2025 (8) TMI 1580 - AT - Income Tax

Appeal dismissed over alleged undeclared cash sales where additions rested on inference, records showed sustained legitimate bulk sales

ITAT MUMBAI upheld the CIT(A)'s deletion of additions for alleged undeclared cash sales, dismissing the revenue's appeal. The AO relied solely on another ... Addition on account of undeclared sales - AO received information from the AO of M/s. HI Tech Sales Corporation that M/s. Hi Tech Sales Corporation had made sale of micro SD cards to various parties entirely in cash - CIT(A) deleted addition - HELD THAT:- AO had simply relied upon the inference drawn by the AO of Hi Tech Corporation without bringing any relevant material on record to prove that M/s. Hi Tech Sales Corporation was the front of the assessee. It is evident that small difference in the average rate of selling price was attributed because of providing discount to M/s Hi Tech Sales Corporation for purchasing goods in high volume in the whole year compared to one time small quantity of sale made to M/s Samay Time Syndicate. During the course of appellate proceeding before us, the assessee has also filed paper book comprising detail of month wise sale made to M/s Hi Tech Sales Corporation which demonstrate that M/s Hi Tech Sales Corporation was the main party through whom the assessee has sold most of the goods during the year. AO has not brought any material on record by conducting independent inquiry/investigation to prove that there was any manipulation made by the assessee in selling the goods through M/s Hi Tech Sales Corporation, therefore, we don’t find any reason to interfere in the decision of CIT(A). Therefore, ground of the appeal of revenue are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the addition to income on account of alleged undeclared sales (difference arising from applying a higher sale price benchmark) was correctly made by the Assessing Officer. 2. Whether the entity purchasing the bulk of goods was a 'front' or related entity of the assessee such that cash sales declared by that entity could be attributed to the assessee. 3. Whether comparison of average sale price to a regular large-volume purchaser with the price of a one-time small-quantity sale is a valid basis for estimating undisclosed income. 4. Whether the Assessing Officer discharged the burden of proof by independent inquiry and production of material to substantiate the allegation of manipulation/suppression. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Correctness of addition for alleged undeclared sales (benchmark price adjustment) Legal framework: The Assessing Officer may determine income by making additions when sales or receipts are found to be understated, but such additions must be founded on relevant material, logical and consistent methodology and be supported by evidence on record. Precedent Treatment: No specific precedential decisions were cited or applied by the Tribunal; the analysis proceeds on principles of evidentiary sufficiency and comparative valuation methodology. Interpretation and reasoning: The Assessing Officer computed an addition of Rs. 13,83,36,069 by applying a benchmark rate of Rs. 200 per unit (derived from a one-time sale) against the larger quantity sold to a regular buyer at an average rate computed by the AO as Rs. 179 per unit. The First Appellate Authority and the Tribunal examined the contemporaneous month-wise sale records and found that in the relevant month (January 2014) sales to both buyers were substantially similar in price (the appellant's material showed ranges of Rs. 200-210 and an average of Rs. 204 for the regular buyer in that month). The Tribunal held that the AO's approach lacked a scientific and consistent basis because it compared a one-time transaction price with an annual average applied to large-volume, continuous sales. The Tribunal also noted VAT was charged and paid and that the books and audit records did not disclose related-party treatment. Ratio vs. Obiter: Ratio - An addition based on price comparison must use comparable temporal and transactional parameters; using an inapt benchmark (one-time sale) to value continuous large-volume sales is unsustainable absent supporting evidence. Obiter - Observations on business practices and discounts for volume were explanatory. Conclusion: The addition for undeclared sales founded on the AO's benchmark price adjustment is not sustainable and was correctly deleted by the appellate authority and affirmed by the Tribunal. Issue 2 - Allegation that the purchaser was a 'front' entity (attribution of cash sales) Legal framework: To attribute income or undisclosed receipts between entities on the ground that one is a front/related entity, the Revenue must establish nexus or control by independent evidence beyond inference - e.g., admissions, documentary links, agreements, common management, or corroborative