ITAT Chandigarh: Unaccounted Sales to Be Computed on Basis of Established Unaccounted Purchases — Telescoping Benefit Upheld

Background and Parties Involved

The Chandigarh Bench "A" of the Income Tax Appellate Tribunal, constituted by Vice President Shri Rajpal Yadav and Accountant Member Shri Krinwant Sahay, adjudicated a Revenue appeal alongside a cross-objection filed by the assessee, both arising out of proceedings for Assessment Year 2022-23 in the case of DCIT Vs Shri Aman Batra.

The assessee operated a trading business in artificial jewellery and cosmetic goods under the trade name M/s Mani Ram Balwant Rai & Sons. A search operation under Section 132 of the Income Tax Act, 1961 was executed at the assessee's business premises on 24 November 2022, during which digital records, sales slips, WhatsApp communications, a Document Modification Log (DML) and User Log Book (ULB) reports were seized and subsequently analysed by the Assessing Officer.

Grounds Raised by the Department and the Assessee

Revenue's Grounds of Appeal

The department challenged the relief granted by the CIT(A) across multiple issues:

1. Whether CIT(A) was justified in restricting the addition of Rs. 3,36,14,297/- under Section 28 of the Income Tax Act, 1961 to Rs. 1,20,90,623/- on account of gross profit on unaccounted sales, when the addition was based on scientific analysis of the software used by the assessee.
2. Whether CIT(A) was justified in estimating sale suppression at 26.75% by averaging the 14.71% and 38.77% figures worked out independently.
3. Whether CIT(A) was justified in enhancing the gross profit rate by only 5% without adequate basis, as against the 18% enhancement applied by the Assessing Officer on account of GST evasion on out-of-books sales.
4. Whether CIT(A) was justified in deleting the addition of Rs. 5,78,25,348/- under Section 69C of the Income Tax Act, 1961 on account of unaccounted purchases by granting telescoping benefit, despite the absence of any cash flow statement.
5. Whether CIT(A) was justified in deleting the addition of Rs. 1,29,00,000/- under Section 69/Section 69A of the Income Tax Act, 1961 by applying the peak credit theory, again without any cash flow submission.
6. Whether CIT(A) was justified in deleting the addition of Rs. 2,25,00,000/- under Section 69A of the Income Tax Act, 1961 on account of unaccounted money allegedly received from Shri Rajat Batra, when the Assessing Officer had identified the transaction as pertaining to sale of immovable property.

Assessee's Cross-Objection Grounds

The assessee cross-objected on several fronts, including:

• A jurisdictional challenge to the notice issued under Section 143(2) read with Section 144B of the Income Tax Act, 1961, alleging non-compliance with faceless assessment requirements (subsequently not pressed during hearing and dismissed accordingly).
• Challenge to the sustained addition of Rs. 1,20,90,623/- on account of gross profit on alleged unaccounted sales, raising grounds of unconfronted material, unreliability of DML report, coerced statements, inadmissible evidence and inapplicability of an enhanced gross profit rate.
• Support for CIT(A)'s deletion of the Rs. 5,78,25,348/- addition under Section 69C, with additional arguments on admissibility of WhatsApp evidence and telescoping entitlement.
• Challenge to the sustained addition of Rs. 5,00,000/- under Section 69 read with Section 115BBE of the Income Tax Act, 1961 on account of alleged on-money paid in a property transaction.
• Support for CIT(A)'s deletion of Rs. 1,29,00,000/- under Section 69/Section 69A, relying on peak credit theory and inadmissibility of WhatsApp-based evidence.
• Support for CIT(A)'s deletion of Rs. 2,25,00,000/- under Section 69A, on grounds of absence of corroborative evidence and non-satisfaction of statutory ingredients.

Issue 1: Quantification of Gross Profit on Unaccounted Sales

Positions Taken at Assessment and First Appellate Stages

The Assessing Officer anchored the entire quantification exercise on the DML report generated from the Logic ERP billing software, treating the document as conclusive proof of suppressed turnover. The CIT(A) partially moderated this approach by applying averages and a lower gross profit rate but continued to treat the DML report as a primary benchmark.

Tribunal's Findings on Existence of Unaccounted Sales