Chennai ITAT: Alleged Bogus Purchase Additions Must Be Backed by Independent Evidence — Seized Tally Data Alone Is Insufficient

Background and Overview

The Chennai bench of the Income Tax Appellate Tribunal delivered a comprehensive ruling in the matter of DCIT Vs Salem Mines and Aggregates, addressing a critical question that frequently arises in post-search assessment proceedings: whether additions towards alleged bogus purchases and profit suppression can be sustained solely on the basis of incomplete electronic data recovered during a search operation under Section 132 of the Income-tax Act, 1961, without any independent corroborative material.

The Tribunal, after an elaborate examination of the facts, evidence, and applicable legal principles, held that seized Tally data is merely a starting point for further investigation and cannot, standing alone, constitute conclusive proof of income suppression when the assessee offers a credible reconciliation backed by books of account and documentary evidence. The ruling also reinforces the well-settled principle that additions under the Income-tax Act must rest on cogent, corroborative material — not on presumptions, theoretical possibilities, or conjectures.

Factual Background

The Assessee and Its Business

Salem Mines and Aggregates is a partnership firm engaged in the manufacturing and sale of aggregates and sand. The firm is involved in quarrying operations and supplies blue metal aggregates to customers under contractual arrangements.

Search and Seizure Operation

A search and seizure operation under Section 132 of the Income-tax Act, 1961 was conducted on 02.03.2022 at the premises of the assessee, its group entities, and its partner, Shri Subramani Perumal. During the course of the search, the Authorised Officer seized various books of account, documents, loose sheets, and electronic devices containing incomplete data maintained in Tally Accounting Software (referred to throughout as the "seized Tally data").

Initial Profit Suppression Allegation

On examining the seized Tally data, the Authorised Officer noticed a discrepancy between the profits reflected in the seized data and the income disclosed by the assessee in its filed returns of income for Assessment Years 2018-19 to 2021-22. Two specific anomalies were identified:

  1. Diesel stock misclassification: Purchases of diesel issued for vehicle consumption had been erroneously recorded as inward stock entries, resulting in an artificially inflated closing stock of diesel.
  2. Unposted diesel purchases: Diesel purchases recorded in the accounts of M/s. Nayara Energy Limited, M/s. Essar Oil Limited, and M/s. Indian Oil Corporation Limited had not been claimed as expenditure in the seized Tally data for AY 2019-20 and AY 2020-21.

After making adjustments for these items, the Authorised Officer computed an alleged suppressed profit of Rs. 132,95,51,661/- across AY 2018-19 to AY 2021-22.

Statement of the Partner

During the search, the statement of Shri Subramani Perumal was recorded under Section 132(4) of the Act. In response to Question No. 42, he acknowledged that both accounted and unaccounted purchases and sales had been made. However, he did not confirm the quantum of alleged suppression computed by the search team and sought time to verify the books and supporting documents before offering any figure.

Post-Search Reconciliation by the Assessee

Detailed Reconciliation Furnished

During post-search proceedings before the Joint Director of Income Tax (Investigation) (OSD), Unit-2(4), Chennai (the "JDIT(Inv)"), the assessee, vide its reply dated 07.04.2022, submitted a comprehensive reconciliation of the profits reflected in the seized Tally data versus the profits disclosed in the filed returns of income.

The assessee's core explanation was that the seized Tally data represented an incomplete set of books in which several categories of expenditure had not been transferred to the Profit & Loss Account. As a result, the profits appearing in the seized data were artificially inflated and did not reflect the true financial position of the firm.

JDIT(Inv) Acceptance of Reconciliation

The JDIT(Inv), upon verification of the supporting books of account and documentary evidence furnished by the assessee, accepted the genuineness of the following categories of expenditure included in the reconciliation:

  • Diesel Purchases
  • Spare Purchases
  • Explosive Purchases
  • Sales Non-Tax (SM Roads)
  • Consultant Expenses
  • Cash Expenses (including Salary and Bonus)
  • Insurance Expenses

Remaining Issues Left Open

Three issues were left open for examination by the Assessing Officer (AO) during assessment proceedings: