NARAYANA MINES,TAMBARAM vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1(4), CHENNAI, CHENNAI

Since the issues involved in all these appeals are identical and arise out of the same search proceedings, these appeals were heard together. Therefore, for the sake of convenience and brevity, they are being disposed of by this consolidated order.

The brief facts of the case as emanating from the records are that the assessee is a partnership firm engaged in the business of mining and operation of a blue metal quarry. The firm consists of two partners, namely, Shri K.Narendar and Shri P. Subramani. A search and seizure action u/s.132 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) was carried out in the business premises of the assessee on 02.03.2022. During the course of search, inter alia, certain books/data maintained in Tally software were found and seized. According to the assessee, the said Tally data represented incomplete books of account maintained by the assessee.

During the course of search, a statement of Shri P. Subramani, partner of the assessee firm, was also recorded u/s.132(4) of the Act. In the said statement, he stated, inter alia, that the assessee had effected both accounted and unaccounted purchases and sales. Relying upon the seized Tally data as well as the statement recorded u/s.132(4) of the Act, the AO proceeded on the premise that the aforesaid amounts represented sales which had not been duly accounted for by the assessee.

For A.Y. 2020-21, the assessee had originally filed its return of income u/s.139(1) of the Act on 10.01.2021 declaring a total income of Rs.17,93,350/-. Subsequent to the search, notice u/s.148 of the Act was issued on 20.03.2024. :-4-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. In response thereto, the assessee filed its return of income on 19.06.2024 declaring a total income of Rs.1,19,57,240/-. Thus, in the return filed pursuant to the notice issued u/s.148 of the Act, the assessee offered additional income of Rs.1,01,63,890/-. The said additional income was arrived at by estimating the profit element at 25% of the unaccounted sales of Rs.4,06,55,539/- identified on the basis of the seized material.

For A.Y. 2021-22, the assessee originally filed its return of income on 08.11.2022 declaring a total income of Rs.5,02,480/-. The return was subsequently revised by declaring a total income of Rs.1,52,91,970/-. In the revised return, the assessee offered additional income of Rs.1,47,89,491/-, being the estimated profit attributable to the unaccounted sales of Rs.7,50,49,959/-. The profit so offered worked out to approximately 19.70% of the said sales.

For A.Y. 2022-23, the assessee filed its return of income u/s.139(1) of the Act on 07.11.2022 declaring a total income of Rs.18,99,310/-. In the Profit and Loss Account forming part of the return of income, the assessee disclosed total sales/turnover of Rs.8,23,38,060/-. The case of the assessee in respect of this assessment year was materially different from the preceding two assessment years. According to the assessee, the cash sales of Rs.5,91,57,963/- reflected in the seized Tally data already formed part of the total turnover of Rs.8,23,38,060/- disclosed in the Profit and Loss Account. It was, therefore, contended that the said amount could not once again be brought to tax separately as undisclosed sales.

In the course of assessment proceedings, the AO called upon the assessee to explain as to why the entire amount of sales identified from the seized Tally data as per the above extract should not be treated as undisclosed business income for the respective assessment years. In response, the :-5-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. assessee submitted that the entire sales/turnover could not, in law or on facts, constitute income of the business. It was explained that extraction, production and sale of blue metal necessarily involved substantial expenditure and that the sales in question could have been effected only after incurring corresponding expenditure.

The assessee explained that various expenses were necessarily incurred towards diesel, drilling and blasting, labour, purchase of explosives, transportation, machinery hire, loading and unloading and other quarry-related operations. It was further submitted that the assessee did not own transport vehicles and, consequently, substantial expenditure had to be incurred towards freight and hiring of vehicles and machinery. It was also explained that, during the rainy season, considerable expenditure was incurred for dewatering the quarry and removal of accumulated water so as to enable continuation of quarrying operations. The assessee, therefore, contended that, even assuming that the sales identified from the seized Tally data were not fully recorded in the regular books, only the profit element embedded in such sales could be brought to tax and not the gross sale proceeds themselves.

Insofar as AY(s) 2020-21 and 2021-22 were concerned, the assessee submitted that complete and proper books of account had not been maintained relating to the unaccounted sales and, therefore, the income attributable to the sales identified during the search had been estimated and voluntarily offered to tax. The assessee had accordingly offered profit at 25% for A.Y. 2020-21 and approximately 19.70% for A.Y. 2021-22. It was contended that the aforesaid rates were fair and reasonable having regard to the nature of the business and the normal gross profit margin of approximately 17% to 20% stated to prevail in the assessee’s line of business. It was, therefore, the case of the assessee that the additional income already offered represented a reasonable estimation of the profit embedded in the alleged unaccounted turnover and that there was no :-6-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. justification for treating the balance amount of the turnover as further taxable income.

With regard to A.Y. 2022-23, the assessee specifically contended that the cash sales of Rs.5,91,57,963/- appearing in the seized Tally data stood included in the total turnover of Rs.8,23,38,060/- already disclosed in the Profit and Loss Account. According to the assessee, therefore, the question of estimating any separate profit, much less bringing the entire sum of Rs.5,91,57,963/- to tax once again, did not arise.

The AO was, however, not satisfied with the explanation furnished by the assessee. According to the AO, the assessee had failed to substantiate the expenditure claimed to have been incurred in earning the alleged unaccounted sales by producing supporting documentary evidence such as invoices, vouchers and other contemporaneous records. The AO further observed that the gross profit rates adopted by the assessee for estimating the income attributable to the alleged unaccounted sales were not supported by verifiable material. On this premise, the AO rejected the assessee’s contention that only the profit element embedded in the alleged unaccounted turnover was liable to be brought to tax.

Insofar as A.Y. 2022-23 was concerned, the AO further held that the assessee had failed to conclusively establish, by producing supporting evidence, that the cash sales of Rs.5,91,57,963/- reflected in the seized Tally data were already embedded in the total turnover of Rs.8,23,38,060/- disclosed in the Profit and Loss Account.

The AO accordingly proceeded to treat the entire amount of the unaccounted sales as business income of the assessee. However, for AY(s) 2020-21 and 2021-22, credit was allowed for the additional income already

Thus, the assessments of the assessee firm for the assessment years under consideration were completed by the AO determining the total income of the respective assessment years as under:

Aggrieved by the aforesaid assessment orders, wherein the AO made additions on account of the unaccounted sales/turnover, the assessee carried the matter in appeal before the Ld.CIT(A).

The Ld.CIT(A), vide the impugned appellate orders, all dated 15.04.2026, partly allowed the appeals preferred by the assessee for the AY(s) 2020-21 and 2021-22, whereas, for the A.Y.2022-23, the Ld.CIT(A) allowed the appeal of the assessee in full by deleting the addition in its entirety.

The assessee, before the Ld.CIT(A), assailed the additions made by the AO towards alleged unaccounted sales for AY(s) 2020-21, 2021-22 and 2022- 23. :-8-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. 21. For AY(s) 2020-21 and 2021-22, the assessee submitted before the Ld.CIT(A) that the AO had erred in treating the entire amount of unaccounted sales as income, without appreciating the settled principle that sales represent gross receipts/turnover and not income. According to the assessee, only the profit element embedded in such unaccounted sales could be brought to tax, since the corresponding cost of purchases, production and other business expenditure necessarily had to be incurred for earning such sales.

It was contended before the Ld.CIT(A) that there was no finding either in the course of search or in the assessment proceedings that the investments or expenditure relating to the unaccounted sales had been incurred from unexplained sources. In the absence of any such finding, the entire sale proceeds could not be regarded as income. The assessee emphasized that income-tax is chargeable on real income, namely, the surplus remaining after meeting the expenditure incurred for earning the receipts, and not upon gross turnover. In support of this proposition, assessee relied upon various judicial pronouncements before the Ld.CIT(A) notably CIT v. President Industries [2002] 258 ITR 654 (Guj), Man Mohan Sadani v. CIT [2008] 304 ITR 52 (MP), CIT v. Balchand Ajit Kumar [2003] 263 ITR 610 (MP), CIT v. Sharda Real Estate (P.) Ltd. [2013] 8 TMI 1089 (MP) and CIT v. Bokaro Steel Ltd. [1988] 170 ITR 522 (Pat.) and accordingly submitted before the Ld.CIT(A) that the entire suppressed/unaccounted sales cannot be assessed as income and that only the profit component embedded therein is liable to tax.

The assessee also relied upon on the decision of the Coordinate Bench of this Tribunal in in DCIT v. Radiance Realty Developers India Ltd., ITA Nos. 2978 to 2984/Chny/2024, wherein, according to the assessee, this Tribunal held that the mere existence of unaccounted sales/receipts would not justify treating the entire receipts as undisclosed income, particularly when there was no admission that the entire receipts constituted profit and no corresponding

It was further submitted before the Ld.CIT(A) that the seized Tally data itself was incomplete and did not represent the entirety of the assessee's business transactions. The assessee was engaged in mining operations involving extraction of boulders through drilling and blasting and necessarily incurred substantial expenditure towards diesel, explosives, drilling, blasting labour, transportation, loading and unloading, freight and other incidental expenses. Therefore, the unaccounted sales could not be viewed independently of the corresponding expenditure necessarily incurred for generating such turnover.

