2024 (8) TMI 1635 - AT - Income Tax

Ruling upholds 21% gross profit on detected unaccounted sales; rejects extrapolation to earlier years, limits additions

M/s. New Saravana Stores Bramandamai Versus DCIT Central Circle-1 (2) Chennai And (Vice-Versa) And Shri Pondurai Versus DCIT Central Circle-1 (2) Chennai And (Vice-Versa)

ITAT CHENNAI - AT upheld the assessee's method of estimating gross profit at 21% on unaccounted sales detected during search and allowed the assessee's ... Assessment u/s 153A - Unaccounted sales unearthed in search action - admitted GP rate of 21% in statement made during search action - HELD THAT:- On the facts and circumstances of the case, we would concur with the approach adopted by the assessee while estimating GP on suppressed sales. The approach of Ld. AO as well as Ld. CIT (A) is not accepted. In the result, the corresponding grounds raised by the assessee-firm as well as individual assessee, stand allowed for all the years. The corresponding grounds raised by the revenue, in assessee- firm as well as in the case of individual assessee, for all the years, stand dismissed. The individual assessee Shri Pondurai has assailed the action of Ld. AO in extrapolating the sales for earlier years. We are of the opinion that considering the ratio of decision of Abhisar Buildwell (P.) Ltd. [2023 (4) TMI 1056 - SUPREME COURT] no addition could be made for completed assessment in the absence of any incriminating material. We find that suppressed sales for AYs 2017-18, 2018-19 and part of 2019-20 with respect to Padi units are merely extrapolated sales based on 3 months unaccounted sales of AY 2019-20. There are no evidences of suppression of sales in AYs 2017- 18, 2018-19 and remaining months of 2019-20. It is trite law that no addition could be made merely on the basis of assumption, conjectures or surmises. Unless evidences of suppression of sales in relevant years are brought on record in those years, the suppressed sales for only a part of month could not be extrapolated for those years. Therefore, the assessee has rightly offered additional income only in respect of sales suppression detected at the time of search by applying the GP rate of accounted sales in the books of account. The corresponding grounds raised by the assessee, in these years, stands allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether estimation/addition under assessment proceedings initiated under section 153A can be sustained in absence of incriminating material for the relevant assessment year(s). 2. What is the proper basis and methodology for estimating gross profit (GP) on suppressed/unaccounted sales discovered during search - (a) GP as computed by Assessing Officer (AO) based on selective years' seized material (average 37.76%), (b) GP admitted in sworn statement during search (21%), or (c) GP reflected in regular books of account and accepted by department (accounted GP rates of respective years)? 3. Whether extrapolation of unaccounted sales detected for a short period to other completed assessment years is permissible in absence of contemporaneous incriminating material for those years. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Additions under section 153A in absence of incriminating material Legal framework: Proceedings under section 153A are triggered by search and seizure under section 132; additions need to be founded on material brought out by the search for the relevant assessment year(s). Precedent treatment: The Tribunal referred to the ratio in the decision of the Supreme Court (referred to as Pr. CIT vs. Abhisar Buildwell) holding that additions cannot be made for completed assessments without incriminating material for those specific years. Interpretation and reasoning: The Tribunal examined whether the seized material and contemporaneous records established suppression for the years in question. It found that where incriminating material existed for particular periods (periods detected during search) additions could be estimated, but where suppression for other completed years was merely extrapolated from limited-period data without direct evidence, such extrapolation amounted to assumption, conjecture or surmise and could not sustain additions. Ratio vs. Obiter: Ratio - additions for completed years require incriminating material for those years; extrapolation without such material is impermissible. This is a binding principle applied to facts. Conclusion: Additions could not be sustained for years where no incriminating material was found; extrapolated additions for completed assessment years were disallowed. Issue 2 - Methodology for estimating GP on suppressed sales Legal framework: Where suppression of sales is established by search, AO must estimate taxable income (GP) on unrecorded sales; the estimation must be reasonable, based on available material, and not arbitrary. Precedent treatment: The Tribunal evaluated the approaches of the AO (applying an averaged GP rate derived from FY 2017-18 and 2018-19 seized data), the CIT(A) (adopting the sworn admission of 21%), and the assessee (applying GP rates as per regular books accepted by department). Prior judicial guidance emphasizing estimation on reliable material and inadmissibility of additions based solely on uncorroborated statements was considered. Interpretation and reasoning: The Tribunal analysed factual matrix - diversified nature of goods, centralised purchases, use of billing software ('Akshaya') to delete line-items randomly, destruction/incompleteness of evidence of unaccounted purchases, and acceptance of book results by department under tax audit. It found AO's method flawed (computational errors and an implausible average GP jump from ~18.6% to ~56.9% in consecutive years) and unjustified to apply a uniform, abnormally high GP across years. It reasoned that where books are regular, audited, and GP on accounted sales accepted by department, using such composite accounted GP rates to estimate GP on suppressed sales is a practical and realistic approach because it is based on authentic and accepted data rather than incomplete/seized data that cannot be reliably mapped to sales. Ratio vs. Obiter: Ratio - where regular books are maintained, audited and accepted by department, and where seized/incomplete data cannot reliably map purchases to suppressed sales, estimation of GP on suppressed sales should follow the composite GP reflected in the accepted books (assessee's method). Obiter - reliance on voluntary statement (21%) could justify reduction from AO's figure but is secondary to book-based composite approach where books are reliable. Conclusion: The Tribunal accepted the assessee's methodology - adopt GP rates as per regular books (the composite/accounted GP for each year) to compute income on suppressed sales; rejected AO's 37.76% uniform rate and CIT(A)'s partial acceptance of 21% where the books' rates were more appropriate on facts. Consequently, additions computed by AO were reduced/overturned in favour of the assessee's book-based estimation. Issue 3 - Admissibility and weight of statements made during search Legal framework: Statements recorded under section 132(4) during search are admissible and may be relevant; however, statements alone are not conclusive and require corroboration by material evidence for sustaining additions. Precedent treatment: Tribunal noted established position that admissions are important but not conclusive and may be retracted or otherwise tested against documentary material; departmental circulars and earlier judicial pronouncements caution against basing additions solely on uncorroborated statements. Interpretation and reasoning: The Tribunal observed that a voluntary statement admitting GP of 21% was made and not retracted; CIT(A) relied on it to adopt 21% for the firm. However, the Tribunal placed greater emphasis on the admitted books where available and accepted; while the sworn admission could justify departure from AO's figure, the final choice was driven by reliability and verifiability of book GP. Where the statement aligned with book/account data it could corroborate, but it could not alone justify an otherwise arbitrary or computationally erroneous AO estimation. Ratio vs. Obiter: Ratio - sworn statements during search are admissible and can be relied upon if un-retracted and supported by other material, but cannot by themselves sustain arbitrary additions in absence of corroboration. Obiter - reliance on such statements may be permissible as confirmatory evidence where books are incomplete. Conclusion: The Tribunal acknowledged the relevance of the sworn admission of 21% but ultimately preferred the book-based GP rates as the sound basis for estimation on the facts; statements without corroborative material cannot justify the AO's higher/computationally flawed estimate. Cross-references and interrelation of issues 1 ? 2: The permissibility of extrapolation (Issue 1) affects the universe of sales to which the chosen GP rate (Issue 2) may be applied; where extrapolated sales are impermissible, no GP estimation on those extrapolated figures can be sustained. 2 ? 3: Choice of GP estimation (Issue 2) is informed by the evidentiary weight accorded to sworn statements (Issue 3) versus regular audited books; the Tribunal favoured accepted books over uncorroborated seized data or computationally unreliable AO averages. Final conclusions 1. Where incriminating material for a given assessment year is absent, additions based on extrapolation from other periods are impermissible; additions for such years are to be deleted. 2. On facts showing maintained regular books, tax audit, accepted GP on accounted sales and incompleteness/unreliability of seized purchase data, GP on suppressed sales should be estimated using the composite GP reflected in the accepted books of account for respective years rather than by applying an arbitrary or computationally defective GP rate derived from partial seized data. 3. Sworn admissions during search are relevant and admissible but are not conclusive; they must be corroborated by material evidence and cannot justify arbitrary additions contrary to reliable book records.