Script Writer’s Profit Estimation accepted at 68.19%; Arbitrary addition deleted

By | December 11, 2025
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Script Writer’s Profit Estimation accepted at 68.19%; Arbitrary addition deleted

Issue

Whether the Revenue authorities can ignore audited books of account and arbitrarily estimate professional income at a high rate (85.30%) when the assessee (a script writer) has already offered a substantial net profit (68.19%) and voluntarily disallowed personal expenses.

Facts

  • Assessee Profile: A script writer in the entertainment industry.

  • The Default: The assessment was reopened because the assessee initially failed to file a return despite having professional receipts of Rs. 1.09 crores.

  • Reassessment: The AO passed an ex-parte order taxing the entire gross receipt (Rs. 1.09 crores) as income.

  • Appellate Stage: The assessee produced audited books, Tax Audit Report, and P&L account showing:

    • Gross Receipts: Rs. 1.09 crores.

    • Net Profit (Books): Rs. 63.92 lakhs.

    • Suo motu Disallowance (Personal expenses): Rs. 15.44 lakhs.

    • Total Taxable Income Offered: Rs. 74.33 lakhs (approx 68.19% of receipts).

  • CIT(A)’s Action: The CIT(A) ignored the books and arbitrarily allowed only 40% of claimed expenses, effectively taxing the profit at 85.30%.

Decision

  • Books Not Rejected: The Tribunal held that the authorities did not reject the audited books of account under Section 145(3). Without rejecting the books by identifying specific defects, they cannot estimate profit on a purely ad-hoc basis.

  • Reasonable Profit: The assessee had already offered a very healthy net profit rate of 68.19%. This is significantly higher than the presumptive rate benchmark (50% under Section 44ADA, though strictly not applicable due to turnover limits, it serves as a reasonableness check).

  • Ruling: The Tribunal directed the AO to accept the net profit declared by the assessee (68.19%) instead of the arbitrary 85.30% determined by the CIT(A).

Section 69 Addition for Property Purchase deleted; Wrong Assessment Year selected

Issue

Whether an addition for unexplained investment in immovable property under Section 69 can be made in AY 2016-17 when the agreement to sell and the investment actually took place in the preceding financial year (AY 2015-16), and the source was explained via bank loans.

Facts

  • The Addition: The AO added Rs. 2.50 crores as unexplained investment in property for AY 2016-17.

  • Source of Info: The AO relied on Form 26QB (TDS on Property) filed by the assessee.

  • Key Dates:

    • Date of Agreement to Sell: 31-03-2015 (Falls in FY 2014-15 / AY 2015-16).

    • Date of TDS Payment: 01-04-2015 (Falls in FY 2015-16).

  • Assessee’s Defense:

    1. Wrong Year: The investment happened in FY 2014-15 (AY 2015-16), so it cannot be taxed in AY 2016-17.

    2. Explained Source: The purchase was financed by a loan from DHFL and personal savings.

Decision

  • Jurisdictional Error: The Tribunal held that since the investment (agreement date) occurred in the previous year (FY 2014-15), no cause of action arose for the impugned Assessment Year (2016-17). The date of TDS payment (01-04-2015) is merely procedural and does not shift the year of investment.

  • Source Proved: The assessee demonstrated the source of funds (DHFL loan + savings).

  • Ruling: The addition under Section 69 was deleted in favour of the assessee.

Key Takeaways

Ad-hoc Estimation vs Audited Books: Even in ex-parte or reopened assessments, if the assessee produces audited books during appellate proceedings and they are not rejected by pointing out specific defects, the Revenue cannot ignore the book results to apply a flat estimated rate.

Year of Addition: For Section 69 additions, the “Financial Year” in which the investment is made is crucial. If the AO picks the wrong year (e.g., relying on TDS payment date instead of Transaction date), the addition is legally unsustainable.

IN THE ITAT MUMBAI BENCH ‘B’
Bhavani Iyer
v.
Income-tax Officer
SANDEEP SINGH KARHAIL, Judicial Member
and Vikram Singh Yadav, Accountant Member
IT Appeal Nos. 2777, 2932 & 2933 (Mum) OF 2025
[Assessment years 2016-17]
NOVEMBER  17, 2025
Yagnesh Desai for the Appellant. Leyaqat Ali Aafaqui for the Respondent.
ORDER
Vikram Singh Yadav, Accountant Member.- These are cross-appeals filed by the assessee and Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [„Ld.CIT(A)’], dated 25-02-2025, pertaining to Assessment Year (AY) 2016-17 in the context of order u/s. 147 read 144 r.w.s. 144B of the Act; and the appeal filed by the Revenue against the order of the Ld.CIT(A)-NFAC, Delhi, dt. 25-02-2025 in the context of levy of penalty u/s. 271(1)(c) of the Income Tax Act, 1961 („the Act’).
2. Briefly stated, the facts of the case are that the case of the assessee was reopened basis information that the assessee has made payment for purchase of certain immoveable property amounting to Rs. 2.50 crores and in absence of return of income, the sources of the funds utilized for making the payments were un-explained; and also the fact that the assessee has received professional fee of Rs. 1.09 crores and in absence of return of income, the said transaction has escaped taxation. The reasons were recorded and notice u/s. 148 of the Act dt. 26-03-2021 was issued and served on the assessee. Thereafter, notices were issued from time to time as well as a show cause to the assessee was issued. There was, however, no compliance on the part of the assessee. The AO, thereafter proceeded and passed the order u/s. 147 r/w 144 r.w.s. 144B of the Act, wherein an amount of Rs. 2.50 crores was brought to tax as un-explained investment u/s. 69 of the Act and an amount of Rs. 1.09 crores was brought to tax as income under the head „business and profession’.
3. The assessee thereafter carried the matter in appeal before the Ld.CIT(A), and also moved an application for admission of additional evidences under Rule 46A of the Income Tax Rules, 1962 („the Rules’). The Ld.CIT(A), after calling for the remand report from the AO, has held that 40% of claimed expenses of Rs 40,04,680/- may be allowed towards earning of professional receipts and has sustained the addition of Rs. 92,98,128/- as against Rs.1.09 crores in respect of income from professional receipts and as far as addition of Rs. 2.50 crores on account of investment in immoveable property was concerned, the same has been fully deleted.
4. Against the sustenance of addition of Rs.92,98,128/-, the assessee is in appeal before us and against the deletion of Rs. 2.50 crores and allowing 40% of expenses against the professional receipts, the Revenue is in appeal before us.
5. During the course of hearing, the Ld. AR submitted that the assessment was completed ex-parte by the Assessing officer wherein he has passed the order u/s. 147 res 144 r.w.s. 144B of the Act, bringing to tax an amount of Rs. 2.50 crores as un-explained investment u/s. 69 of the Act and an amount of Rs. 1.09 crores, being the gross professional receipts to tax without allowing deduction for expenses under the head „income from business/profession’. It was submitted that the assessee is a script writer in the entertainment industry and has been regularly filing her return of income for last 25 years and have always paid the taxes as due and there are no outstanding past tax liability against her. It was submitted that for the year under consideration, due to exceptional and unforeseen health emergency in her family due to her father illness, she couldn’t file her return of income. At the same time, it was submitted that the assessee did file response to notice received for non-filing of return of income. It was further submitted that the assessee didn’t receive any subsequent notice online on her email, which has resulted in noncompliance to the notices issued by the AO during the course of assessment proceedings and which has in turn resulted in passing of the ex-parte assessment order.
6. It was further submitted that for the aforesaid reasons, during the appellate proceedings, the assessee moved an application for submitting additional evidence and submitted that she has maintained books of accounts and got them audited u/s 44AB of the Act and has submitted necessary documentation in terms of statement of income, audited Balance Sheet, Profit & Loss Account and tax audit report as well as particulars of investment made in a house property and source of such investments. It was submitted that the additional evidences were admitted and remand report of the AO were also called for by the ld CIT(A).