The assessee contended that, in the absence of complete books of account relating to the unaccounted transactions, the proper course was to estimate the profit embedded in the unaccounted sales. It was pointed out that the assessee had already voluntarily offered additional income of Rs.1,01,63,890/- for A.Y.2020-21, representing 25% of the unaccounted sales, and Rs.1,47,89,491/- for A.Y.2021-22, representing 19.70% of the unaccounted sales. According to the assessee, these percentages constituted a reasonable estimate of the profit arising from such transactions.

The assessee further submitted that the AO had not brought any comparable case, industry data or other material on record to demonstrate that the profit percentages adopted by the assessee were unreasonable or that the assessee's line of business ordinarily yielded substantially higher margins. Consequently, the further additions of Rs.3,04,91,654/- for A.Y.2020-21 and :-10-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. Rs.6,02,60,469/- for A.Y.2021-22, representing the balance unaccounted sales, were stated to be unjustified.

The assessee also contended that no unexplained investment corresponding to the alleged unaccounted sales had been detected during the course of search. According to the assessee, neither the search party nor the AO had identified any unexplained asset, investment or expenditure corresponding to the entire amount of suppressed sales. In the absence of such material, treating the entire turnover as income was stated to be contrary to the principle laid down in President Industries (supra). The assessee accordingly submitted that the Revenue could, at the highest, assess the real income or profit embedded in the suppressed turnover and not the gross sale proceeds themselves.

The assessee also demonstrated before the Ld.CIT(A) that the assessment of the entire unaccounted sales resulted in commercially unrealistic profit ratios. The total turnover, after taking into account both disclosed and unaccounted sales, worked out to Rs.7,01,87,020/- for A.Y.2020-21 and Rs.9,45,47,777/- for A.Y.2021-22. After including the additions made by the AO, the business income stood determined at Rs.4,28,92,395/- and Rs.7,65,16,168/-, respectively, resulting in net profit ratios of 61.11% and 80.92%. It was submitted that such profit margins were commercially improbable having regard to the nature of the assessee's mining business. In contrast, for the immediately preceding A.Y.2019-20, the assessee had disclosed turnover of Rs.2,38,22,754/- and net profit of Rs.20,40,448/-, giving a net profit rate of 8.57%, and the said results had been accepted. According to the assessee, the resultant profit rates of 61.11% and 80.92% clearly demonstrated the distortion caused by treating gross unaccounted sales as income.

Accordingly, it was pleaded before the Ld.CIT(A) that the additions of Rs.3,04,91,654/- for A.Y.2020-21 and Rs.6,02,60,469/- for A.Y.2021-22 be deleted, since reasonable profit on the unaccounted turnover had already been offered by the assessee in the respective returns.

With regard to A.Y.2022-23, the assessee raised a distinct factual contention. It was submitted that only one set of Tally data was found and seized during the course of search and the said Tally data contained both accounted as well as unaccounted/cash sales of the assessee. Referring to page 6 of the assessment order, the assessee submitted before the Ld.CIT(A) that the AO himself had reproduced the Sales Account extracted from the seized Tally data for the period 01.04.2021 to 28.02.2022, according to which the aggregate sales, comprising both accounted and cash sales, amounted to Rs.7,94,06,416/-. The cash sales of Rs.5,91,57,963/-, as quantified by the search team, formed part of and were already included in the aforesaid aggregate turnover of Rs.7,94,06,416/-.

It was further contended before the Ld.CIT(A) that the sales for the month of March 2022 amounted to Rs.29,31,643/-, which had not been disputed by the AO. Thus, according to the assessee, the total turnover for the entire financial year 2021-22 worked out to Rs.8,23,38,060/-, comprising the turnover

It was therefore contended that the cash sales of Rs.5,91,57,963/- stood fully subsumed in the total turnover of Rs.8,23,38,060/- already disclosed by the assessee and, consequently, the separate addition of Rs.5,91,57,963/- made by the AO amounted to taxing the very same sales twice.

The assessee further pointed out that the AO's approach effectively resulted in determination of total sales at Rs.14,14,96,023/- [Rs.8,23,38,060/- + Rs.5,91,57,963/-], although neither the search proceedings nor the assessment proceedings yielded any material demonstrating sales of such magnitude.

It was also contended that, when the seized Tally data itself showed aggregate sales of only Rs.7,94,06,416/- for the first eleven months ending 28.02.2022, acceptance of the AO's computation would necessarily imply sales of approximately Rs.6.21 crore in March 2022 alone, whereas the actual sales for March 2022 were only Rs.29,31,643/-. According to the assessee, there was no seized material or other evidence to support such an inference and the same was contrary to the seized Tally data as well as normal commercial probabilities. The assessee, therefore, submitted that there was no material to establish that the cash sales of Rs.5,91,57,963/- represented sales over and above the turnover of Rs.8,23,38,060/- already disclosed in the accounts. Accordingly, the separate addition of Rs.5,91,57,963/- for A.Y.2022-23 was pleaded to be a duplication of turnover already accounted for and offered to tax and was, therefore, liable to be deleted.

The Ld.CIT(A) disposed of the appeals for AY(s) 2020-21 and 2021-22 by a common order, whereas the appeal for A.Y. 2022-23 came to be disposed

The Ld.CIT(A) found merit in the contention of the assessee that, though the seized material evidenced sales outside the regular books of account, it did not necessarily contain or record the entirety of the corresponding expenditure incurred for earning such sales. Considering the nature, scale and volume of the business carried on by the assessee, the Ld.CIT(A) observed that it would be commercially unrealistic to presume that such substantial turnover could have been achieved without incurring any corresponding expenditure.

The Ld.CIT(A) further observed that the AO had not effectively rebutted the claim of the assessee regarding the expenditure attributable to the unaccounted business operations. Though the AO had observed, particularly for A.Y. 2021-22, that the expenditure claimed by the assessee with reference to the seized material was not supported by adequate documentary evidence, the Ld.CIT(A) recorded a specific finding that the AO had not controverted the claim of the assessee by reference to any material or record establishing that no such expenditure had, in fact, been incurred.

The Ld.CIT(A) also examined the resultant profit margins arising from the method adopted by the AO. It was noticed that, by treating the entire unaccounted sales as income, the resultant profit ratio exceeded 60% for A.Y.

The Ld.CIT(A) further took note of the fact that the accounted segment of the very same business yielded a profit of approximately 17%. In the light of the profitability disclosed in the regular business, the Ld.CIT(A) held that the action of the AO in assessing the entire unaccounted turnover as income gave rise to an artificial and commercially unrealistic result having no reasonable nexus with the normal profitability of the assessee's business.

The Ld.CIT(A), therefore, held that merely because the assessee was not in a position to furnish complete and independently verifiable evidence in respect of every item of expenditure relatable to the unaccounted transactions, it would not follow that no expenditure whatsoever had been incurred for effecting such sales. According to the Ld.CIT(A), the income liable to tax had to be determined having regard to the nature of the business, the overall profit margins, the additions made and the income disclosed by the assessee in the relevant as well as earlier assessment years.

On the aforesaid factual findings and having regard to the judicial principles relied upon before him, the Ld.CIT(A) concluded that although the unaccounted turnover was liable to be taken into consideration for the purpose of determining the taxable income, the entire turnover could not be equated with income. What could legitimately be brought to tax was only the profit element embedded in such undisclosed turnover.

Having regard to the substantial volume of the unaccounted transactions, the nature of the business involving considerable expenditure, the absence of :-15-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. complete books of account in respect of such transactions and the lack of fully verifiable supporting evidence, the Ld.CIT(A) considered estimation of the profit embedded in the unaccounted turnover to be the appropriate course.

The Ld.CIT(A), however, was not inclined to accept the profit rates of 25% for A.Y. 2020-21 and 19.70% for A.Y. 2021-22 as offered by the assessee. The Ld.CIT(A) considered that the said rates required an upward adjustment. Taking into consideration the totality of the facts and circumstances and also referring to the gross-profit rate of approximately 43% stated to have been adopted in the case of another concern, namely, S Traders, which was stated to be carrying on an identical line of business in the State of Tamil Nadu, the Ld.CIT(A) estimated the income at 45% of the undisclosed turnover for both the assessment years. Accordingly, for AY(s) 2020-21 and 2021-22, the Ld.CIT(A) rejected the action of the AO in treating 100% of the undisclosed sales as income and directed the AO to restrict the addition to 45% of the undisclosed turnover.

The facts relating to A.Y. 2022-23, however, were found by the Ld. CIT(A) to stand on a materially different footing. On examination of the seized Tally data, the Ld.CIT(A) recorded a categorical finding that the said data contained both accounted as well as unaccounted sales. The Ld.CIT(A) noticed that, as per the very seized material relied upon by the AO, the aggregate sales up to 28.02.2022 amounted to Rs.7,94,06,416/-, which already included the impugned cash sales of Rs.5,91,57,963/-. Thus, according to the Ld.CIT(A), the cash sales of Rs.5,91,57,963/- did not represent turnover over and above the aggregate turnover of Rs.7,94,06,416/- reflected in the seized material.

