2026 (3) TMI 796 - AT - Income Tax

Extrapolation of suppressed sales based on uncorroborated portal rates is unsustainable, resulting in deletion of additions.

Additions in search assessments based solely on undated, unsigned or uncorroborated digital records and on extrapolation from market-portal asking rates ... Addition based on uncorroborated seized loose papers and marketing 'welcome letters' - reference to DVO valuation in absence of incriminating material - rejection of book results and invocation of section 68/115BBE without cogent evidence - treatment of unsecured loans as unexplained cash credit where corroborative bank evidence and repayments exist - validity of approval under section 153DAddition based on uncorroborated seized loose papers and marketing 'welcome letters' - Addition of alleged unaccounted sale receipts (on money) quantified from seized documents and extrapolation - HELD THAT: - The Tribunal accepted that the seized welcome letters and undated digital loose sheets were marketing/negotiation material, unsigned and not corroborated by receipts, bank trail, agreements or buyer admissions; extrapolation to other sales using portal rates was speculative and mechanically replaced declared figures without rejecting books under section 145(3). On the stated facts (which are pari materia to AY 2019 20), the addition based on such material and extrapolation was unsustainable. [Paras 4]Impugned addition of Rs. 13,02,90,000 (and the extrapolated Rs. 999.86 Lacs) deletedReference to DVO valuation in absence of incriminating material - Addition made on account of alleged unaccounted construction expenditure based on DVO valuation - HELD THAT: - In the absence of any incriminating material showing out of books expenditure, reference to the DVO and reliance on its estimation (which used CPWD rates rather than local PWD rates and did not allow self supervision benefit) was held to be invalid and arbitrary; payments to contractors appeared in regular books with banking trail and TDS, and no independent enquiries were made to substantiate unaccounted expenditure. [Paras 5]Impugned addition of Rs. 259.49 Lacs on account of alleged unaccounted construction expenditure deletedRejection of book results and invocation of section 68/115BBE without cogent evidence - Addition treating higher gross profit in jewellery business as unexplained cash credit under section 68 and chargeable under section 115BBE - HELD THAT: - The Tribunal found the assessee's audited books, quantitative stock records and verifiable purchases intact; comparison with a franchised concern having a different business model was inappropriate. Receipts in issue were recorded sales proceeds whose nature and source were explained, and therefore section 68/115BBE did not apply. [Paras 6]Addition on account of alleged excess profit/unexplained cash credit deletedTreatment of unsecured loans as unexplained cash credit where corroborative bank evidence and repayments exist - Addition of unsecured loans as unexplained cash credit under section 68 - HELD THAT: - For corporate lenders whose loans were repaid in subsequent year, the Tribunal applied the principle that repayment accepted by revenue precludes sustaining addition; for other lenders, the assessee produced confirmations, bank statements, PAN/ITR and ledger extracts showing receipt by banking channels and repayments. No enquiries were made by AO of lenders and no cogent material indicated these were unexplained credits. [Paras 6]Impugned additions treating the unsecured loans (totaling Rs. 207.40 Lacs) as unexplained cash credit deletedValidity of approval under section 153D - Allegation that approval under section 153D was mechanical and without application of mind - HELD THAT: - The Tribunal concurred with the CIT(A)'s finding that the Addl. CIT (range head) had perused assessment records, followed CBDT guidance and applied mind in granting approval; the approval was administrative and supervisory in nature and was not shown to be a mechanical rubber stamp. [Paras 7, 8]Allegation of mechanical approval under section 153D rejected; approval held validFinal Conclusion: The Tribunal, applying the reasoning recorded (including reliance on its lead order for AY 2019 20), deleted the additions for alleged on money, the DVO based construction valuation, the jewellery GP/section 68 addition and the unsecured loan additions for AY 2020 21, while upholding the validity of the approval under section 153D; the assessee's appeal was partly allowed and the revenue's appeal dismissed. Issues: (i) Whether additions for alleged suppression of sales and the extrapolated additions could be sustained; (ii) Whether addition of unexplained construction expenditure based on DVO valuation is sustainable; (iii) Whether addition for higher gross profit in jewellery business treated as unexplained cash credit under Section 68 and taxed under Section 115BBE is sustainable; (iv) Whether additions of unexplained loans u/s 68 are sustainable; (v) Whether approval under Section 153D was mechanical and invalid.Issue (i): Whether the additions for alleged on-money relating to sale of units and the extrapolated addition based on market portal rates are sustainable.Analysis: The decided findings show that welcome letters and loose digital sheets were undated, unsigned and lacked acknowledgement or independent corroboration. A buyer's statement undermined the allegation that welcome letters represented actual higher sale consideration. No enquiries were made of buyers except one, no cash receipts or bank trails corroborating suppressed sales were produced, and the books were not rejected under Section 145(3). The extrapolation applied market portal asking rates without corroborative transaction evidence or comparable sale deeds, and no seized material supported the assumed universal suppression.Conclusion: In favour of Assessee. The additions for alleged suppression of sales and the extrapolated addition are deleted; the corresponding grounds of Revenue are dismissed.Issue (ii): Whether the addition of alleged unaccounted construction expenditure based on the DVO report is sustainable.Analysis: The DVO valuation was based on estimation using CPWD rates rather than local PWD rates, without applying self-supervision allowance. No incriminating material or independent enquiries established out-of-books construction expenditure; payments to contractors were reflected in audited books with bank payments and TDS. Precedent supports that a DVO reference and resultant addition are unsustainable absent cogent material.Conclusion: In favour of Assessee. The DVO-based addition is deleted.Issue (iii): Whether alleged excess gross profit in the jewellery business can be treated as unexplained cash credit under Section 68 and taxed under Section 115BBE.Analysis: The assessee maintained audited books, quantitative stock records and verifiable purchase channels. Comparison with a franchisee having a different business model was an unreliable benchmark. The receipts were recorded as sales in the books and not as unidentified credits; there was no evidence rejecting the books or showing suppression of sales to justify treating business receipts as unexplained cash credits.Conclusion: In favour of Assessee. The addition treating excess profit as unexplained cash credit is deleted; Revenue's corresponding grounds are dismissed.Issue (iv): Whether additions of unexplained loans under Section 68 are sustainable for specified lenders.Analysis: For two corporate lenders the loans were repaid in subsequent year with bank evidence, ledger extracts, confirmations, PAN and ITR details; precedent holds that repaid loans accepted by revenue cannot be added. Other lenders' advances were received through banking channels, supported by confirmations and ledger entries; no enquiries were made by assessing authority to dislodge genuineness.Conclusion: In favour of Assessee. All additions on account of unexplained loans are deleted.Issue (v): Whether the approval under Section 153D was mechanical and without application of mind.Analysis: The approval was given after perusal of the draft assessment record by the range head in accordance with administrative practice and CBDT guidance; the record shows consideration of issues rather than mere rubber-stamping.Conclusion: In favour of Revenue. The challenge to the validity of approval under Section 153D is dismissed.Final Conclusion: The appellate orders result in deletion of the additions for suppressed sales (including extrapolation), DVO-based construction expenditure, classification of higher jewellery profit as unexplained cash credit, and unexplained loans; the approval under Section 153D is upheld. The assessee's appeal is partly allowed and the revenue's appeal is dismissed.Ratio Decidendi: Additions in search assessments based solely on unsigned or uncorroborated seized digital records or on mechanical extrapolation from market portal asking prices are unsustainable; a DVO reference and valuation cannot support additions absent incriminating material and correct local valuation rates; repayments in subsequent years and banking records can defeat additions under section 68.