7. It was submitted by the ld AR that as per the audited financial statements and the computation of income, the assessee has suo moto disallowed an amount of Rs.15,44,465/- and has offered income of Rs. 74,33,640/- on total professional receipts of Rs.1,09,00,000/- thereby disclosing 68.19% profits on total professional receipts which is quite reasonable by any industry benchmark. It was submitted that there is no adverse finding recorded by the AO in his remand report and inspite of that, the ld CIT(A) has estimated allowable expenses @ 40% of expenses. It was submitted that books of accounts so maintained by the assessee have not been rejected and ld CIT(A) has not specified what is the basis for determining 40% of expenses as allowable expenses, no allowance for depreciation has been given which has to be statutorily allowed and further, he has not taken cognizance of the fact that the assessee has suo-moto disallowed an amount of Rs.15,44,465/- as personal expenses not attributable to professional activities. It was submitted that no comparable instance has been brought on record to justify that the assessee has disclosed lower profitability @ 68.19% and the profitability should have been on a higher side. It was submitted that reference of ld CIT(A) was also drawn to section 44ADA which provides that in case of assessee engaged in specified profession, 50% of gross receipts have been provided as deemed profit which can be brought to tax and it was submitted that even though the threshold for invoking the said section of Rs.75 lacs gross receipts doesn’t strictly apply in the instance case, however, a reasonable basis for estimating the net profit can be derived from the said provisions given that the assessee has received whole of the professional receipts through banking channel and has also maintained books of accounts, however, the Ld.CIT(A) has summarily dismissed the same. It was submitted that in the instant case, the assessee has maintained books of accounts which have been duly audited and assessee has disclosed higher net profit @ 68.19% of gross professional receipts which should be accepted and the findings of the Ld.CIT(A) where he has estimated profits @ 85.30% of the total receipts being without any reasonable basis therefore deserve to be set-aside and necessary relief be provided to the assessee.
8. Secondly, regarding the source of investment in purchase of immoveable property, it was submitted that firstly, the purchase of immoveable property i.e, Flat No. 202/A, Raj Kamal Co-operative Housing Society Ltd, Versova, Andheri (West), Mumbai, happened by virtue of agreement to sell dated 31/03/2015 which falls during the financial year 2014-15 relevant to AY. 2015-16 and not during the financial year 201516 relevant to the impugned assessment year 2016-17 as wrongly construed by the AO. In this regard, our reference was also drawn to the assessment order where the AO has taken note of the date of agreement as 31-03-2015 and it was submitted that inspite of that, the AO has proceeded and made the addition towards the unexplained investment. It was further submitted that the assessee has purchased the flat through borrowed funds from financial institution and the Ld.CIT(A) has rightly taken cognizance of the source of such investment as duly explained and has deleted the addition so made by the AO.
9. Per contra, the Ld. DR submitted that the assessee has not submitted any details of the expenses claimed to have been incurred in relation to professional receipts and in spite of that, the Ld.CIT(A) has allowed 40% of the claimed expenses. Regarding deletion of addition of Rs. 2.50 crores, it was submitted that the assessee has failed to submit the proof of disbursal of loan or payment of amount to seller, Ms. Anupama Mandloi and, therefore, in the absence of necessary nexus between loan taken and property purchased, the Ld.CIT(A) was not correct in deleting the addition so made by the AO. He accordingly supported the order passed by the AO.
10. In his rejoinder, the Ld.AR submitted that during the course of appellate proceedings, the assessee has submitted that she has maintained books of accounts and duly audited financial statements and tax audit report were submitted and the assessee was thereafter never asked to submit any further details of the expenses claimed, therefore, the question of non-submissions doesn’t arise. Regarding the nexus between loan taken and property purchased, it was submitted that as evident from agreement to sell where the sale consideration has been stated at Rs 2.5 crores, the assessee has made payment of Rs 35 lacs from her own funds, Rs 2.5 lacs was deducted towards TDS which was duly deposited and Rs 2.12 crores was taken as loan from Deewan Housing Finance Ltd (DHFL) and which was disbursed directly to the seller, Mrs Anupama Mandloi on 31/03/2015 and the sanction letter, disbursement letter and details of cheques issued directly in favour of the assessee have been placed on record. It was reiterated that the transaction of purchase of immoveable property was completed on 31-03-2015 which falls during the financial year 2014-15 relevant to assessment year 2015-16 and there is thus no basis for the AO to question the source of investment in such immoveable property during the impugned assessment year 2016-17. It was submitted that in any case, the assessee has demonstrated the source of such investment by way of partly own funds and partly borrowed funds and thus, even on this ground, no addition can be sustained. It was further submitted that in December 2015, the assessee took another loan of Rs 2.55 crores from Reliance Housing Finance Limited (RHFL) which was used to repay the earlier housing loan taken from DHFL and another loan from Axis Bank and loan disbursal, loan statement issued by RHFL and earlier loan closure documents have been placed on record. It was accordingly submitted that no investment has been made during the year and further, the investment made in earlier financial year was funded out of borrowed funds and such borrowed funds have infact been repaid during the financial year relevant to impugned assessment year.