The Ld.CIT(A) further found that the assessee had reconciled the aforesaid sales with the GST returns for the quarter ending March 2022 and had also discharged the applicable GST thereon. The turnover was reflected

The Ld.CIT(A) held that notwithstanding the aforesaid reconciliation, the AO added the cash sales of Rs.5,91,57,963/- once again to the turnover already disclosed by the assessee and thereby arrived at an enhanced turnover of Rs.14,14,96,023/-. The Ld.CIT(A) found that such computation was not supported by any material brought on record by the AO. The Ld.CIT(A) specifically observed that there was no evidence of any sales over and above those appearing in the seized data. Nor was there any material evidencing additional production, mining activity or corresponding business capacity capable of generating the enhanced turnover presumed by the Assessing Officer. In these circumstances, the Ld.CIT(A) held that the impugned cash sales of Rs.5,91,57,963/- did not constitute a separate or additional stream of turnover but stood already embedded in the aggregate turnover disclosed by the assessee. In the absence of any material establishing sales over and above the turnover already disclosed, the addition of Rs.5,91,57,963/- once again amounted to duplication of the very same turnover and consequently resulted in double addition of the same income. The Ld.CIT(A), therefore, deleted the addition of Rs.5,91,57,963/- in its entirety for A.Y. 2022-23. Thus, the distinction

For A.Y. 2022-23, on the other hand, the ld. CIT(A) found, as a matter of fact, that the impugned cash sales of Rs.5,91,57,963/- were already forming part of the aggregate turnover of Rs.8,23,38,060/- disclosed by the assessee in its books of account and GST returns. In the absence of any material demonstrating turnover over and above the amount so disclosed, the separate addition of Rs.5,91,57,963/- was held to be a duplication and was accordingly deleted.

Aggrieved by the orders of the Ld.CIT(A), both the assessee as well as the Revenue are in appeal before us on the respective issues decided against them.

For AY(s) 2020-21 and 2021-22, the assessee is aggrieved by the action of the Ld.CIT(A) in estimating the profit at 45% of the unaccounted turnover. The case of the assessee is that the Ld.CIT(A), having accepted the principle that only the profit element embedded in the unaccounted turnover could be brought to tax, ought to have accepted the profit rates of 25% for A.Y. 2020-21 and 19.7% for A.Y. 2021-22, respectively, as voluntarily offered by the assessee, which, according to the assessee, represented a fair and reasonable estimate having regard to the nature of its business and the surrounding facts and circumstances.

The Revenue, on the other hand, is in appeal for AY(s) 2021-22 and 2022-23. For A.Y. 2021-22, the Revenue has challenged the action of the Ld.CIT(A) in restricting the addition to 45% of the unaccounted sales instead of sustaining the addition of the entire unaccounted turnover as made by the AO. The principal contention of the Revenue is that, in the absence of satisfactory documentary evidence substantiating the expenditure allegedly incurred in relation to the unaccounted cash sales, the L.CIT(A) was not justified in estimating the income by allowing an implicit deduction towards such unsubstantiated expenditure.

For A.Y. 2022-23, the Revenue is aggrieved by the deletion of the addition of Rs.5,91,57,963/-. The Revenue disputes the finding of the Ld.CIT(A) that the impugned cash sales were already embedded in the turnover disclosed by the assessee and challenges the consequential deletion of the addition made by the AO. Thus, the principal controversy arising for our consideration in AY(s) 2020-21 and 2021-22 is with regard to the appropriate determination of the income embedded in the unaccounted turnover, whereas, for A.Y. 2022-23, the controversy essentially turns upon the factual question as to whether the cash sales of Rs.5,91,57,963/- constituted turnover in addition to the turnover of Rs.8,23,38,060/- already disclosed by the assessee or whether the same stood subsumed therein, as held by the ld. CIT(A). Accordingly, in the light of the aforesaid factual matrix and the rival contentions raised by the assessee as well as the Revenue, the respective appeals for the assessment years under consideration are adjudicated hereunder.

The Ld.DR, appearing on behalf of the Revenue made common arguments for both the assessment years. The Ld.DR vehemently supported the assessment orders for the assessment years under consideration. The Ld.DR submitted that the Ld.CIT(A) erred in restricting the addition arising from undisclosed sales to 45%, without appreciating the incriminating material unearthed during the course of search and the failure of the assessee to substantiate the corresponding expenditure claimed to have been incurred in generating such sales.

The Ld.DR submitted that the assessee is a partnership firm engaged in the business of mining and manufacturing M-sand, P-sand and various types of blue metals. A search and seizure operation u/s.132 of the Act was conducted in the group cases on 02.03.2022, during which incriminating material, including electronic records and Tally data, was found. On verification of the seized electronic records, the Investigation Wing noticed that the sales recorded in the Tally database did not reconcile with the sales disclosed in the regular books of account and returns of income. The seized data contained separate ledgers styled as "Cash Sales" and "Local Credit Sales", recording transactions with various parties. The AO, after examining the seized material, quantified the unaccounted sales pertaining to the respective assessment years. Since the assessee had already offered additional income in the return of income, the AO brought the balance amount of unaccounted sales to tax. The Ld.DR submitted that the addition was thus founded upon specific electronic records found during search and was not merely based upon conjectures, assumptions or an arbitrary estimation of turnover.

It was further submitted that the assessee could not, on the one hand, accept the seized electronic records for the purpose of quantifying undisclosed sales and, on the other hand, claim an arbitrary deduction towards expenditure without satisfactorily establishing its actual incurrence. The assessee's offer of income at 25% and 19.7% of the unaccounted could not, by itself, constitute evidence establishing the correctness of the expenditure claimed. The Ld.DR contended that the AO was justified in examining whether the expenditure claimed against the undisclosed sales had actually been incurred and whether the same was supported by credible documentary evidence.

The Ld.DR submitted that the assessee had claimed that expenditure towards salary and wages, fuel and hire charges, and drilling and blasting had been incurred in generating the undisclosed turnover. However, according to the AO, the assessee failed to substantiate the claimed expenditure with satisfactory supporting material. The Ld.DR contended that a general assertion that expenditure must necessarily be incurred in carrying on a mining business

The Ld.DR further submitted that the mere existence of undisclosed turnover did not automatically establish that the entire expenditure claimed by the assessee had been incurred wholly and exclusively for earning such turnover. The primary burden of establishing the expenditure lay upon the assessee, which had claimed the benefit of such expenditure in computing its taxable income. In the absence of satisfactory evidence demonstrating the actual incurrence of the expenditure, the Ld.DR submitted that the Ld.CIT(A) ought not to have granted relief merely on the presumption that a mining concern must necessarily incur substantial expenditure to generate sales. According to the Ld.DR the Ld.CIT(A) had, therefore, erred in accepting the assessee's claim for deduction towards expenditure without first examining whether the corresponding expenditure had been duly substantiated.

It was further submitted that the assessee's claim of incurring expenditure equivalent to a substantial percentage of undisclosed sales required independent verification and could not be accepted merely on the basis of an estimated profit margin. The Ld.DR contended that, in the absence of reliable material establishing the corresponding expenditure, the ld.CIT(A) ought not to have substituted the addition made by the AO with an estimated addition of 45%. The Ld.DR, therefore, submitted that the relief granted by the Ld.CIT(A) was not sustainable and that the addition made by the AO deserved to be restored and accordingly prayed for dismissal of the assessee’s appeal for the assessment years under consideration and prayed for allowing the appeal of the Revenue A.Y.2021-22. 61. Per contra, the Ld.AR, appearing on behalf of the assessee, vehemently opposed the contentions advanced by the Ld.DR. At the outset, the Ld.AR

The Ld.AR submitted that the entire approach of the AO in seeking to bring the gross unaccounted sales to tax proceeds on an erroneous understanding of the distinction between sales turnover and taxable business income. It was submitted that the gross sale consideration represents the aggregate receipts arising from the disposal of goods and cannot, by itself, constitute the income or profit of the seller. The income element embedded in such receipts is only the surplus remaining after taking into consideration the expenditure necessarily incurred in acquiring, extracting, processing and selling the goods, together with other expenditure incidental to carrying on the business.

The Ld.AR contended that, in the case of a mining and quarrying business, the generation of sales necessarily involves the incurring of expenditure towards extraction, labour, machinery operation, fuel, transportation and other operational activities. Consequently, the proposition that the entire sale consideration constitutes income would be commercially unrealistic and contrary to the settled principles governing the computation of business profits. The Ld.AR further submitted that the mere fact that certain sales have not been recorded in the regular books of account does not alter their fundamental character as business transactions. The non-recording of sales may justify the taxation of the income attributable thereto, but it does not, by itself, establish that the entire gross receipts represent profits earned by the assessee. There is a clear distinction between the discovery of undisclosed

It was further contended that the Income-tax Act seeks to bring to tax the income arising from business transactions and not the gross receipts in their entirety, except where a specific statutory provision warrants a different treatment. In the absence of any material demonstrating that the entire sale consideration represents unexplained money or that the corresponding costs have been separately funded out of undisclosed sources, the AO cannot mechanically equate the unaccounted sales with taxable income.

The Ld. AR submitted that the principle of taxation of real income requires the computation to reflect the actual commercial substance of the transactions. The AO is therefore obliged to distinguish between the gross receipts arising from the business and the profit component embedded therein. The adoption of the entire turnover as income, without considering the costs necessarily associated with the generation of such turnover, would result in an artificial and excessive determination of taxable income.

