the ₹6 lakh in old currency notes was relatively small when compared with the overall sales of approximately ₹1.42 crore. According to the assessee, demonetisation was an extraordinary event and the deposit was generated from regular sales proceeds. 

The assessee had also specifically challenged the ₹6 lakh addition under Section 69A, contending that the deposit had already formed part of sales proceeds and turnover and therefore could not be independently added after estimation of profit. 

Reliance was placed on the Tribunal decisions in Jayesh Jagat Parekh v. ITO and Muthusamy Mudaliar Prakasam v. ACIT. 

The Revenue opposed the appeal and argued that the assessee had failed to furnish the required details before the AO despite being provided sufficient opportunity.

According to the Department, in the absence of supporting details, the AO had reasonably estimated income at 20% of the total credits or receipts. The Revenue further argued that since the assessee had failed to file the return of income within the prescribed due date, the ₹6 lakh deposited during demonetisation had rightly been treated as an unexplained cash deposit. 

After considering the rival submissions and examining the orders of the lower authorities, the Tribunal recorded that the assessee was carrying on business through M/s Suraj Country Bar and held a licence for sale of country-made liquor.

The Bench noted an important distinction between the figure considered by the AO and the actual sales disclosed before it. While the AO had proceeded on total bank credits of ₹92.73 lakh, the assessee’s authorised representative accepted before the Tribunal that total sales exceeded ₹1.42 crore. 

The Tribunal therefore considered ₹1.42 crore as the appropriate turnover for estimating the assessee’s income.

Instead of accepting either the AO’s 20% estimation or the assessee’s plea for an 8% rate, the Tribunal adopted a middle course.

Considering the overall facts and with a view to avoiding the possibility of revenue leakage, the ITAT held that estimating income at 11% of the ₹1.42 crore turnover would be sufficient.

The Tribunal consequently directed the AO to take the assessee’s turnover at ₹1.42 crore and estimate income by applying an 11% rate. 

This effectively displaced the AO’s methodology of applying a 20% profit rate to ₹86.73 lakh of bank credits.

At 11% of ₹1.42 crore, the estimated income works out to approximately ₹15.62 lakh, subject to the precise turnover figure and consequential computation by the AO.

More importantly, the Tribunal accepted the principle underlying the assessee’s challenge to the separate demonetisation cash addition.

The Bench recorded the explanation that the old currency notes deposited in the bank represented sale proceeds of the business. Having decided to estimate the assessee’s business income at 11% of the entire turnover, the Tribunal held that the separate cash-deposit addition could no longer survive.

The ITAT categorically observed:

“Considering the fact that we have estimated the income at the rate of 11%, no separate addition on account of cash deposit will survive.” 

Thus, while the Tribunal did not accept the assessee’s request to restrict the estimated profit rate to 8%, it substantially reduced the rate from the 20% adopted by the AO and eliminated the separate addition relating to the ₹6 lakh demonetisation-period cash deposit.

The Tribunal ultimately partly allowed the assessee’s appeal, directing the AO to compute income at 11% of turnover of ₹1.42 crore and holding that no independent addition for the ₹6 lakh cash deposit would survive after such estimation. 

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