ITAT restricts off-book sales additions to identified parties, confirms 8.60% gross profit rate instead of full sale value

ITAT Chandigarh upheld CIT(A)'s decision to restrict additions for off-book sales only to parties identified in WhatsApp chat evidence, finding this approach logical due to lack of incriminating documents for other parties. However, the tribunal modified the addition amount, confirming only gross profit at 8.60% rate on total off-book sales of Rs. 32,69,643 rather than the entire sale value, reasoning that corresponding purchases must have also occurred outside books. The assessee's appeal was partly allowed with reduced addition based on declared GP ratio.

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Issues Involved:
1. Addition on account of alleged under-invoicing.
2. Calculation basis for alleged under-invoicing.
3. Reliance on statements and WhatsApp messages.
4. Addition on account of sales outside the books of accounts.
5. Rejection of books of accounts under Section 145(3) of the Income Tax Act.

Detailed Analysis:

1. Addition on Account of Alleged Under-Invoicing:
The Assessee argued that the CIT(A) erred in confirming an addition of Rs. 22,77,606/- for alleged under-invoicing involving three parties: M/s Dhanawat Enterprises, M/s Ashoka Trading Co., and M/s A.K. Sales India. The CIT(A) relied on statements and WhatsApp messages to sustain the addition. During a search operation, statements from employees and WhatsApp chats indicated a suppression of sales by 25% to 30%. The Assessing Officer (A.O.) extrapolated this to the entire turnover, resulting in an addition of Rs. 27,01,59,518/-.

2. Calculation Basis for Alleged Under-Invoicing:
The Assessee contended that the CIT(A) incorrectly calculated under-invoicing by adopting a basis of 30% of disclosed sales. The CIT(A) concluded that only 30% of sales to three specific parties were under-invoiced and added Rs. 22,77,606/- to the income. The Assessee argued that the sales outside the books should only attract gross profit addition, not the total sales amount.

3. Reliance on Statements and WhatsApp Messages:
The CIT(A) relied on statements and WhatsApp messages from employees to uphold the addition. The Assessee argued that the WhatsApp chats were misinterpreted and that no corroborative evidence supported the alleged under-invoicing. The CIT(A) rejected the retraction of statements by the Assessee's partners, considering them an afterthought.

4. Addition on Account of Sales Outside the Books of Accounts:
The CIT(A) confirmed an addition of Rs. 26,58,600/- for sales outside the books of accounts. The Assessee argued that only the gross profit rate of 8.60% should be applied to these sales, not the entire sales amount. The Tribunal agreed, stating that the sales outside the books must have been from unrecorded purchases, and only the gross profit on these sales should be added.

5. Rejection of Books of Accounts Under Section 145(3):
The CIT(A) upheld the A.O.'s rejection of the books of accounts under Section 145(3) of the Income Tax Act. The Assessee argued that no negative or excess stock was found during the search, and the extrapolation of sales based on WhatsApp chats was unjustified. The Tribunal found that the CIT(A)'s restriction of the addition to sales outside the books for specific parties was logical and justified.

Conclusion:
The Tribunal concluded that the CIT(A) was justified in restricting the addition based on sales outside the books to specific parties identified in the WhatsApp chats. The addition of Rs. 26,58,600/- was confirmed with the application of a gross profit rate of 8.60%. The Assessee's appeal was partly allowed, and the Revenue's appeal was also partly allowed, confirming the CIT(A)'s findings on restricting the extrapolation and deleting the larger addition based on the entire turnover.

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