The Ld. AR further submitted that, where the Revenue has accepted the existence of sales arising from the assessee's regular business activity, the expenditure ordinarily and necessarily associated with such sales cannot be ignored merely because the corresponding transactions were not recorded in the books of account. The proper course in such circumstances is to determine the reasonable profit attributable to the unaccounted turnover, having regard to the nature of the business, the assessee's disclosed results and other relevant material available on record.

Accordingly, the Ld.AR submitted that the AO was not justified in treating the entirety of the unaccounted sales as the income of the assessee. The :-24-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. Ld.CIT(A), therefore, correctly appreciated the legal distinction between turnover and income and was justified, in principle, in restricting the addition to the estimated profit element embedded in such sales.

The Ld. AR, further, placed reliance upon the decision of the Coordinate Mumbai Bench of the Tribunal in Prime Developers v. DCIT, ITA Nos. 175 to 178/Mum/2010, order dated 22.03.2013. Drawing the attention of the Bench to paragraph 42 of the said decision, the Ld.AR submitted that the Tribunal had specifically considered the scope and allowability of reasonable expenditure incurred in earning unaccounted profits. The Ld.AR submitted that the Tribunal recognised the fundamental commercial principle that expenditure is necessarily incurred in the process of earning business income, irrespective of whether the underlying transactions are accounted for or unaccounted. The Tribunal further recognised that, owing to the very nature of unaccounted transactions, the assessee may not maintain regular documentary evidence in support of every item of expenditure incurred in relation thereto. The Ld.AR submitted that the Mumbai Bench, after considering the judicial precedents referred to therein, held that the absence of documentary evidence for unaccounted expenditure cannot, by itself, justify the taxation of the entire sale proceeds. The appropriate course is to allow a reasonable deduction towards the expenditure necessarily incurred, taking into account the nature of the industry, the facts and circumstances of the case and the profit margins earned by the assessee.

The Ld.AR contended that the ratio of the aforesaid decision squarely applies to the facts of the present case. Once the Revenue seeks to assess the unaccounted sales arising from the assessee's mining and quarrying business, it cannot disregard the expenditure necessarily incurred in generating such sales merely because separate vouchers or supporting documents for every unaccounted transaction are unavailable.

The Ld. AR submitted that the AO was required to undertake a reasonable estimation of the income element embedded in the sales, rather than proceed on the presumption that the assessee had earned the entire sale consideration without incurring any corresponding expenditure. The Ld. AR further placed reliance upon the decision of the Coordinate Chennai Bench of this Tribunal in DCIT v. Radiance Realty Developers India Ltd., ITA Nos. 2978 to 2984/Chny/2024, order dated 02.05.2025. It was submitted that the Tribunal, while considering the addition made in respect of unaccounted cash collections arising from the sale of flats, examined the distinction between unaccounted receipts and the profits embedded therein. The Ld.AR submitted that the Chennai Bench considered the principles laid down in Prime Developers (supra) and the judicial precedents governing the taxation of unaccounted business receipts. The Tribunal recognised that the computation of income attributable to unaccounted transactions must take into consideration the expenditure reasonably associated with such transactions and cannot proceed merely on the basis of gross receipts.

The Ld.AR contended that the aforesaid decision reinforces the proposition that, where unaccounted receipts arise from business operations, the computation of taxable income must reflect the profit component attributable thereto. The AO cannot refuse to recognise the reasonable expenditure inherent in the transactions solely for want of separate documentary evidence.

Further, the Ld.AR vehemently assailed the action of the Ld.CIT(A) in estimating the profit embedded in the unaccounted sales at 45%. The Ld. AR submitted that, although the Ld.CIT(A) correctly appreciated the principle that only the profit element embedded in the unaccounted sales could be brought to tax, the adoption of a profit rate of 45% is wholly excessive, arbitrary and unsupported by the facts and circumstances of the assessee's case.

The Ld. AR submitted that the Ld.CIT(A), while determining the profit rate, had placed reliance upon the case of one M/s. S Traders without appreciating

It was contended that the profitability of a particular business depends upon several factors, including the nature of the products dealt with, the extent of processing undertaken, the cost structure, operational efficiency, machinery utilisation, labour requirements, transportation costs and the prevailing market conditions. Unless the functional and economic comparability of the two concerns is established, the profit margin disclosed by one concern cannot be adopted as a reliable basis for determining the income of another. The Ld. AR submitted that the Ld.CIT(A) had neither demonstrated that the business model of M/s.S Traders was comparable with that of the assessee nor brought on record any analysis establishing similarity in their respective functions, assets employed, risks assumed and cost structures.

The Ld. AR further submitted that the mere fact that two concerns operate in broadly related sectors does not render their profit margins interchangeable. The Ld. CIT(A) ought to have examined whether the activities carried on by the comparable concern were substantially similar to those of the assessee before adopting its profit rate. The Ld.AR contended that, in the absence of such an exercise, the adoption of 45% as the profit element embedded in the assessee's unaccounted sales is based upon an inappropriate external comparable and is therefore unsustainable.

The Ld. AR further submitted that the most appropriate and reliable basis for estimating the profit element embedded in the unaccounted sales is the assessee's own disclosed trading results, particularly when such results relate to the very same business carried on by the assessee. Drawing the attention of the Bench to the Profit and Loss Account for the assessment year 2019-20, the Ld. AR submitted that the assessee had disclosed a net profit ratio of only 8.57% from its regular business operations. The said ratio, according to the Ld. AR, provides a relevant internal benchmark for evaluating the reasonableness of the profit offered in respect of the unaccounted sales for the subsequent assessment years. The Ld.AR submitted that, as against the disclosed net profit ratio of 8.57% for the assessment year 2019-20, the assessee had voluntarily offered income by applying profit rates of 25% and 19.7% on the unaccounted sales for the assessment years 2020-21 and 2021-22, respectively. The Ld.AR contended that the profit rates voluntarily adopted by the assessee are substantially higher than the net profit ratio disclosed in its regular books of account. This, according to the Ld.AR, demonstrates that the assessee has already adopted a reasonable and conservative approach while determining the income attributable to the unaccounted sales. The Ld. AR further submitted that :-29-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. the profit rates of 25% and 19.7% were not adopted mechanically by applying the regular net profit ratio of 8.57%. On the contrary, the assessee had offered income at substantially enhanced rates, thereby providing an adequate margin for any possible variation in profitability between the accounted and unaccounted transactions. It was submitted that, once the assessee has voluntarily offered income at rates materially higher than its disclosed net profit ratio, the Ld.CIT(A) was required to identify specific defects in such estimation or bring on record relevant material justifying the adoption of a still higher rate.

The Ld.AR further contended that the assessee's own historical results deserve greater evidentiary weight than the results of an external concern whose functional comparability has not been established. In the absence of any material demonstrating a substantial change in the assessee's business operations or profitability during the relevant assessment years, there is no justification for disregarding the internal benchmark. The Ld. AR thus submitted that the profit rates of 25% and 19.7% voluntarily offered by the assessee for the assessment years 2020-21 and 2021-22, respectively, constitute a fair and reasonable estimation of the income embedded in the unaccounted sales. Consequently, no further addition over and above the income already offered by the assessee is warranted.

The Ld. AR further submitted that the controversy arising in the present appeals involves two distinct aspects, namely, the correctness of the method adopted for determining the income attributable to the unaccounted sales and the reasonableness of the rate applied for such estimation. Insofar as the first aspect is concerned, the Ld.AR submitted that the Ld.CIT(A) was justified in rejecting the AO's approach of treating the entire unaccounted sales as taxable income. The decision of the Ld.CIT(A) to restrict the addition to the profit element embedded in such sales is consistent with the principles laid down in the judicial precedents relied upon by the assessee. However, insofar as the :-30-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. quantum of estimation is concerned, the Ld.AR submitted that the Ld.CIT(A) fell into error in adopting a profit rate of 45%, disregarding the assessee's own trading results and the income already voluntarily offered. The Ld.AR contended that the correctness of the principle of profit estimation does not, by itself, validate the particular rate adopted by the Ld.CIT(A). The method of estimation and the quantum of profit determined thereunder are separate matters requiring independent examination. The Ld. AR submitted that, while the Revenue's contention seeking taxation of the entire unaccounted turnover deserves to be rejected, the assessee's grievance against the excessive estimation at 45% requires to be adjudicated on the basis of the actual business activities, the disclosed results and the surrounding facts and circumstances. The Ld. AR further submitted that the adoption of 45% would result in assessing a substantially higher income without any corresponding material demonstrating that the assessee had earned such an extraordinary profit margin from its mining and quarrying operations. The Ld. AR contended that an estimate of income must be fair, reasonable and founded upon relevant material. It cannot be sustained merely because the exact amount of income attributable to the unaccounted sales is incapable of precise determination. Accordingly, the Ld.AR submitted that the Ld.CIT(A) was justified in principle in adopting the method of profit estimation but was not justified in determining the profit element at 45%. The Ld. AR thus prayed that the appeals preferred by the Revenue on this issue be dismissed and the corresponding grounds raised by the assessee be allowed.

