ITAT Ahmedabad Deletes Tax Addition Based On Loose Sheets Found During Search, Cites Lack Of Evidence

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has upheld the deletion of tax additions made against a mouth freshener manufacturing company, finding that the additions were founded only on loose sheets that lacked basic particulars and were unsupported by any corroborative evidence to establish unaccounted transactions. 

The case arose from a search conducted on a third party, during which certain handwritten loose sheets were found in the possession of an employee of the taxpayer company, Zen Industries Pvt. Ltd.

Relying on these documents along with statements recorded during the search and post-search proceedings, the Assessing Officer treated the figures noted in the loose sheets as unaccounted sales. The officer rejected the company's books of account under Section 145(3) of the Income Tax Act and proceeded to make additions by estimating gross profit at 15 percent on the alleged unaccounted turnover.

The coram comprising Judicial Member Sanjay Garg and Accountant Member Annapurna Gupta observed that the entire addition was founded only on loose sheets which did not contain essential details such as the name of the assessee, name of the purchaser, description or quantity of goods, rate, delivery details, or payment trail, and were not found from the premises of the assessee.

The tribunal noted that no corroborative material, such as transport documents, delivery challans, confirmations, discrepancy in stock or production, or unrecorded cash receipts, was brought on record. It further noted that neither the assessee nor the alleged purchaser concerns admitted any unaccounted transactions. The employee from whose possession the documents were seized later stated that the entries related to his personal financial dealings, and in his own assessment the Assessing Officer accepted this position.

The bench stated that,

"Moreover, the Assessing Officer, in making the impugned addition has simply adopted the figures from the loose sheets as unaccounted sales without bringing on record any corroborative material such as transport documents, delivery challans, confirmations, unrecorded cash receipts, or any discrepancy in stock or production vis-à-vis the regular books. The regular books of account of the assessee are audited. Apart from the loose sheets, no specific defect or discrepancy in the maintenance of these books has been pointed out."

Upholding the order of the Commissioner of Income Tax (Appeals), the tribunal held that the seized loose sheets, in the facts of the present case, could not be treated as reliable evidence of unaccounted sales and that rejection of books of account on that basis alone was not sustainable.

The bench stated that,

"We, therefore, are in agreement with the reasoning and conclusion given by the Ld. CIT(A) that the seized loose sheets, in the facts of this case, do not constitute reliable evidence of unaccounted sales by the assessee. The rejection of books of account solely on that basis is not sustainable. The impugned addition made by estimating gross profit at 15 per cent on alleged unaccounted sales is therefore without legal and factual foundation."

Consequently, the additions made on an estimated basis were deleted, and the Revenue's appeals for assessment years 2020-21, 2021-22 and 2022-23 were dismissed.

For Appellant: Anil Kshatriya and Alay Anil Kashatriya, ARs

For Respondent: Sher Singh, CIT-DR & Kakoli Uttam Ghosh, Sr.DR