Facts of the Case

The assessee firm was assessed under section 143(3) following search proceedings. The Assessing Officer made several additions, including:

₹87,94,292 for alleged suppressed sales

₹2,66,73,629 for alleged unaccounted purchases

₹10,08,367 disallowance of diesel expenses

₹2,95,217 for alleged unexplained expenditure through the “Deshawar account”

Various ad hoc disallowances of business expenses

The CIT(A) granted substantial relief by deleting major additions but sustained certain minor disallowances. Both the assessee and the Revenue filed cross appeals before the Tribunal.

Issues Involved

  1. Whether suppressed sales can be inferred from discrepancies in seized material without proper identification and correlation.
  2. Whether purchases recorded in computerized books but absent in manual registers can be treated as unaccounted.
  3. Whether diesel expenses and other business expenses can be disallowed without concrete evidence.
  4. Whether cash transactions through internal accounts constitute unexplained expenditure.

Petitioner’s Arguments (Assessee)

The assessee contended that the Assessing Officer’s trading account was prepared from unidentified seized material and did not reconcile with audited books, which reflected higher sales, purchases, and profits.

It was argued that purchases allegedly treated as unaccounted were duly recorded in computerized accounts, backups of which had been seized by the Department itself. Differences arose due to incomplete manual registers maintained by employees for convenience.

Regarding diesel expenses and Deshawar account transactions, the assessee submitted that these represented genuine business expenditures incurred in the normal course of operations.

Respondent’s Arguments (Revenue)

The Revenue argued that discrepancies detected from seized documents justified additions for suppressed sales and unaccounted purchases. It also contended that lack of log books and external vouchers justified disallowance of diesel and other expenses.

Court Order / Findings (ITAT Allahabad)

The Tribunal observed that the Assessing Officer had prepared a trading account based on unspecified seized material without identifying its source, making verification impossible.

Further, the assessee’s audited books showed higher sales and profits than those computed by the Assessing Officer. The Tribunal also noted that figures for different periods had been compared, rendering the analysis flawed.

Accordingly, deletion of the major addition of ₹86,94,292 by the CIT(A) was upheld, while a nominal addition of ₹1,00,000 was sustained due to unexplained discrepancies in a branch’s records.

Important Clarification

The Tribunal emphasized that additions based on search material must be supported by clearly identified evidence and proper correlation with books of account. Mechanical reliance on incomplete records or assumptions cannot justify large additions when audited accounts and quantitative details support the assessee’s claims.

Link to download the order -   https://www.mytaxexpert.co.in/uploads/1771063329_KESARWANICO.ALLAHABADVS.JT.CITALLAHABAD.pdf

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