The Ld. AR further submitted that the Ld. CIT(A), having restricted the addition to the estimated profit element embedded in the unaccounted sales, erred in not issuing a specific and unambiguous direction to the AO to reduce the income already voluntarily admitted by the assessee in its returns of income for the respective assessment years. The Ld. AR submitted that the assessee had already offered income by applying profit rates of 25% and 19.7% on the :-31-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. unaccounted sales for the assessment years 2020-21 and 2021-22, respectively. Consequently, even assuming without admitting that the estimation of profit at 45% by the Ld. CIT(A) is sustainable, the AO could, at the highest, bring to tax only the differential income remaining after giving due credit for the income already admitted and subjected to tax. The Ld. AR contended that the failure of the Ld. CIT(A) to issue such a specific direction would result in the same income being subjected to tax twice, once as income voluntarily offered by the assessee and again as part of the estimated profit determined on the very same unaccounted sales. Such double taxation of the identical income component is legally impermissible and would result in an artificial inflation of the assessed income. The Ld. AR, therefore, submitted that the Ld. CIT(A) ought to have categorically directed the AO to reduce the income already admitted by the assessee from the profit estimated on the unaccounted sales and to restrict any further addition only to the differential amount, if any. Accordingly, the Ld. AR prayed that the Hon'ble Tribunal may be pleased to delete the further additions sustained by the Ld. CIT(A) and, without prejudice, issue a specific direction to the AO to grant full credit for the income already admitted by the assessee in the respective assessment years, so as to prevent duplication of the same income.

We have heard the rival submissions, perused the orders of the authorities below, and carefully considered the material available on record in the light of the judicial precedents relied upon by both sides. Since the issues arising for consideration in the appeals of the assessee for AY(s) 2020-21 and 2021-22 and the corresponding appeal of the Revenue for A.Y. 2021-22 emanate from a common search, involve substantially identical facts, and raise interconnected questions concerning the taxability of unaccounted sales, we consider it appropriate to adjudicate these appeals together by this consolidated order.

At the outset, we observe that there is no dispute regarding the existence of unaccounted sales of Rs.4,06,55,539/- for A.Y. 2020-21 and Rs.7,50,49,959/- for A.Y. 2021-22, as identified from the Tally data seized during the course of search conducted u/s.132 of the Act on 02.03.2022. The assessee has not disputed the aforesaid turnover and has, in fact, voluntarily offered the profit element embedded therein in the returns of income filed for the respective assessment years. The dispute, therefore, is not with regard to the quantification of the unaccounted turnover but with regard to the determination of the taxable income attributable thereto.

We find that the AO has proceeded on the premise that, once the unaccounted sales were established on the basis of the seized electronic records, the entire amount of such sales was liable to be assessed as undisclosed business income, unless the assessee independently established the corresponding expenditure by producing satisfactory documentary

It is a fundamental principle of commercial accounting that the sale consideration represents the gross realisation arising from the disposal of goods, whereas the profit represents the surplus remaining after taking into consideration the cost of acquisition, extraction, production and other expenditure attributable to the sale of such goods. Merely because the sale proceeds have not been recorded in the regular books of account, the character of the receipts does not undergo any transformation so as to convert the entire turnover into taxable profits. The taxable income attributable to such transactions must be determined having regard to their true commercial character and the expenditure necessarily associated with the generation of the corresponding turnover.

In this regard, we gainfully refer to the decision of the Hon'ble Gujarat High Court in the case of CIT v. President Industries [2002] 258 ITR 654 (Guj), wherein the Hon'ble High Court has explained the distinction between undisclosed sales and undisclosed income and held that the entire amount of suppressed sales cannot be treated as income merely because such sales were not recorded in the books. The Hon'ble High Court has further held that, unless there is a finding supported by material establishing that the investment made in acquiring the goods sold was also undisclosed, the entire sale proceeds cannot be assessed as income. The ratio of the aforesaid judgment is that the consideration realised on sale includes the recovery of the cost incurred in acquiring the goods and that it is only the excess over such cost which :-34-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. represents the profit embedded in the sale consideration. The relevant observations of the Hon’ble High Court are reproduced hereunder for ready reference:

The aforesaid principle has also been followed by the Hon'ble Madhya Pradesh High Court in CIT v. Balchand Ajit Kumar [2003] 263 ITR 610 (MP) and Man Mohan Sadani v. CIT [2008] 304 ITR 52 (MP), wherein the Hon'ble High Court has held that the entire unaccounted sale proceeds cannot be regarded as profits and that the taxable income attributable to such sales is required to be determined by applying a reasonable net profit rate. Similarly, in CIT v. Sharda Real Estate (P.) Ltd., the Hon'ble Madhya Pradesh High Court upheld the estimation of income at 25% of the unaccounted cash sale proceeds in the circumstances of that case, instead of treating the entire receipts as income. The percentage adopted in that decision is not a universal rate applicable to all businesses; nevertheless, the judgment reinforces the principle that the profit component of unaccounted business receipts must be determined with reference to the facts and circumstances of the particular case.

We also find that the Coordinate Bench of this Tribunal, in DCIT v. Radiance Realty Developers India Ltd., ITA Nos.2978 to 2984/Chny/2024, order dated 02.05.2025, has considered an analogous controversy concerning

13 According to the Ld. CIT DR however, the search did not reveal incurrence of any expenses qua such cash collections and therefore, he argued that the AO had rightly brought the entire on-monies to tax. On the other hand, the Ld. AR brought to our notice that, the assessee had demonstrated before the lower authorities that, they were required to incur expenses viz., (i) miscellaneous & incidental Expenses during registration process, (ii) provide additional amenities provided as per the customer’s requirements, (iii) additional expenses for furnishing the flats like Welcome kits to the customers, Apartment activities etc. & (iv) make pooja arrangements during House-warming ceremonies. The Ld. AR further contended that, had the assessee collected such huge on-monies and not incurred any expenses, then such cash collections ought to have been found in the form of some unexplained investment or asset, in the course of search. We observe that, apart from these excel notings, the Investigating Officer didn’t find any unaccounted cash or assets of such magnitude which would justify the addition of entire on-monies as income of the assessee. And as rightly pointed out by the Ld.AR that if the entire on-monies is treated as the income of the assessee, then the profits of the assessee would show unrealistic outcome. We therefore find merit in the assessee’s plea that the entire cash receipts cannot be said to constitute its income.

14 The Ld. CIT, DR for the Revenue further contended that, the assessee was unable to provide the exact details of cash expenses incurred out of these cash collections and therefore the benefit of same should not be given and thus the entire proceeds ought to be taxed as undisclosed income of the assessee. In this regard, we find that, on same set of facts, similar contention was raised by the Revenue before this Mumbai Tribunal in the case of M/s. Prime Developers Vs ACIT (ITA Nos.175 – 178/Mum./2010 by order dated 22.03.2013) viz., the set-off/benefit of expenses against on-monies shouldn’t be allowed as the assessee was unable to substantiate the incurrence of expenses with evidences. This Tribunal is noted to have rejected this plea of the Revenue and upheld the assessee’s plea for estimation of profit element embedded in on-monies by observing as under: - “42. Scope of Reasonable Expenditure: Assessee needs to expend in order to earn income/profit and it is basic and universal principle in any business. This principle applies to both accounted and unaccounted profits. In a case of unaccounted profits, due to its very nature of unaccounting, normally, the parties do not maintain evidences and therefore, evidencing such unaccounted evidences is impossibility.

15 It was brought to our notice that the above findings of this Tribunal have been affirmed by the Hon’ble Bombay High Court in their decision rendered in ITA No.2452 of 2013. Following the ratio decidendi, this particular argument of the Revenue is hereby rejected.”

Applying the aforesaid principles to the facts of the present case, we find that the assessee is engaged in the business of mining and operating a blue metal quarry. The business involves extraction of boulders and other materials through drilling and blasting, operation of machinery, consumption of diesel and explosives, deployment of labour, loading and unloading, transportation and other incidental activities. It is not in dispute that the unaccounted sales identified from the seized Tally data pertain to the very same business carried on by the assessee. The Revenue has not brought on record any material establishing that the assessee was carrying on an independent activity in relation to such sales which could have generated the entire sale consideration without incurring any corresponding cost.

We also find that neither the assessment orders nor the material referred to before us disclose any specific finding that the entire cost attributable to the unaccounted sales was incurred out of unexplained sources or that unexplained assets or investments corresponding to the gross amount of such sales were detected during the course of search. The absence of such a finding assumes significance in the light of the principle laid down in President Industries (supra). Although the absence of unexplained assets, by itself, does not conclusively establish the precise amount of business expenditure, it is a relevant circumstance in examining whether the entire unaccounted turnover can reasonably be regarded as taxable income.

It is also pertinent to observe that the AO's method of treating the entire unaccounted turnover as income results in a net profit ratio of 61.11% for A.Y. 2020-21 and 80.92% for A.Y.2021-22, on the combined disclosed and unaccounted turnover. These resultant ratios are wholly disproportionate to the profit margins disclosed by the assessee in its regular business and are not supported by any material demonstrating that the assessee's mining operations yielded such exceptionally high profitability. The AO has not brought on record any comparable instance or other evidence establishing that the assessee

We are, therefore, of the considered view that the AO was not justified in equating the entire unaccounted sales with the income of the assessee. The unaccounted sales identified from the seized material are liable to be taken into consideration for determining the taxable business income; however, the addition must be confined to the profit element reasonably attributable thereto, subject to the consideration of any separately established unexplained investment or other taxable item, if any. No such separate item has been established in the present proceedings.