11. It was accordingly submitted that necessary relief be provided to the assessee by computing the income from business and profession at Rs. 74,33,640/- and further, he supported the order of the Ld.CIT(A), wherein he has deleted the addition u/s. 69A of the Act amounting to Rs. 2.50 crores.
12. We have heard the rival contentions and perused the material available on record. Firstly, on the issue of allowability of expenses against the professional receipts, we find that the AO has brought to tax whole of the professional receipts to tax without allowing any expenses apparently for the reasons that the assessee has not replied to the notices and submitted any documentation. During the appellate proceedings, the assessee has come forward explaining the reasons for non-compliance and submitted that she has maintained books of accounts which have been duly audited and has submitted documentation in terms of statement of computation of income, audited Balance Sheet, Profit & Loss Account and tax audit report. As per the audited financial statements, the assessee has reported gross professional receipts of Rs 1,09,00,000/- and net profit of Rs 63,92,248/ and in the computation of income, the assessee has suo moto disallowed an amount of Rs.15,44,465/-, being the personal expenses not been incurred for the purposes of her profession and has offered net income of Rs. 74,33,640/- thereby disclosing net profit @ 68.19% on gross professional receipts. The AO in the remand report has not recorded any adverse finding regarding claim of the expenses and has thus in effect accepted the claim of the assessee. The Ld.CIT(A) has taken cognizance of the documentation so submitted and without even raising a whisper on the authenticity of the books of accounts and without rejecting the books of accounts and the results so declared/reflected as per the audited financial statements, has estimated allowable expenses @ 40% of claimed expenses without specifying the basis of such estimation which has resulted in determination of net profits @ 85.30% as against 68.19% of the gross professional receipts as so reported by the assessee in her computation of income. The Ld.CIT(A) has not even taken cognizance of the fact that the assessee has suo-moto disallowed an amount of Rs.15,44,465/- as personal expenses not attributable to professional activities, and besides that, no allowance for depreciation has been given which has been rightly claimed by the assessee and has to be statutorily allowed. The only reason stated by the Ld.CIT(A) is that the assessee has not submitted the details of the expenses claimed which has been refuted by the Ld.AR stating that no such have been called for at first place. Further, as pointed out by the Ld.AR, the Ld.CIT(A) has not brought on record any comparable case as that of the assessee where the net profit has been determined at 85.30% of gross receipts and as against that, the Ld.AR has placed reliance on provisions of section 44ADA for comparability purposes where 50% of gross receipts have been provided as deemed profit in case of similar situated assessees.
13. In our overall analysis, we therefore find that where the books of accounts so maintained have not been rejected, there is no basis to disturb the profits so declared as per the books of accounts. Secondly, the assessee has suo-moto apportioned and disallowed certain expenses which can reasonably be related as personal in nature and not related to professional activities and thirdly, the profits so determined @ 68.19% of gross receipts are comparable to similar situated assessees and therefore, we donot see any legal and factual basis not to accept the net profits so declared by the assessee.
14. In light of the aforesaid discussions and in the entirety of facts and circumstances of the case, we set-aside the matter to the file of the AO for the limited purposes of re-computation and direct the AO to determine the net profit @ 68.19% of gross professional receipts as against 85.30% determined by the Ld.CIT(A). The ground of appeal taken by the assessee is thus partly allowed and the ground of appeal taken by the Revenue is dismissed.
15. Now, coming to matter relating to addition of Rs 2.50 crores u/s 69 of the Act on account of source of investment in immoveable property remaining unexplained. The property under consideration is Flat No. 202/A, Raj Kamal Cooperative Housing Society Ltd, Versova, Andheri (West), Mumbai, which has been purchased by the assessee in terms of agreement to sell. The agreement to sell has been executed on 31-03-2015 and registered with the stamp duty authority on the same date. The transfer of the property thus happened on 31-03-2015 which falls during the financial year 2014-15 relevant to assessment year 2015-16. The discharge of sale consideration by the assessee also happened on or before 31-03-2015 as evident from the agreement to sell. Therefore, where the AO seeks to verify the source of such investment, the relevant year of investment is financial year 2014-15 which falls for consideration in previous assessment year 2015-16 and not during the impugned assessment year 2016-17.
