ITAT Delhi Restricts Profit Estimate in Milk Trading Case to 5%, Rejects Arbitrary 20% Addition
Tribunal Says Ad-Hoc Profit Estimation Must Be Backed by Evidence
Ruling Provides Relief to Small Traders Facing Unreasonable Tax Demands
By Our Legal Reporter
New Delhi: February 02, 2026:
In a significant judgment, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, has ruled in favour of a milk trader, setting aside an arbitrary 20% profit estimate imposed by the Income Tax Department and restricting the gross profit addition to 5%. The case, Hansraj vs. ITO, arose from reassessment proceedings for the Assessment Year 2014–15, where large cash deposits were treated as unexplained money under Section 69A of the Income Tax Act and taxed under Section 115BBE.
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The Tribunal’s decision is expected to have wide implications for small traders and businesses, particularly in sectors like dairy, agriculture, and commodities, where cash transactions are common and profit margins are thin.
Background of the Case
- Assessee: Hansraj, a milk trader.
- Assessment Year: 2014–15.
- Issue: The Assessing Officer (AO) treated large cash deposits in the assessee’s bank account as unexplained money under Section 69A.
- Profit Estimate: The AO applied an ad-hoc 20% gross profit rate on turnover, leading to heavy tax liability.
- Appeal: Hansraj challenged the addition, arguing that milk trading operates on thin margins and such high estimates were unrealistic.
Tribunal’s Observations
- Arbitrary Estimation Not Allowed: The ITAT held that profit estimation must be based on industry norms, past records, and evidence, not arbitrary figures.
- Reasonable GP Rate: Considering the nature of milk trading, the Tribunal restricted the GP addition to 5%, which aligns with market realities.
- Relief to Assessee: The Tribunal partly allowed the appeal, reducing the tax burden significantly.
- Legal Principle: The ruling reinforced that tax authorities cannot impose excessive profit rates without justification.
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Why This Judgment Matters
- For Small Traders: Provides protection against arbitrary profit additions by tax authorities.
- For Dairy Sector: Recognizes the thin margins in milk trading and sets a realistic benchmark.
- For Tax Administration: Reinforces the need for evidence-based assessments rather than ad-hoc estimates.
- For Legal Precedent: Strengthens jurisprudence on Section 69A and profit estimation cases.
Broader Implications
- Cash-Intensive Businesses: The ruling will benefit traders in sectors like agriculture, dairy, and wholesale commodities, where cash deposits are common.
- Reduced Litigation: By setting a precedent, the judgment may reduce disputes over arbitrary profit estimations.
- Fair Taxation: Ensures that taxpayers are assessed fairly, based on actual business realities.
Human Angle
The case highlights the stress faced by small traders when confronted with unrealistic tax demands. For many, such arbitrary additions could mean financial ruin. The Tribunal’s ruling offers relief and restores confidence in fair tax administration.
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Conclusion
The ITAT Delhi’s ruling in Hansraj vs. ITO is a landmark in tax jurisprudence. By restricting the gross profit addition to 5%, the Tribunal has ensured fairness, protected small traders, and reinforced the principle that tax assessments must be evidence-based, not arbitrary.
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