In the light of the foregoing discussion, we concur with the finding of the Ld. CIT(A) that the entire unaccounted turnover cannot be assessed as income and that the appropriate course is to determine the profit element embedded therein. To this extent, the order of the Ld.CIT(A) does not call for any interference. Accordingly, the contention of the Revenue seeking restoration of the addition of the entire unaccounted turnover for A.Y. 2021-22 is rejected.

The next contention advanced by the Ld.DR is that the assessee, having admitted the existence of unaccounted sales, was required to substantiate the corresponding expenditure by furnishing proper documentary evidence and that, in the absence of such evidence, the Ld.CIT(A) ought not to have granted the benefit of estimated expenditure. We have considered the aforesaid contention. In our considered opinion, the Revenue has failed to appreciate the distinction between allowing a specific claim of expenditure on the basis of books of account and estimating the profit arising from business transactions where complete and reliable accounts are unavailable.

In this connection, we find considerable force in the reliance placed by the Ld.AR upon the decision of the Coordinate Mumbai Bench of the Tribunal in Prime Developers v. ACIT (supra). The Tribunal, while considering the scope of reasonable expenditure attributable to unaccounted business receipts, recognised that expenditure is ordinarily incurred in the process of earning business income and that the absence of regular documentary evidence in respect of unaccounted transactions cannot, by itself, justify the taxation of the entire sale proceeds. The Tribunal accordingly held that the reasonable expenditure attributable to such receipts should be determined with reference to the facts of the case, the nature of the industry and the profit margins earned by the assessee.

The aforesaid principle was subsequently considered and followed by the Coordinate Chennai Bench of this Tribunal in Radiance Realty Developers India Ltd. (supra). In paragraphs 4.13 to 4.15 of the said order, this Tribunal specifically examined the Revenue's contention that, since the assessee had not furnished exact details and supporting evidence of expenditure incurred out of the unaccounted cash collections, the entire receipts ought to be assessed

In our view, the ratio of the aforesaid decisions squarely supports the assessee's contention that the absence of complete documentary evidence of every item of expenditure cannot be made the sole basis for treating the entire unaccounted turnover as income. If the Revenue's proposition were accepted without qualification, every case involving unaccounted business sales would necessarily result in taxation of the entire gross receipts merely because the corresponding expenditure had not been recorded in the regular books. Such an approach would render the principle of reasonable profit estimation ineffective and would fail to recognise the commercial realities underlying the transactions.

In the present case, the assessee has consistently explained that its quarrying operations necessarily involved expenditure towards diesel, explosives, drilling and blasting, wages, machinery hire, transportation, freight and other operational activities. The assessee has also explained that it did not own transport vehicles and was therefore required to incur expenditure towards hiring vehicles for transportation of the extracted materials. The nature of the business and the substantial volume of unaccounted sales lend support to the existence of corresponding operational expenditure. We further notice that the Ld. CIT(A) has recorded a finding that the AO had not effectively controverted the assessee's explanation by bringing on record material establishing that no such expenditure was incurred.

The mere fact that the assessee could not produce complete vouchers, bills or other supporting documents in respect of every unaccounted transaction does not establish that the assessee incurred no expenditure whatsoever. At :-42-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. the same time, the assessee's assertion that expenditure was necessarily incurred does not entitle it to an automatic deduction of any percentage claimed without scrutiny. The correct approach is to make a fair and reasonable estimation on the basis of the available material and the commercial circumstances of the business.

We accordingly hold that, in the peculiar facts of the present case, production of documentary proof for each individual item of unaccounted expenditure is not a mandatory precondition for estimating the profit embedded in the unaccounted sales. The absence of such evidence may be a relevant factor in determining the appropriate rate of profit, but it cannot, by itself, justify treating the entire turnover as taxable income. We, therefore, find no infirmity in the decision of the Ld.CIT(A) insofar as he rejected the AO's approach and recognised the necessity of estimating the profit element attributable to the unaccounted sales. The corresponding contention of the Revenue is rejected.

Having upheld the decision of the Ld.CIT(A) insofar as he held that only the profit element embedded in the unaccounted sales is liable to be assessed as income, we now proceed to examine the correctness of the profit rate of 45% adopted by him for both assessment years. The assessee has vehemently challenged the aforesaid estimation on the ground that the rate is excessive and unsupported by the facts and circumstances of its business. According to the assessee, the profit rates of 25% and approximately 19.70% voluntarily adopted for AY(s) 2020-21 and 2021-22, respectively, constitute a fair and reasonable estimation of the income attributable to the unaccounted sales.

We find that the Ld.CIT(A), while rejecting the AO's method of assessing the entire unaccounted turnover as income, has proceeded to estimate the profit at 45% principally having regard to the magnitude of the unaccounted transactions and the gross profit rate of approximately 43% stated to have been :-43-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. adopted in the case of another concern, namely, M/s.S Traders. The Ld.CIT(A) has, however, not demonstrated how the said rate could reasonably be applied to the assessee's business, particularly when the assessee had placed its own historical trading results and the profitability of its regular business on record.

It is trite law that estimation of income, although involving an element of approximation, cannot be made arbitrarily or on the basis of conjectures and surmises. The authority making the estimation is required to adopt a rational and reasonable basis having nexus with the material available on record. The mere fact that the precise income cannot be determined owing to the absence of complete books of account does not confer an unrestricted discretion upon the taxing authority to adopt any percentage considered appropriate. The estimation must be fair, judicious and commensurate with the nature of the business and the surrounding facts and circumstances. In this regard, we find that the assessee's own trading results constitute a relevant internal benchmark for determining the reasonableness of the profit embedded in the unaccounted sales. It is an admitted position that the assessee is engaged in mining and operating a blue metal quarry. The business carried on in respect of the unaccounted sales is not shown to be materially different from the business carried on in the accounted segment. Consequently, the profitability disclosed in the regular books of account and the historical results of the assessee deserve due consideration while estimating the income attributable to the unaccounted turnover.

We notice that, for the immediately preceding A.Y. 2019-20, the assessee had disclosed a turnover of Rs.2,38,22,754/- and net profit of Rs.20,40,448/-, resulting in a net profit ratio of 8.57%. The said financial results were accepted by the Department. Further, the Ld.CIT(A) himself has taken note of the fact that the accounted segment of the assessee's business yielded a profit margin of approximately 17%. These figures provide relevant indicators of the :-44-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. profitability of the assessee's own business. As against the aforesaid historical and contemporaneous results, the assessee has voluntarily offered income by applying a profit rate of 25% on the unaccounted sales of Rs.4,06,55,539/- for A.Y. 2020-21 and approximately 19.70% on the unaccounted sales of Rs.7,50,49,959/- for A.Y. 2021-22. The profit rates so adopted are substantially higher than the net profit ratio of 8.57% disclosed for A.Y. 2019-20 and are also higher than the profit margin of approximately 17% noticed by the Ld.CIT(A) in the accounted segment of the business.

We are conscious of the fact that the profitability of accounted and unaccounted transactions need not necessarily be identical. Unaccounted transactions may involve differences in pricing, expenditure and other commercial considerations. Nevertheless, any upward departure from the assessee's own trading results must be founded upon relevant material. In the present case, the assessee has already adopted enhanced profit rates in respect of the unaccounted sales. Neither the AO nor the Ld.CIT(A) has identified any specific circumstance demonstrating that the profit embedded in such sales was substantially higher than the rates voluntarily offered by the assessee.

We further find that the adoption of a uniform profit rate of 45% for both assessment years does not adequately take into consideration the assessee's own financial results or the differences in the quantum and circumstances of the transactions pertaining to the respective years. The estimation appears to have been made principally on the basis of an external comparable without undertaking a meaningful examination of the assessee's actual business operations, cost structure and profitability.

The Ld. CIT(A) has placed reliance upon the gross profit rate of approximately 43% stated to have been adopted in the case of M/s.S Traders.

In our considered view, merely because two concerns operate in broadly related business sectors, the profit rate of one concern cannot automatically be adopted for estimating the income of the other. The profitability of a business depends upon several factors, including the nature of its products, extent of processing, cost of production, machinery utilisation, labour requirements, transportation expenses, scale of operations and prevailing market conditions. Unless the material comparability of the two concerns is established, the profit margin of one concern cannot constitute a reliable benchmark for determining the income of another.

There is yet another material infirmity in the approach adopted by the Ld. CIT(A). The rate of approximately 43% referred to in the case of M/s.S Traders is stated to be a gross profit rate, whereas the rate of 45% adopted by the Ld.CIT(A) has been applied for determining the income attributable to the unaccounted sales. Gross profit and net business income are distinct concepts. Gross profit ordinarily represents the surplus after deducting the cost of goods sold or production, whereas net business income is determined after taking into consideration the other allowable expenditure attributable to the business. In the absence of an examination of the nature of the rate adopted in the comparable case and the expenditure covered thereby, the gross profit rate of another concern cannot mechanically be applied as the net income rate of the assessee.