16. Evidently, the information in possession of the AO and basis which the case of the assessee was reopened was in terms of TDS return (Form 26QB) submitted online by the assessee after deposit of TDS u/s 194IA on payment of sale consideration. As evident from the said information which has been reproduced by the AO in paragraph 7 of the assessment order, besides all relevant details, it contains the date of agreement as 31-032015 and purchase consideration of Rs 2.50 crores and date of tds payment of 01-04-2015 and amount of TDS of Rs 2.5 lacs. The fact that the TDS has been deposited during the financial year 2015-16 doesn’t by any stretch of imagination lead to the fact that the purchase transaction has actually got executed during the financial year 2015-16 especially where the date of agreement has been clearly specified as 31-03-2015 which falls during the financial year 2014-15. The AO cannot be allowed to read the information in piecemeal and seek to reopen the assessment for the impugned assessment year where admittedly, the transaction has happened during the previous assessment year. This also reflects nonapplication of mind by the AO while reopening the assessment.
17. In any case, the issue before us is limited to whether the investment has happened during the year under consideration and if so, what the source of such investment. As we have discussed earlier, the investment has happened evidently during the previous financial year 2014-15 relevant to assessment year 2015-16 and thus, no cause of action arises for the impugned assessment year 2016-17. Having said that, we find that the assessee has duly demonstrated through the documentation placed on record that such investment has been substantially financed through loan of Rs 2.12 crores taken from DHFL besides utilization of personal savings of Rs 35 lacs. As evident from documents placed on record, the disbursal of loan amount of Rs 2.12 crores have happened directly from DHFL to the seller and thus, establishing the necessary nexus between loan taken and property purchased by the assessee and source of such investment. For the aforesaid reasons, we upheld the conclusion so drawn by the Ld.CIT(A) whereby he has deleted the addition of Rs 2.5 crores u/s 69 of the Act. In the result, ground of appeal taken by Revenue is dismissed.
18. In the result, the appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed.
ITA No. 2933/Mum/2025:
19. This appeal is filed by the Revenue, challenging the order of the Ld.CIT(A) in the context of levy of penalty u/s 271(1)(c) of the Act wherein the Ld.CIT(A) has reduced the quantum of penalty and directed the AO to re-compute penalty u/s 271(1)(c) of the Act on concealed income of Rs.92,98,128/- while giving effect to appellate order passed on 25-02-2025 against quantum appeal.
20. During the course of hearing, the Ld.DR submitted that since the Department has not accepted the order of the Ld.CIT(A) in deleting the additions in the quantum proceedings, the present appeal has been filed.
21. In his submissions, the Ld.AR submitted that the penalty order has been decided ex-parte qua the assessee. It was submitted that the assessee couldn’t respond to the notices issued by the AO due to nonreceipt of the notices on her email ID as was the case in quantum proceedings. It was reiterated that the assessee has been regularly filing her return of income for past many years and have always paid the taxes as due and for the year under consideration, due to exceptional and unforeseen health emergency in her family due to her father illness, she couldn’t file her return of income, at the same time, on professional receipts of Rs 1.09 crores, the TDS of Rs 10,90,000/- has been deducted as so reflected in Form 16A. It was accordingly submitted that there was reasonable cause for non-filing of return of income and there is no question of evasion of taxes. It was further submitted that the arguments raised in the context of merit of additions be considered and where the additions are deleted, there is no basis for consequent levy of penalty. It was further submitted that even the ld CIT(A) has decided the matter ex-parte qua the assessee and the assessee has requested the Video conferencing facility, however, the assessee couldn’t avail the same due to her own health issues. It was accordingly submitted that the assessee be allowed one more opportunity and the matter may be remitted to the file of the AO.
22. Both the parties were heard and material available on record pursued. In view of our aforesaid findings in the quantum proceedings where we have set-aside the matter to the file of AO, the matter relating to levy of penalty is also set-aside to the file of the AO to take in consideration our findings in the quantum proceedings, the fact that TDS amounting to Rs. 10,90,000/- has been deducted as so reflected in Form 16A on gross professional receipts of Rs 1,09,00,000/- and determine whether the same can be excluded while computing the tax sought to be evaded and decide the matter as per law after providing reasonable opportunity to the assessee. The matter relating to levy of penalty u/s. 271(1)(c) is thus set-aside to the file of the AO with the aforesaid directions.
23. In the result, the appeal of the Revenue is allowed for statistical purposes.