ITAT Delhi Clarifies Law on Post-Search Assessments, Estimated Bogus Purchases & Evidence for Commission Disallowance

1. Background and Parties Involved

The Income Tax Appellate Tribunal, Delhi Bench, dealt with a set of connected appeals involving two assessees: Pilot Industries Limited and Ardee Industries Limited, along with cross-appeals by the Revenue. The central issues arose from a search and seizure action under section 132 in the case of Pilot Industries Limited, which is engaged in manufacturing lead alloys, lead oxide and lead acid batteries.

The appeals spanned multiple assessment years:

  • For Pilot Industries Limited:
    • Assessee’s appeals for AYs 2020-21 to 2024-25
    • Revenue’s appeals for AYs 2018-19 and 2019-20
  • For Ardee Industries Limited:
    • Assessee’s appeal for AY 2023-24

Since the factual matrix and legal issues overlapped, the Tribunal heard all matters together and issued a common order pronounced on 8 May 2026.

The key categories of additions or disallowances made by the Assessing Officer (AO) included:

  • Alleged bogus/non-genuine purchases (applied at 3.27% of certain purchases)
  • Warranty expenditure under Section 37
  • Commission expenses
  • Unaccounted sales under Section 28
  • Alleged inflated expenses
  • Stock differences treated as undisclosed business profit or unexplained investment
  • Unexplained money under Section 69A
  • Issues relating to post-search jurisdiction, particularly whether assessments for AYs preceding the search year could validly be framed under Section 143(3) in light of Section 148, Explanation 2 to Section 148 and Section 148B.

The Commissioner of Income Tax (Appeals) [CIT(A)] had deleted a substantial part of the additions while sustaining some items. Both sides were aggrieved to varying degrees and approached the ITAT.

2. Alleged Bogus Purchases @ 3.27% – ITAT Upholds Deletion

2.1 AO’s Basis for Addition

In several years, the AO concluded that Pilot Industries Limited had availed accommodation entries in the form of non-genuine purchases. Rather than disallowing specific invoices, the AO adopted an ad hoc disallowance rate of 3.27% of certain purchases.

This rate was derived not from material found in the assessee’s own case, but from findings in the search case of another entity, Bindal Smelting Private Limited, also engaged in the lead business. In Bindal Smelting’s case, a price differential of 3.27% was alleged between invoiced and non-invoiced sales, and the AO extrapolated this percentage to Pilot Industries merely on industry similarity.

2.2 Assessee’s Evidence and Arguments

Pilot Industries Limited argued that:

  • All disputed purchases were properly recorded in audited books of account.
  • No rejection of books had been made by the AO.
  • Payments were routed through banking channels.
  • Extensive supporting evidence was filed, including:
    • Confirmations from suppliers
    • Ledger accounts of the parties in the assessee’s books
    • Confirmed ledgers of the assessee in suppliers’ books
    • Tax invoices with transporter receipts, e-way bills, weighing slips
    • Goods inward registers
    • GST registrations and Udyam Certificates of suppliers
    • Dharam Kanta (weighbridge) slips
    • Photographs of trucks at the assessee’s factory premises
  • The AO’s doubt that no freight charges were booked was explained by stating that purchases were made on FOR/CIF basis, meaning the freight was embedded in the purchase price and not debited separately.

The assessee also submitted that:

  • There was no incriminating material from the search directly relating to its purchases.
  • The AO’s action was based purely on presumptions and comparisons with Bindal Smelting’s case without any corroborating evidence.
  • Reliance was placed on judicial precedents such as:
    • Umacharan Shaw & Bros. Vs CIT, 37 ITR 271 – suspicion, however strong, cannot replace proof.
    • Dhakeshwari Cotton Mills Ltd. Vs CIT, 26 ITR 775 (SC) – additions cannot rest merely on conjectures.
    • PCIT Vs Forum Sales Private Limited, ITA No. 862/2019 (Delhi High Court) – estimated additions without rejecting books are impermissible.
    • CIT Vs Kohinoor Foods Ltd. [2015] 61 taxmann.com 84 (Delhi High Court) – ad hoc additions and rejection of regularly maintained audited books without concrete basis are not sustainable.

2.3 CIT(A)’s Findings

CIT(A) examined the evidence in detail and recorded that:

  • Purchases were recorded in books, and payments were made via banking channels.
  • The AO had accepted the books of account; there was no finding of defects or rejection under Section 145.
  • Supporting documents submitted by the assessee were comprehensive and directly supported the genuineness of the purchases.
  • The AO merely presumed that, since Bindal Smelting had issues, Pilot Industries (being in a similar line of business) would also be indulging in similar practices.
  • Bindal Smelting Private Limited is an independent entity, and its findings cannot be transplanted wholesale into another assessee’s case, especially where a search has also been conducted in that other case and no corresponding incriminating material is brought.
  • The 3.27% rate had no rational or statutory basis in the assessee’s own case and amounted to an ad hoc disallowance.

CIT(A) therefore deleted the bogus purchase additions made on this estimated basis.

2.4 ITAT’s Ruling on Bogus Purchases

The Tribunal agreed with the CIT(A) and emphasized:

  • The AO’s only concrete objection was that no separate freight charges were visible in the books; the assessee, however, proved that freight was included in purchase costs (CIF/FOR terms).
  • There was no finding that Pilot Industries was actually following the same modus operandi as Bindal Smelting.
  • The factual context of Bindal Smelting was distinct, and importing a gross profit/price-difference rate from that case into the present case, without supporting material, was unsustainable.
  • Since the books of account were not rejected, and sales corresponding to the purchases were accepted, an estimated disallowance merely on suspicion could not stand.

Accordingly, the Tribunal dismissed the Revenue’s grounds on bogus purchases for AY 2018-19, and applied the same reasoning mutatis mutandis to AYs 2019-20, 2020-21 and 2021-22, thereby upholding deletion of similar additions in those years as well.

3. Warranty Expenses – Consistency and Commercial Necessity

3.1 Nature of Warranty Claims

Pilot Industries Limited manufactures batteries and offers warranty to its customers. The business model operates as follows: