TaxTMI 
TaxTMI 
2026 (2) TMI 1488
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.... 1. On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income-tax (Appeals) erred in failing to appreciate that the Order passed u/s.147 of the Ld. Assessing Officer is erroneous on the facts and the merits of the case and provisions of Law as well and hence requires to be quashed. 2. That the Ld. CIT(A) erred in rejecting the legitimate claim of the appellant that the income in respect of suppressed sales has to be determined applying the gross profit margin on such quantum and not the entire value of suppressed sales. 3. That the Ld. CIT(A) erred in failing to appreciate the rationale expressed in the various case laws cited by the Appellant in the affidavit of declaration filed during the course of reassessment proceedings affirmed the principle of taxation of GP Margins on suppressed sales and rejecting the same without assigning any suitable reason is inappropriate. 4. That the Ld. CIT(A) erred in failing to appreciate that the quantum of suppressed sales can get translated into taxable income in its totality only when the undisclosed asset found at the time of search in the case of the appellant is commensurate to....
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....ith the same software application, namely "S.S. Retail", but with additional features. This server was referred to as "SS Posting". The data in the SS Posting server was stated to be regularly imported from the billing server through a process described as "Data Posting" and was stored in a separate database named "KVTEXSSRETAILTRANBKP". 6. Both the databases, namely "KVTEXSSRETAILTRAN" (billing server) and "KVTEXSSRETAILTRANBKP" (SS Posting server), were analysed by the Department using SQL Server. As per the AO, both databases had identical database structures. Item-wise purchase details were recorded in the table named "TRANS_PURCHASE_DET", while the summary of purchase bills was recorded in "TRANS_PURCHASE_MAS". Similarly, item-wise sales details were recorded in the table named "TRANS_SALES_DET", and the summary of sales bills was recorded in the table named "TRANS_SALES_MAS". 7. On verification and comparison of the data available in the two databases, it was observed by the AO that the sales figures reflected in the table "TRANS_SALES_MAS" in the database connected to the billing server were lower than the sales figures reflected in the database connected to the SS Pos....
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....e u/s. 148 of the Act dated 30.03.2023, initiating reassessment proceedings for AY 2020-21 to 2023-24. In response to the notice issued u/s. 148 of the Act, the assessee filed the return of income on 08.06.2023 for the AY: 2020-21 to 2022-23 offering additional income in the form of G.P on suppressed sales. AY Suppressed Sales (in Rs. ) GP Ratio in percentage Addl. Income offered to tax (in Rs.) 2020-21 Rs. 6,63,66,758 18.76 Rs 1,20,23,501 2021-22 Rs. 6,89,90,818 23.80 1,63,71,985 2022-23 Rs. 3,71,66,199 21.30 78,47,338 TOTAL Rs. 17,25,23,775 3,62,42,824 11. During the course of the assessment proceedings, the Assessee submitted that, even assuming the existence of any suppressed turnover, only the gross profit element embedded therein could be brought to tax as income. In support of the said contention, the Assessee filed a sworn affidavit and placed reliance on binding judicial precedents, including the decision of the Hon'ble Gujarat High Court in CIT v. President Industries (258 ITR 654). The AO, however, rejected the Assessee's explanation and proceeded on the premise that only sales had been suppressed, whi....
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....passed on 29.03.2024 based on the aforesaid notice. Based on the aforesaid facts the following question of law on jurisdiction of reopening is raised for determination by the ld. CIT(A). 1. Whether the reassessment proceedings initiated by issuance of notice under section 148 dated 30.03.2023 by the Jurisdictional Assessing Officer, instead of the Faceless Assessing Officer as mandated under the e-Assessment of Income Escaping Assessment Scheme, 2022 notified u/s 151A, are without jurisdiction and therefore void ab initio? 18. The ld.AR submitted that on 29.03.2022, the CBDT notified the e- Assessment of Income Escaping Assessment Scheme, 2022 in exercise of powers u/s. 151A of the Act. Clause 3(b) of the said Scheme expressly provides that issuance of notice u/s. 148 of the Act shall be through automated allocation in a faceless manner, in accordance with the risk management strategy formulated by the Board. In the present case, the notice u/s. 148 was issued on 30.03.2023, well after the said Scheme had come into force. The said notice u/s. 148 dated 30.03.2023 was issued not by the Faceless Assessing Officer (FAO), but by the Jurisdictional Assessing Officer (JAO)- n....