We further observe that the AO's method of treating the entire unaccounted sales as income resulted in combined net profit ratios of 61.11% and 80.92% for AY(s) 2020-21 and 2021-22, respectively. The Ld.CIT(A) himself considered such results to be commercially unrealistic and accordingly rejected the AO's approach. Having accepted that the profitability of the assessee's business must be determined on a realistic basis, the Ld.CIT(A) ought to have evaluated the reasonableness of the profit rates voluntarily adopted by the assessee with reference to its own business results before resorting to an external comparable. In this context, we also find support from :-47-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. the decision of the Coordinate Bench of this Tribunal in K V Tex Firm v. ACIT, ITA Nos.1859, 1860 and 1865/Chny/2025, order dated 04.02.2026, wherein the Tribunal considered the distinction between suppressed turnover and the income attributable thereto in the context of sales detected during search proceedings. The principle that the profit embedded in unaccounted business transactions must be determined on a reasonable basis, rather than mechanically treating the entire turnover as income, is relevant to the controversy before us.

Having regard to the totality of the facts and circumstances, we are of the considered view that the profit rate of 45% adopted by the Ld.CIT(A) is excessive and lacks a reasonable nexus with the assessee's own trading results. The assessee's historical net profit ratio of 8.57%, the profit margin of approximately 17% noticed in the accounted segment, the nature of the mining and quarrying operations, and the absence of reliable material establishing a substantially higher profit margin in the unaccounted transactions are relevant circumstances which weigh against the adoption of the aforesaid rate.

On the other hand, the assessee has voluntarily offered income at 25% of the unaccounted sales for A.Y. 2020-21 and approximately 19.70% for A.Y. 2021-22. The rates so adopted are higher than the profitability disclosed in the regular business and, in our considered opinion, adequately take into account the possibility of a higher profit element in the unaccounted transactions. We do not find any material brought on record by the Revenue which would warrant further enhancement of the said rates.

We accordingly hold that, in the peculiar facts and circumstances of the present case, the profit rates of 25% and approximately 19.70% voluntarily adopted by the assessee for AY(s) 2020-21 and 2021-22, respectively, constitute a fair and reasonable estimation of the income embedded in the :-48-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. unaccounted sales. The estimation of income at 45% by the Ld.CIT(A) is, therefore, unsustainable and is hereby set aside. We direct the AO to accept the profit voluntarily offered by the assessee attributable to the unaccounted sales in the respective returns of income filed. Therefore, the AO is directed to accept the income declared in the return of income filed for the A.Y.2020-21 and 2021-22. Consequently, no further addition on account of the very same unaccounted sales is warranted.

We shall now deal with the alternative contention of the assessee that the Ld.CIT(A), having restricted the addition to the estimated profit element embedded in the unaccounted sales, ought to have issued a specific direction to the AO to reduce the income already voluntarily offered by the assessee in the respective returns of income. In the present case, we have already held that the profit rates of 25% and approximately 19.70% voluntarily declared by the assessee for the respective assessment years are reasonable and that no further estimation is warranted. Consequently, the entire income attributable to the unaccounted sales stands covered by the income already offered by the assessee in the respective returns of income. Since the relief has been given to the assessee by directing the AO to accept the returned income, the alternative contention becomes academic and does not require adjudication. Accordingly, the alternative ground raised by the assessee regarding the failure of the Ld.CIT(A) to grant a specific direction for giving credit to the income already offered is allowed in the aforesaid terms.

We accordingly modify the order of the Ld.CIT(A) and direct the AO to delete the additions of Rs.3,04,91,654/- and Rs.6,02,60,469/- made in the assessment orders for AY(s) 2020-21 and 2021-22, respectively, in their entirety. Consequently, the grounds raised by the assessee challenging the estimation of income at 45% and seeking deletion of the additions made on account of unaccounted sales are allowed for both assessment years. The :-49-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. grounds raised by the Revenue for A.Y. 2021-22, seeking restoration of the addition of the entire unaccounted turnover, are dismissed.

In the result, the appeals filed by the assessee in ITA Nos.2285 and 2286/Chny/2026 for AY(s) 2020-21 and 2021-22 are allowed, whereas the appeal filed by the Revenue in ITSSA No.19/Chny/2026 for A.Y. 2021-22 is dismissed.

The Ld.DR, appearing on behalf of the Revenue, vehemently supported the assessment order and submitted that the Ld.CIT(A) erred in deleting the addition of Rs.5,91,57,963/- made by the AO towards unaccounted cash sales detected during the course of search proceedings. The Ld.DR submitted that the impugned addition was not founded upon any conjecture or presumption, but was based on the specific entries contained in the Tally database found during the course of search conducted u/s.132 of the Act on 02.03.2022. The said electronic records disclosed substantial cash sales and local credit sales which, according to the AO, had not been accounted for in the regular books of account of the assessee. The Ld.DR contended that the Ld.CIT(A), without properly appreciating the evidentiary value of the seized material and the findings recorded by the AO, had accepted the explanation of the assessee and directed deletion of the addition, which was wholly unjustified.

The Ld.DR drew the attention of the Bench to the detailed tabulation reproduced in the assessment order, wherein the AO had quantified the unaccounted sales of the assessee at Rs.4,06,55,539/-, Rs.7,50,49,959/- and Rs.5,91,57,963/- for the financial years 2019-20, 2020-21 and 2021-22, respectively, aggregating to Rs.17,48,63,461/-. The Ld.DR submitted that the quantification was made on the basis of the entries appearing in the Tally

The Ld. DR further submitted that the aforesaid findings were duly confronted to Shri Subramani Perumal during the course of search proceedings and his sworn statement was recorded u/s.132(4) of the Act on 06.03.2022. In response to Question No.38, Shri Subramani Perumal had acknowledged that the entities referred to in the statement were engaged in accounted as well as unaccounted purchases and sales for the relevant financial years. Although he sought one week's time to verify the exact quantum with reference to the Tally records and supporting documents, the Ld. DR contended that the admission regarding the existence of unaccounted transactions was material evidence which could not have been brushed aside by the Ld.CIT(A). According to the Ld.DR, the subsequent claim of the assessee that the entire cash sales detected during search had already been included in the turnover disclosed in the return of income was required to be substantiated by cogent documentary evidence.

The Ld. DR submitted that the central issue involved in the present appeal was whether the cash sales of Rs.5,91,57,963/- detected during the course of search were already embedded in the turnover declared by the assessee or represented sales over and above the disclosed turnover. The Ld.DR contended that the case of the AO was that the aforesaid amount represented unaccounted sales in excess of the sales of Rs.7,94,06,416.96 reflected in the Tally Profit and Loss Account found during search. The :-51-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. assessee, on the other hand, had claimed that the turnover of Rs.8,23,38,060/- disclosed in the return of income included the entire amount of un accounted sales of Rs.5,91,57,963/-. According to the Ld.DR, the mere fact that the disclosed turnover was numerically higher than the amount of cash sales detected during search could not, by itself, establish that the latter amount was included in the former. The Ld.DR submitted that the assessee was required to demonstrate the actual inclusion of the identified transactions in the disclosed turnover by producing a proper reconciliation supported by the relevant books of account and primary records.

The Ld.DR particularly emphasized that the assessee had failed to establish a one-to-one correlation between the individual cash sale transactions aggregating to Rs.5,91,57,963/- and the sales of Rs.8,23,38,060/- declared in the return of income. According to the Ld.DR, the assessee ought to have furnished a transaction-wise reconciliation identifying the corresponding entries in the regular sales ledger, the relevant dates, amounts, particulars of purchasers, and the manner in which the cash sales detected during search were incorporated in the disclosed turnover. In the absence of such reconciliation, the assessee's explanation remained an unsubstantiated assertion. The Ld.DR submitted that the AO had specifically recorded that, apart from the assessee's statement and Form 26AS, no documentary evidence had been produced to conclusively establish that the cash sales detected during search formed part of the turnover offered in the return of income. The Ld.DR, therefore, contended that the Ld. CIT(A) had erred in accepting the explanation of the assessee without establishing a direct nexus between the seized entries and the disclosed sales.

The Ld.DR further invited the attention of the Bench to the Profit and Loss Account extracted from the Tally database, as reproduced on page 6 of the assessment order, wherein the sales for the period from 01.04.2021 to :-52-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. 28.02.2022 were reflected at Rs.7,94,06,416. 96. The sales account group summary contained separate ledger balances under the heads "Local Credit Sales", "Local Sales", "Permit Sales" and "Sales GST 5%". The Ld.DR submitted that the AO had examined the sales data available in the seized Tally records and had concluded that the assessee had failed to establish that the unaccounted cash sales of Rs.5,91,57,963/- were already included in the turnover disclosed in the return of income. The Ld.DR contended that the Ld.CIT(A) ought to have examined the individual entries appearing in the seized material and their corresponding treatment in the regular books of account before accepting the assessee's explanation.

The Ld.DR also submitted that the absence of GST being charged on the identified cash sales and the non-generation of regular sale invoices were relevant circumstances which supported the inference drawn by the AO. The Ld.DR contended that, although the assessee had furnished an explanation with reference to subsequent GST disclosures, the same could not automatically establish that the entire amount of cash sales detected during search had been duly incorporated in the books of account and offered to tax. According to the Ld.DR, the GST disclosures and the income-tax records were required to be reconciled with the actual transactions identified in the seized material. The Ld.DR submitted that the Ld.CIT(A) had erred in accepting the assessee's explanation based on subsequent disclosures without first establishing a transaction-wise correlation between the seized sales and the sales declared in the regular books of account.

