Facts of the Case

A search and seizure operation was conducted at the premises of the assessee firm, M/s Kesarwani & Co. During assessment proceedings under Section 143(3), the Assessing Officer (AO) made multiple additions based on alleged discrepancies found in seized material and registers, including:

  • Suppressed sales of ₹87,94,292
  • Unaccounted purchases of ₹2,66,73,629
  • Diesel expenses disallowance
  • Unexplained expenditure through a “Deshawar” account
  • Various ad-hoc disallowances of business expenses

The Commissioner of Income Tax (Appeals) [CIT(A)] substantially reduced or deleted these additions. Both the Revenue and the assessee filed cross appeals before the Income Tax Appellate Tribunal (ITAT), Allahabad.

Issues Involved

  1. Whether alleged suppressed sales could be added when the assessee’s audited books showed higher sales and profit.
  2. Whether purchases treated as unaccounted could be added despite being recorded in computerized accounts and supported by quantitative details.
  3. Whether diesel expenses and other business expenses could be disallowed in absence of complete supporting documents.
  4. Whether withdrawals through the “Deshawar account” constituted unexplained expenditure.
  5. Whether partial rejection of books under Section 145(3) was justified.

Petitioner’s (Assessee’s) Arguments

  • The AO’s trading account was based on unidentified or unreliable seized material.
  • Audited books reflected higher sales, purchases, and profit than those computed by the AO.
  • The AO compared figures for unequal periods, leading to artificial discrepancies.
  • Purchases alleged as unaccounted were duly recorded in computerized books, whose backup was seized during search.
  • Mismatch in invoices was due to different types of invoices (tax vs. excise) for the same transactions.
  • Diesel expenses were genuine business expenses for vehicles used in operations.
  • The Deshawar account represented a long-standing business practice for operational cash management, not undisclosed income.
  • Ad-hoc disallowances were arbitrary and unsupported by evidence.

Respondent’s (Revenue’s) Arguments

  • Additions were based on material seized during search operations.
  • Discrepancies between registers, invoices, and books indicated suppression of sales and bogus purchases.
  • Absence of logbooks and proper vouchers justified disallowance of diesel expenses.
  • The Deshawar account reflected unexplained withdrawals and potential diversion of funds.
  • Estimated disallowances were reasonable given incomplete documentation.

 Court’s Order / Findings (ITAT Allahabad)

1. Suppressed Sales — Major Addition Deleted

  • The AO failed to identify the specific seized material forming the basis of computation.
  • Audited books showed higher sales, purchases, and profit than the AO’s figures.
  • Comparison of different accounting periods rendered the calculation unreliable.
  • Therefore, the allegation of suppressed sales was not substantiated.

However, due to unexplained discrepancies in a branch’s accounts, the CIT(A)’s limited addition of ₹1,00,000 after invoking Section 145(3) was upheld.

 Important Clarification by the Tribunal

  • Additions in search assessments must be supported by identifiable and reliable evidence.
  • Audited books, computerized records, quantitative details, and banking transactions carry significant evidentiary value.
  • Manual registers alone cannot override comprehensive accounting records.
  • Rejection of books under Section 145(3) must be limited to demonstrable defects.
  • Ad-hoc additions cannot be made merely on suspicion or conjecture.

 Final Outcome

  • Revenue’s appeals largely dismissed.
  • Assessee obtained substantial relief.
  • Only nominal additions (such as ₹1,00,000 for discrepancies and limited expense disallowances) were sustained.
  • Major additions for suppressed sales, unaccounted purchases, and unexplained expenditure were deleted.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1771063659_AgriculturalTechnologyManagementAgency922026115845684.pdf

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