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....or one aspect, proceedings post the issue of notice under Section 148 of Act being assessment, reassessment or recomputation under Section 147 of the Act and inapplicable the issuance of notice under Section 148 of the Act. The Scheme to is clearly the applicable for issuance of notice under Section 148 of the Act and accordingly, it is only the FAO which can issue notice under Section 148 of the Act and not the JAO. The argument advanced by respondent would render clause 3(b) contravened, of as the Scheme otiose and to be ignored or according to respondent, even though the Scheme specifically provides for issuance notice under Section 148 of the Act in a faceless manner, no notice of is required to be issued under Section 148 of the Act in a faceless manner. In such a situation, not only clause 3(b) but also the first two lines below clause 3(b) would be otiose, as it deals with the aspect of issuance of notice under Section 148 of the Act. Respondents, being an authority subordinate to the CBDT, CBDT, cannot argue that the Scheme framed by the and which has been laid before both House of Parliament is partly otiose and inapplicable. The argument advanced by respondent expressly m....
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....pra) and has decided the issue in favour of the Assessee. The Hon'ble Court categorically stated since all the impugned notices u/s. 148 of the Act were not issued in a faceless manner, the consequential proceedings founded upon it including the assessment orders stood vitiated. The relevant extract of the judgment has been reproduced below as under:- "27. We are in respectful agreement with the view taken by the Bombay High Court and are of the opinion that the aforesaid underlined expression used in clause 3(b) of the scheme dated 29.03.2022 does not preclude the mandatory faceless procedure for issuance of notice under Section 148 of the Act. Any other interpretation, in our humble view, will not only cause violence to the language used, but will also defeat the object for which a transparent faceless procedure' was introduced. Hence, we are unable to persuade ourselves to accept a different meaning than the literal meaning flowing and conveyed from the provisions." 21.3 It is submitted that a similar case had come up before the Hon'ble Telangana High Court in the case of Deepanjan Roy Vs. ADIT (International Taxation) & Anr in WP No. 23573/2024 and the Hon'ble High ....
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.... notices u/s. 148 of the Act ought to have been issued in a faceless manner, and extended the application of the scheme to notices issued by the Central Circle and International Taxation Ward of the Income Tax Department u/s. 148 of the Act. 21.6 It is submitted that the Hon'ble Income Tax Appellate Tribunal, Chennai Bench has adopted the view taken by the Jurisdictional High Court in the case of TVS Credit (supra) and has set aside assessment order undertaken pursuant to the issuance of notice u/s.148 of the Act by the JAO in the case of Kumaresan Bhagavathiperumal Pillai Vs. The ITO, International Taxation Ward in ITA No. 1357/Chny/2025. The relevant extract of the order has been reproduced as below: - "14. The Hon'ble jurisdictional High Court in the case of TVS Credit Services Ltd. v. DCIT in WP No. 22402 of 2024 & WMP No. 13336 of 2023 on similar issued held as under: ... ... 15. Therefore, respectfully following the decision of the Hon'ble jurisdictional High Court, we set aside the impugned notice u/s.148 of the Act and consequential orders thereof. However, in the light of the Para No. 8 of the judgment of the jurisdictional High Court, we also keep ope....
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....essee's software ecosystem, as demonstrated by both the assessment record and the functioning of the S.S. Retail software. Operationally, the sequence is: 1. Goods arrive (with or without invoice). 2. Goods are segregated and tagged. 3. Barcode is generated for showroom identification. 4. Goods are displayed and sold. 5. Only if there is a supplier invoice, the purchase entry is made in the purchase data sheet, which then flows into S.S. Retail accounts and then into Tally. Thus, barcoding precedes and is independent of accounting. It does not require an invoice, nor does it create a purchase record. 25. The ld.AR submitted that Barcoding in its business is designed exclusively for inventory identification and physical stock tracking within the showroom. It is an operational tool used by sales personnel to track movement of goods from store to racks, prevent pilferage, identify products during billing, and maintain uniformity in stock classification. Crucially, barcoding has nothing to do with recording purchases or passing any accounting entry. The Ld.AR submitted that a barcode generated in S.S. Retail contains no supplier name, ....