transactional anomalies. Precedent Treatment: No decision was expressly followed or distinguished; the Tribunal applied the general evidentiary standard requiring independent inquiry and proof. Interpretation and reasoning: The AO relied on information and inferences drawn by another Assessing Officer in the purchaser's assessment, including purported statements of the proprietor. On review, the Tribunal found that the purchaser's recorded statements did not contain any explicit admission of being a front entity and that the AO of the assessee did not conduct independent inquiries to corroborate the inference. The Tribunal emphasized that conclusions based solely on another AO's inferences, without independent verification or supporting material, amount to assumption, conjecture and surmise. The Tribunal also observed that the purchaser's audit and turnover showed negligible profit on large turnover, which, in the absence of other evidence, did not substantiate creation of a front to siphon profits. Ratio vs. Obiter: Ratio - Allegation of a front entity cannot be sustained on the basis of another AO's inference alone; the AO asserting such a relationship must make independent inquiries and place substantiating material on record. Obiter - Remarks regarding the purchaser's lack of technical knowledge and cash deposit practices were treated as findings in the purchaser's order but not as admissions binding on the assessee's record without independent proof. Conclusion: The finding that the purchaser was a front entity was unsubstantiated; in absence of independent inquiry and corroborative material by the AO, the allegation could not be sustained and did not justify an income addition. Issue 3 - Validity of comparing average prices across dissimilar transactions for estimating suppressed income Legal framework: For comparative pricing to be a reliable basis of estimating undisclosed income, transactions compared must be contemporaneous, of similar quantity/quality and subject to comparable commercial terms; the methodology must be consistent and rational. Precedent Treatment: None cited; Tribunal relies on established principles of comparability and sound valuation methodology. Interpretation and reasoning: The AO compared an annual average price for sales to a regular purchaser with the price of a single, isolated sale to a different purchaser. The Tribunal found this approach inherently flawed because volume discounts, temporal price fluctuations and the nature of regular supply versus one-time sale distort comparability. The appellate record included month-wise sales data showing that the relevant month's prices were effectively comparable; therefore the AO's use of disparate averaging was inconsistent and demonstrably incorrect. The Tribunal characterized the AO's approach as approbating one mode of price computation and reprobating another. Ratio vs. Obiter: Ratio - Price comparisons used to determine additions must employ comparable bases (same time period, similar quantities and terms); failure to do so renders the comparison unreliable. Obiter - Observations on commercial discount practices were explanatory. Conclusion: The AO's price-comparison methodology was unscientific and unsound; reliance on it to make the addition was improper, thus deletion of the addition was warranted. Issue 4 - Adequacy of AO's independent inquiry and evidentiary burden Legal framework: The Assessing Officer bears the burden of adducing evidence to support adjustments; reliance on third-party assessments or statements requires corroboration and independent verification within the assessee's proceedings. Precedent Treatment: No prior authority cited; Tribunal applied canonical evidentiary principles. Interpretation and reasoning: The Tribunal emphasized that the AO did not carry out independent investigations (e.g., verifying counterparty records, banking trails, direct enquiries, corroborative documentary evidence) to substantiate the allegation of manipulation or undisclosed receipt. The AO's dependence on another AO's inference and lack of material demonstrating receipt of extra consideration by the assessee undermined the addition. The Tribunal also noted the presence of contemporaneous sales registers, VAT compliance and tax audits which were not rebutted by independent negative evidence from the AO. Ratio vs. Obiter: Ratio - An AO must conduct independent and adequate inquiries and produce supporting material before making an addition based on third-party inferences; absent such steps, additions are unsustainable. Obiter - The Tribunal's observations on the sufficiency of the documentary production by the assessee serve to explain why the AO's case failed. Conclusion: The AO failed to discharge the evidentiary burden by independent inquiry; the lack of substantiating material required deletion of the addition and dismissal of the Revenue's appeal.