ITAT Chandigarh Curtails Survey-Based Salary Addition: Extrapolation Beyond Documentary Evidence Held Impermissible

Introduction

The Chandigarh Bench of the Income Tax Appellate Tribunal delivered a significant verdict in the matter of Auto Vogue Private Limited Vs DCIT/ACIT, concerning Assessment Year 2018-19. The tribunal partially allowed the assessee's appeal and significantly reduced an addition that had been made by extrapolating data from a solitary document discovered during survey operations. This ruling reinforces the principle that survey-based additions must be strictly confined to the incriminating material actually discovered, without resorting to assumptions or projections.

Factual Matrix of the Case

Background of Survey Operations

The assessee company underwent survey proceedings under Section 133A of the Income Tax Act on 22nd August 2017. During these operations, revenue authorities recovered an Excel spreadsheet from the cashier's workstation. This document contained details of 35 individuals who were allegedly employed by the company under irregular arrangements.

Discovery of Incriminating Document

The spreadsheet specifically reflected salary disbursements amounting to Rs. 2,54,115/- for the calendar month of July 2017. These wage payments were allegedly made to employees whose details were not reflected in the official payroll records of the assessee-company. The document formed the foundation for the subsequent addition made by the revenue authorities.

Admissions During Survey

Both the cashier and the Human Resources Manager, when questioned during the survey proceedings, acknowledged that the enumerated personnel were fictitious employees. They further admitted that the corresponding salary payments had not been entered into the company's regular accounting system. These statements were recorded during the survey and subsequently formed part of the assessment records.

Assessment Proceedings

Approach Adopted by the Assessing Officer

Based on the discovered spreadsheet and the recorded statements, the Assessing Officer issued a show-cause notice to the assessee during the assessment proceedings. The assessee contested the proposed addition and argued against any extrapolation of the single-month data.

However, the Assessing Officer rejected the assessee's submissions. Relying on the statements recorded during the survey, the AO proceeded on the assumption that similar irregular salary disbursements would have been made consistently throughout the entire financial year.

Methodology of Addition

By multiplying the amount found in the document (Rs. 2,54,115/-) by twelve months, the Assessing Officer computed an aggregate addition of Rs. 28,09,380/-. This extrapolated figure was added to the assessee's income and the assessment was finalized under Section 143(3) of the Income Tax Act on 29th September 2021.

First Appellate Proceedings

Arguments Advanced by the Assessee

Before the Commissioner of Income Tax (Appeals)-3, Gurgaon, the assessee raised several substantive objections to the addition:

• The Excel sheet discovered contained payment information for merely one month (July 2017)
• No additional evidence or documentation was uncovered to establish that similar payments continued throughout the remaining eleven months
• The revenue authorities had not discovered any corroborative material substantiating the alleged cash salary disbursements for other months
• The addition was premised entirely on conjecture and presumption rather than concrete evidence

Decision of CIT(A)

Despite these contentions, the CIT(A) upheld the addition confirmed by the Assessing Officer. The order dated 29th January 2025 sustained the extrapolated addition in its entirety. Aggrieved by this confirmation, the assessee preferred a further appeal before the Income Tax Appellate Tribunal.