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.... f) No supplier statements or confirmations were obtained. g) No evidence shows that unbilled purchases were recorded in Tally. Thus, there is no evidentiary nexus between altered sale entries and any purchase entries. 28. The AO's conclusion that purchases corresponding to the alleged suppressed sales were recorded in the accounting system is factually incorrect, procedurally unjustified, and legally unsound. The AO has not produced the necessary primary evidence (invoices, vendor confirmations, bank payments or system audit trails). The S.S. Retail barcode/sales tables do not and cannot substitute for supplier invoices or purchase vouchers. 29. The entire assumption of the revenue rests on the belief that all purchases whether with invoice or without are automatically captured in the S.S. Retail software and thereby reflected in the accounting system. This premise is factually incorrect and legally unsustainable. Purchase Data Sheet captures only invoiced purchases. 30. As per the assessment order's own narration: a) A purchase data sheet is prepared only where supplier name, invoice date, invoice number, item code, design number, and purchase....
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.... false supplier/invoice entries) the books would show unexplained negative cash balances or other inconsistencies, yet no such anomalous accounting trail exists in the record (and AO has not produced any). Merley because the assessee could not and did not lawfully enter unbilled purchases in Tally, it is not open to the AO to assert that purchases corresponding to suppressed sales were entered in the accounting system. 36. The Ld.AR submitted that the statements from the inventory manager and accounts manager admit that unbilled purchases exist and that these are barcoded and routed to showrooms precisely the process the assessee has described. Those very statements are in the AO's own record and were not meaningfully contradicted. Further the AO did not produce supplier invoices or statements from suppliers that match the alleged purchases (there is no supplier ledger printed and proved). In search/reconstruction cases that matter, the Department must prove purchases by independent corroboration, it did not do so. 37. The Ld.AR urged that a fundamental factual and accounting flaw in the AO's assumption is the belief that unbilled cash purchases could have been, or were, ....
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....cited to demonstrate the presence of matching purchases in the books. Likewise, there is no evidence of any bank or cash outflow in the form of payments to suppliers for such alleged purchases. Even system-generated audit logs or internal software trails, if any existed, could have shown whether corresponding purchase entries had ever been recorded or subsequently deleted. The AO, however, has not produced a single such item. This complete evidentiary vacuum makes it clear that there is no nexus whatsoever between the altered sales entries detected in the S.S. Retail software and any purchase entries in the accounting system. In the absence of such nexus, the AO's inference that the entire suppressed turnover represents income is not only speculative but directly contrary to the settled principles of law governing assessments based on unaccounted turnover. 40. The ld.AR therefore submitted that no addition can be made by treating entire suppressed sales as income on the basis of S.S. Retail differences alone, unless the Department produces: (a) vendor invoices/supplier confirmations/supplier ledger entries matching those purchases; and (b) system audit-logs or ....
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....ation. It is a trite principle that sales or turnover represent only the gross receipts of a business and inherently comprise both the cost component (i.e., purchases and related expenses) and the profit component. It is only the profit element embedded in such turnover that can be subjected to tax as income. The suppression of sales, at its highest, indicates that a portion of turnover has escaped recording in the regular books. Such turnover, however, would necessarily have corresponding purchases, stock movements, and expenses, all forming part of the trading cycle. The Department has not brought any material on record to show that these sales were fictitious or that the goods sold were self-generated without incurring any cost. Therefore, taxing the entire suppressed turnover amounts to taxing both the capital and revenue components of a trading transaction, which is impermissible in law. 46. The principle has been consistently recognized by judicial authorities: • In CIT v. President Industries (2002) 258 ITR 654 (Guj.), the Hon'ble Gujarat High Court held that the entire sales cannot represent income of the assessee; only the profit element embedded in such sa....
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....nager, who categorically stated (pp. 6-7) that preparation of the purchase data sheet is possible only when supplier name, invoice number, invoice date, purchase rate, MRP and discount are available fields which cannot exist for unbilled purchases. His statement expressly confirms that only goods supported by supplier invoices are entered into the purchase data sheet, which is the very document that serves as the sole input for transferring purchase details into S.S. Retail and thereafter to Tally. Accordingly, goods procured without invoices are never capable of entering the accounting system. The statements of Managing Partner Shri. Venkateshwaran (pp. 09) and the affidavit filed by the assessee further reinforce that the only manipulation in the software related to post-sale reduction of sale values, and had no relation whatsoever to the purchase module or to accounting entries. Their depositions describe a highly specific, custombuilt screen enabling reduction of sale value after billing, by modifying only the "Trans_Sales_Det" and "Trans_Sales_Mas" tables. Crucially, both Shri D. Sounderrajjan, Godown Manager and Managing Partner Shri. Venkateshwaran confirm that (i) ....
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....ce or modify the recorded sales turnover in the live billing server. The entire discussion concerning Shri Vijay revolves around how sales figures reflected in SS Retail were altered, while the original sales data continued to remain intact in the SS Posting or backup server. There is no reference anywhere in the assessment order to Shri Vijay having any access to, or control over, the purchase modules of the software. 53. Further, the assessment order itself demonstrates that purchase entry is a completely independent process, carried out at the godown stage and strictly on the basis of supplier invoices. Mandatory details such as invoice number, date, supplier particulars, quantity, and rate are required to be entered before a purchase can be recorded in SS Retail and subsequently in Tally. Vijay is not stated to have participated in, supervised, or interfered with this process at any point of time. He had no role in invoice entry, godown receipt of goods, or physical verification of stock, nor did he have any responsibility in relation to procurement or dealings with suppliers. 53.1 Significantly, the AO has nowhere alleged either in the narration of facts or in the conclu....
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....oices. In the absence of invoice particulars, such purchases never enter SS Retail, never get posted into SS Posting, and never find their way into Tally. Therefore, the systems examined by the AO are structurally incapable of capturing unaccounted purchases, irrespective of whether such purchases exist in reality. 58. The Ld.AR thus submitted that in this backdrop, the fact that recorded purchase data matches across SS Retail, SS Posting and Tally only establishes the internal consistency and correctness of the purchases that are actually recorded in the books. It does not, and cannot, negate the existence of purchases outside the accounting ecosystem. The AO's conclusion conflates the absence of unaccounted purchases in the system with the absence of unaccounted purchases in fact, which is a clear fallacy. Accordingly, the intact and matching nature of purchase data across the examined systems does not lead to the inference that no unrecorded purchases exist; it merely demonstrates that all invoice-backed purchases have been consistently and correctly recorded. 59. The modus operandi explained by Vijay, and expressly accepted by the AO, clearly establishes that cash generat....
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.... excess stock, investments or any other assets were found or seized which could be correlated to the alleged suppressed turnover. Further, for all the assessment years under consideration, the additional income voluntarily offered by the Assessee was substantially in excess of the aggregate value of the undisclosed assets, if any, identified during the search. 65. The ld.AR submitted that the AO has read the assessee's affidavit wholly out of context, resulting in a distorted and inaccurate narration of facts. As evident from page 30 of the assessment order, the AO has cherry-picked isolated sentences, the AO has attempted to present the affidavit as if the assessee had admitted that all purchases, whether billed or unbilled were fully captured in the software, which is neither stated nor implied anywhere in the sworn statement. 66. In fact, the affidavit, when read as a whole, makes it abundantly clear that the assessee's disclosure related to suppressed sales achieved through post-billing rate reduction, while simultaneously explaining that corresponding purchases of a segment of goods were never recorded because they were cash-based and unbilled, and therefore incapable of....
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....nd not to treat the entire amount as income. Similarly, in Gurubachhan Singh J. Juneja (302 ITR 63), the same Court reaffirmed that additions must be confined to the reasonable margin of profit, and that gross receipts cannot be regarded as income in the absence of evidence showing that the assessee earned 100% profit on such transactions. These decisions encapsulate a uniform judicial doctrine that turnover is only a trading receipt and income arises only from the profit portion of that turnover. The ld.AR submitted that to assess the whole of the suppressed sales as income is to ignore the inherent cost of goods sold, leading to taxation of capital rather than income an approach repeatedly deprecated by courts. Therefore, in the present case as well, the only legally-permissible method is to estimate and tax the gross profit relatable to the alleged suppressed sales, and not the entire sales value itself. 69. The ld.AR further submitted that the Revenue cannot adopt two different standards for the same assessee, dealing in the same line of business, selling the same class of goods, under the same market conditions. For the disclosed segment of turnover, the AO as well as the R....
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....and immovable, are inventoried; and statements are recorded under oath. Consequently, what emerges from such a comprehensive investigation is a complete picture of the assessee's business and personal financial position. If, after such an extensive exercise, no undisclosed asset of corresponding magnitude is found, the presumption of large-scale suppression of income becomes inherently weak. 73. It is thus an established and logical proposition that income determined on the basis of a search must necessarily be linked to what has been actually unearthed such as undisclosed cash, stock-in-trade, investments, or other tangible assets representing income that has escaped assessment. In the absence of any such discovery, mere computational or notional differences in sales figures drawn from software data or other digital records cannot, by themselves, justify the conclusion that the entire turnover represents undisclosed income. 74. This principle flows from the very object of a search u/s. 132 of the Act, which is to unearth real and existing undisclosed assets rather than to reconstruct income hypothetically or infer profit where no physical evidence exists. The Hon'ble Courts ....
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....O has neither identified nor brought on record any asset, cash, or investment approximating the total alleged suppressed turnover, nor has he demonstrated any accumulation of unaccounted funds in the hands of the assessee. In the absence of such corroborative evidence, treating the entire suppressed sales as income is both illogical and inconsistent with the evidentiary findings of the search. 79. The Hon'ble Gujarat High Court in Navjivan Oil Mills v. CIT [(2001) 252 ITR 417 (Guj.)] has categorically held that the findings of a search must be read and interpreted as a whole and not selectively to suit the Revenue's case. When the search reveals only limited undisclosed assets, the Department cannot arbitrarily expand the scope of assessment by treating notional or unsubstantiated turnover as unexplained income. 80. Therefore, in the absence of any undisclosed asset of corresponding magnitude, the addition of the entire unaccounted turnover as income is devoid of factual foundation and is liable to be deleted. 81. In view of the above facts, circumstances, explanations, and judicial authorities, the ld.AR prayed to delete the addition made by the AO by treating the entire ....
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....tion that no undisclosed cash, excess stock-in-trade, bullion, jewellery or other assets commensurate with the alleged suppressed turnover of Rs. 17.25 crores were unearthed during the search. These admitted and incontrovertible facts constitute the bedrock of our adjudication. 87. We find that the AO proceeded on the premise that since purchases were found to be recorded in the system and only sales had been suppressed, the entire difference in sales represented undisclosed income liable to be taxed u/s. 69A of the Act. In our considered view, such an approach is fundamentally flawed, both on facts and in law. It is a settled principle of commercial accounting that sales, by themselves, do not constitute income. Sales are merely gross trading receipts which necessarily comprise: • the cost of goods sold, and • the profit margin embedded therein. 88. Unless it is demonstrated that the assessee earned a hundred per cent margin on such sales a proposition which is commercially absurd the entire turnover cannot be equated with income. 89. The Hon'ble Gujarat High Court in CIT v. President Industries (258 ITR 654) has categorically held that: ....
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....rchase values. Barcode generation precedes accounting and does not validate whether any purchase has been recorded in the books. Therefore, the presence of a barcode or the sale of a barcoded item cannot, by itself, establish that the corresponding purchase was recorded in the accounts. 95. The AO has failed to bring on record any supplier invoices, vendor confirmations, purchase ledger entries, bank or cash payment trails, or system audit logs evidencing the creation of purchase entries in respect of the alleged suppressed sales. In the absence of such primary evidence, the conclusion that all purchases stood recorded is nothing but conjecture and surmise. 96. The inference drawn by the AO that since purchase data matched across systems there were no unaccounted purchases is equally unsustainable. The matching merely establishes that invoice-backed purchases were correctly recorded; it does not rule out the existence of purchases outside the accounting ecosystem which, by design, cannot enter the system in the absence of invoices. The AO has thus conflated the absence of unaccounted purchases in the system with absence of unaccounted purchases in fact a classic non sequitur.....