2025 (10) TMI 845 - AT - Income Tax

Mechanical approval under s.153D cannot uphold enhanced profit estimate; revised return profit and agricultural income accepted, s.68 loans upheld

ITAT held that the Addl. CIT's mechanical approval under s.153D could not sustain enhanced profit estimation; the assessee's revised return profit ... Approval as required u/s 153D by approving authority i.e., Addl. CIT as a mechanical approval - HELD THAT:- As we find substance in the plea / working of Ld. AR. It could be seen that considering the expenses found recorded in the seized material as well as in the regular books of accounts (allowed partially by CIT(A) while arriving at profit rate of 17.16%), the aggregate net profit margin for the group as a whole is less than 1.5%. If the material is considered in toto, the NP rate for all the entities work out to be 1.47% which is substantially lower than the declared profit of 14% to 15% by the assessee group in the revised return of income. This being the case, the profit declared in the revised return of income is to be accepted and in our considered opinion, no further addition is warranted in the hands of the assessee. The profit rate declared by the assessee is substantially higher. Pertinently, profit rate of less than 3% has been accepted in immediately preceding year in assessee's case and such higher estimation of 18%, under identical business conditions, could not be sustained in law - We delete the impugned addition as sustained in the impugned order and allow the corresponding grounds of assessee's cross-objection. The revenue's ground of appeal stands dismissed. Agricultural income as discarded by AO, it could be seen that the estimation of Rs. 50,000/- per acre is without any supporting document on record - It is undisputed fact that the assessee was having sufficient land holding to earn the agricultural income so disclosed by the assessee. The claim of the assessee stood substantiated by copies of 'J' forms and copies of Khasra and Khatauni. Therefore, the approach of CIT(A) in discarding the estimation made by Ld. AO could not be faulted with. The grounds raised by the revenue stand dismissed. Unsecured loans as taken by the assessee from three parties - As it could be seen that the assessee had furnished sufficient documents with respect to M/s Guru Nanak Stone Crusher as required in terms of Sec.68 - With respect to loan as taken from Smt. Mandeep Kaur and Shri Rajbeer Singh, the assessee duly filed confirmation letters from the lenders along with their respective PAN details, copies of ITRs etc. The same has been disbelieved only because some immediate cash has been found to be deposited in their respective bank accounts. However, no verification has been done by AO from these two lenders. The assessee had filed confirmatory letters as well as income tax details of all the lenders and duly discharged the primary onus as required u/s 68. Therefore, the deletion of addition by Ld. CIT(A) is upheld. The remaining addition of Rs. 10 Lacs as sustained in the impugned order stand deleted. The corresponding grounds of revenue's appeal stand dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Net Profit (NP) rate for estimating undisclosed business income should be determined by applying comparable-listed entities' mean NP rates or by relying on seized consolidated documents and extracted expenses found during search. 2. Whether discounts and rehabilitation/compensation entries recorded in seized electronic/physical documents can be accepted as allowable expenditures for computing NP rate without further corroboration. 3. Whether large variations in estimated NP rates across consecutive years (consistency rule) preclude an upward revision of NP rate based on seized material. 4. Whether additions u/s. 68 for unsecured loans are sustainable where the assessee furnishes confirmations, PANs, ITRs and bank statements but AO points to antecedent cash credits in lenders' accounts without independent verification. 5. Whether agricultural income claimed by the assessee can be rejected where sample Khasra/Khatauni and 'J' forms are furnished but AO makes per-acre estimate without supporting material. 6. Whether prior approval u/s 153D granted by a supervisory officer in a search-related assessment is vitiated if the approval is brief/rapid and alleged to be mechanical. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Basis for Estimating Net Profit Rate (Comparables v. Seized Material) Legal framework: Assessment u/s 153A with power to estimate income where books are rejected u/s 145(3); Sec. 132(4A) r.w.s. 292C creates a presumption as to truthfulness of seized documents. Precedent treatment: Tribunal and authorities use comparable companies' NP where functionally and financially comparable; seized documents admitted as reliable source when they reflect actual transactions. Interpretation and reasoning: The Tribunal found that the comparables relied on by AO and assessee were functionally dissimilar (different product lines, export orientation, state ownership, non-crushing activities) and thus unreliable. Seized consolidated documents contained granular entries of gross receipts, discounts, rehabilitation charges and various expenses attributable to the group and were held to represent the actual state of affairs, attracting the statutory presumption under Sec.132(4A) r.w.s. 292C. Given rejection of regular books, seized material was deemed the most reliable base for estimation; consequently the Commissioner (CIT(A)) computed NP from seized totals rather than mean NP of non-comparable firms. Ratio vs. Obiter: Ratio - where seized material is cogent and regular books are unreliable/manipulated, estimation should be based on seized records rather than unrelated comparables. Conclusion: The Tribunal concurred with CIT(A)'s approach of preferring seized material over inapposite comparables and found AO's reliance on unrelated listed comparables unsustainable. Issue 2 - Allowability of Discounts and Other Expenditures Shown in Seized Documents Legal framework: Allowability of business expenses for determining profit; AO may make additions where expenses are unsubstantiated; seized documents carry presumption under Sec.132(4A) r.w.s.292C but allowability still depends on nature of entries. Precedent treatment: Expenses recorded in seized documents can be accepted if they reflect actual transactions and are not inherently non-qualifying; however, disallowance may be appropriate where entries are not vouched or are contrary to statutory provisions (e.g., Sec.40A/40(a)(ia)). Interpretation and reasoning: CIT(A) accepted large discount and rehabilitation entries from seized material and allowed certain annual contract/other expenses after adjustments (capital expenditure, etc.), computing an NP of ~17.16% and applying 18%. AO had earlier applied 25% excluding some expenses. The Tribunal examined consolidated seized and books entries and found that when all seized and regular-book expenses (including VAT, new point expenses, mining installments, CSR/environmental/labour welfare etc.) are taken in toto, the true NP for the group materially fell (to ~1.47%). The Court emphasized that excluded or partially disallowed expenditures in CIT(A) computations ought to have been considered if they were revenue in nature and supported by seized or regular books; mechanical wholesale rejection of such items was unsound. Ratio vs. Obiter: Ratio - expenses recorded in reliable seized material and regular books must be considered in estimating profit if they are revenue in nature and adequately evidenced; deductions should not be arbitrarily disallowed when seized records corroborate them. Conclusion: The Tribunal held that acceptance of seized-document expenses (with proper classification) yields a much lower NP and that the assessee's revised declared profit ought to be accepted; additions based on overstated NP were deleted. Issue 3 - Consistency in NP Rates Across Years Legal framework: Principle of consistency in assessment; large unexplained variations require justification. Precedent treatment: NP estimation should be consistent unless verifiable changes in business justify variance. Interpretation and reasoning: The Tribunal noted that CIT(A) had computed a very low NP (~2.28%) for the preceding year under similar business conditions but accepted higher NP here (18%), leading to inconsistency. However, the Tribunal ultimately relied on consolidated seized/regular-book figures showing an NP far below both figures and concluded declared revised NP was acceptable. The inconsistency note supported skepticism of high estimates but did not alone determine outcome. Ratio vs. Obiter: Obiter insofar as consistency is a relevant factor but not determinative when seized material demonstrates the correct position. Conclusion: Consistency concerns reinforced rejection of inflated NP estimates; Tribunal accepted the assessee's revised profit given the seized-record analysis. Issue 4 - Additions u/s 68 for Unsecured Loans Legal framework: Section 68 places primary onus on assessee to explain nature and source of unexplained credits; genuineness and creditworthiness of lenders must be established (PAN, ITRs, bank statements, confirmations). Precedent treatment: Where assessee furnishes requisite documentary evidence and AO fails to independently verify adverse inferences, additions are not sustainable. Interpretation and reasoning: Assessee produced confirmations, PANs, ITRs, bank statements for lenders. AO disbelieved explanations citing antecedent cash credits in lenders' accounts but did not carry out verification from lenders. CIT(A) accepted evidence for one lender fully, and rejected parts where cash deposits immediately preceded transfers to assessee; CIT(A) confirmed additions partially. Tribunal observed that AO's disbelief without lender verification was improper; primary onus discharged by assessee in respect of specified lenders and CIT(A)'s deletion of additions was upheld. Ratio vs. Obiter: Ratio - where assessee furnishes primary evidentiary records under Sec.68 and AO fails to verify adverse facts or produce contradicting evidence, additions are unwarranted. Conclusion: Tribunal deleted additions totalling the unsecured loans challenged (deletion of Rs.16 Lacs addition upheld; other confirmed amounts adjusted as per CIT(A) and deleted where proper). Revenue's additions under Sec.68 were dismissed in the present facts. Issue 5 - Agricultural Income Claimed by Assessee Legal framework: Claim of agricultural income requires supporting documents (land records, sale receipts); AO may estimate if evidence lacking. Precedent treatment: Sample Khasra/Khatauni and 'J' forms constitute acceptable evidence when they substantiate landholding and sales. Interpretation and reasoning: AO estimated Rs.50,000 per acre without documentary support and recharacterised part of claimed agricultural income as other sources. CIT(A) accepted Khasra/Khatauni and 'J' forms and found assessee had sufficient holding; AO's per-acre estimate was held ad hoc and unsupported. Ratio vs. Obiter: Ratio - agricultural income should not be mechanically estimated when adequate documentary evidence (land records, market receipts) is furnished by assessee. Conclusion: Tribunal upheld CIT(A)'s deletion of AO's disallowance and accepted the agricultural income claim. Issue 6 - Prior Approval u/s 153D (Allegation of Mechanical Approval) Legal framework: Section 153D requires prior approval of specified supervisory officer before AO finalizes assessment after search; approval must be on record but is administrative in nature. Precedent treatment: Approvals held invalid where manifestly mechanical and without application of mind; conversely, approvals sustained where range head had access to seized records and considered the draft. Interpretation and reasoning: CIT(A) recorded that draft assessment and appraisal/seized documents were forwarded to Addl. CIT who perused material and granted approval; alleged rapid approval across multiple cases did not of itself prove absence of application of mind given routine supervisory involvement. Tribunal found the issue rendered infructuous because it disposed merits in favour of assessee; it further noted that no cogent evidence established the approval as wholly mechanical here. Ratio vs. Obiter: Obiter in present decision - procedural validity of approval considered but not determinative because merits disposal obviated need for a separate ruling. Conclusion: The Tribunal declined to annul assessments on 153D grounds since merits disposed in favour of assessee; no independent finding of vitiating mechanical approval made decisive. OVERALL CONCLUSION The Court sustained CIT(A)'s reliance on seized material over non-comparable listed comparables, but found CIT(A)'s partial disallowances resulted in an overstatement of NP; on full consideration of seized records and regular books, the assessee's revised declared profits were accepted and impugned additions deleted. Additions u/s 68 and disallowance of agricultural income were deleted where evidentiary onus was met; procedural challenge to approval u/s 153D was rendered infructuous by the merits outcome.