The Ld.DR further submitted that the financial results declared by the assessee for the assessment year under consideration also required careful examination. It was contended that the assessee had declared a net profit ratio of merely 3.48% for A.Y.2022-23, as against the net profit of approximately 17% declared for A.Y.2020-21 and the profit rate of 25% adopted in the earlier

The Ld. DR contended that the assessee was engaged in the same line of mining business during the relevant assessment years and that the substantial reduction in the net profit ratio called for a satisfactory explanation supported by the books of account and other relevant material. It was submitted that the assessee had not demonstrated, to the satisfaction of the Assessing Officer, the existence of any exceptional commercial circumstances warranting such a steep decline in profitability. The Ld. DR submitted that, when the low net profit ratio was considered together with the seized Tally records and the failure of the assessee to establish a one-to-one correlation between the unaccounted sales and the disclosed turnover, the inference drawn by the Assessing Officer regarding suppression of sales stood reinforced. According to the Ld. DR, the Ld. CIT(A) had failed to appreciate the cumulative effect of these circumstances and had erroneously deleted the addition.

The Ld. DR, therefore, submitted that the impugned order of the Ld. CIT(A), insofar as it directed deletion of the addition of Rs.5,91,57,963/-, was unsustainable on the facts of the case. It was contended that the Ld. CIT(A) had failed to appreciate the evidentiary value of the seized Tally records, the sworn statement recorded during search, the absence of a transaction-wise reconciliation and the substantial decline in the net profit ratio declared by the :-54-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. assessee. The Ld. DR accordingly prayed that the order of the Ld. CIT(A) on this issue be set aside and the addition made by the Assessing Officer be restored.

Without prejudice to the foregoing submissions, the Ld. DR submitted that, even assuming that the Hon'ble Tribunal was not inclined to restore the entire addition of Rs.5,91,57,963/-, the Ld.CIT(A) was not justified in directing complete deletion of the addition without considering the profit element attributable to the unaccounted sales detected during search. The Ld.DR contended that the existence of the sales identified in the seized material was not in dispute and that the assessee had failed to establish their complete and proper accounting in the disclosed turnover. It was submitted that the deletion of the entire addition, without examining whether any income had escaped assessment on account of the identified transactions, would result in granting relief beyond what was warranted by the facts and circumstances of the case.

The Ld.DR further submitted that the profit element embedded in the unaccounted sales was required to be determined having regard to the nature of the assessee's business, the profitability disclosed in the relevant year and the profit rates adopted in the earlier assessment years. It was contended that the net profit ratio of 3.48% declared for the assessment year under consideration could not automatically be adopted for determining the profit attributable to the unaccounted sales, particularly when the Revenue had disputed the correctness of the disclosed financial results. The Ld.DR submitted that the earlier profit rates of 25% and 19.7%, as referred to in the assessment proceedings, constituted relevant comparative material for determining an appropriate rate of profit, subject to consideration of the facts of the relevant assessment years.

Per contra, the Ld. AR, appearing on behalf of the assessee, strongly supported the order of the Ld.CIT(A) deleting the addition of Rs.5,91,57,963/- made by the AO towards alleged unaccounted sales. The Ld.AR submitted that the AO had erroneously treated the sales which were not subjected to GST as on the date of search as unaccounted sales, without appreciating that the very same sales were subsequently reported in the GST returns and duly included in the turnover disclosed by the assessee in its Profit and Loss Account.

The Ld.AR submitted that, during the course of search conducted on 02.03.2022, the Department found seized Tally data reflecting sales of Rs.7,94,06,417/- for the period from 01.04.2021 to 28.02.2022. Out of the said turnover, the AO treated sales of Rs.5,91,57,963/- as unaccounted merely because GST had not been discharged thereon as on the date of search. However, the assessee had disclosed total turnover of Rs.8,23,38,060/- in its P&L Account, which included the disputed sales of Rs.5,91,57,963/-.

The Ld. AR further submitted that, if the turnover determined by the AO were accepted, it would imply that the assessee had effected sales of Rs.6,20,89,606/- during March 2022 alone, as against the aggregate sales of Rs.7,94,06,417/- reflected in the seized Tally data for the preceding eleven months. The AO had not brought on record any material to establish such substantial sales during March 2022. The Ld.CIT(A) had rightly appreciated this factual inconsistency while deleting the addition.

The Ld.AR also invited the attention of the Bench to the turnover of the preceding two assessment years. The total turnover, including the sales identified by the search team, was Rs.7,01,87,020/- for AY 2020–21 and Rs.9,45,47,777/- for AY 2021–22. The average turnover for these two years was approximately Rs.8.24 crores, which was substantially in line with the turnover of Rs.8,23,38,060/- disclosed by the assessee for the year under consideration. The Ld. AR submitted that these comparative figures further supported the turnover declared by the assessee.

The Ld. AR further submitted that the disputed sales of Rs.5,91,57,963/- were subsequently reported in the GST returns filed for the quarter ending March 2022. The assessee had reported total sales of Rs.6,16,10,811/- for the :-57-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. said quarter, comprising the disputed sales of Rs.5,91,57,963/- and sales of Rs.24,52,848/- effected during March 2022. Thus, the very same sales identified during the search were subsequently subjected to GST.

The Ld.AR submitted that, out of the disputed sales, an amount of Rs.4,26,99,223/- pertaining to M/s.P S Blue Metals was duly reported as B2B sales in GSTR-1. The remaining sales were reported as B2C sales. The assessee had not effected any fresh sales to M/s.P S Blue Metals during the quarter ending March 2022. The GST returns therefore corroborated the assessee's explanation that the disputed transactions represented earlier sales which were subsequently regularised for GST purposes.

The Ld.AR further submitted that the assessee had reported turnover of Rs.8,22,49,874/- in GSTR-3B, whereas the turnover disclosed in the Profit and Loss Account was Rs.8,23,38,060/-. Thus, the turnover disclosed for income- tax purposes was higher than the turnover reported for GST purposes. The AO had failed to reconcile these figures before concluding that the assessee had suppressed sales of Rs.5,91,57,963/-. The Ld. CIT(A), after appreciating the reconciliation furnished by the assessee, had rightly deleted the addition.

Adverting to the contention of the Ld.DR regarding the reduction in the net profit ratio as compared to the preceding assessment years and higher profit shown in the seized tally as on 28.02.2022, the Ld.AR submitted that the AO had neither rejected the books of account u/s.145(3) of the Act nor made any disallowance of the expenditure claimed in the Profit and Loss Account. Mere reduction in the net profit ratio, without pointing out any specific defect in the books or establishing the existence of sales outside the declared turnover, could not justify an addition towards alleged unaccounted sales.

Coming to the alternative contention of the Ld. DR that the profit element embedded in the sales of Rs.5,91,57,963/- ought to be estimated, the Ld. AR submitted that the question of estimating profit would arise only where the existence of unaccounted sales outside the books of account had first been established. In the present case, the disputed sales were already subsumed in the turnover of Rs.8,23,38,060/- disclosed by the assessee, and the resultant business income had already been offered to tax.

The Ld. AR submitted that any further estimation of profit on the same sales would result in taxing the income attributable to those sales twice. Moreover, the AO had neither rejected the books of account nor resorted to estimation of income. The alternative plea of the Ld.DR was therefore not the case made out in the assessment order and was devoid of merit.

In conclusion, the Ld. AR submitted that the AO had failed to establish that the disputed sales of Rs.5,91,57,963/- were over and above the turnover declared by the assessee. The seized Tally data, GST returns and Profit and Loss Account clearly supported the assessee's explanation that the disputed sales had already been accounted for. The Ld.CIT(A) was therefore fully justified in deleting the addition. Accordingly, the Ld.AR prayed that the order of :-59-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. the Ld.CIT(A) on this issue be upheld and the grounds raised by the Revenue be dismissed.

We have heard the rival submissions, perused the orders of the authorities below, and carefully considered the material placed before us including the written submission placed by both the sides. The solitary issue arising for our consideration in the present ground of appeal is whether the Ld.CIT(A) was justified in deleting the addition of Rs.5,91,57,963/- made by the AO towards alleged unaccounted cash sales for the A.Y.2022-23. The Revenue has assailed the impugned order principally on the ground that the Ld.CIT(A) failed to appreciate the evidentiary value of the Tally data seized during search, the statement recorded u/s.132(4) of the Act, and the alleged failure of the assessee to establish a transaction-wise correlation between the sales identified during search and the turnover disclosed in the return of income. The Ld. DR has further sought to support the addition by referring to the decline in the net profit ratio and, alternatively, has prayed for estimation of the profit element attributable to the impugned sales. Having given our thoughtful consideration to the entire factual matrix, we find that the conclusion reached by the Ld. CIT(A) is supported by the material on record and does not warrant interference for the reasons discussed hereinafter.

At the outset, it is necessary to appreciate the precise nature of the controversy. A search u/s.132 of the Act was conducted on 02.03.2022, during which certain electronic records, including the Tally database pertaining to the business activities of the assessee, were found and seized. The said Tally data contained details of sales effected during the period from 01.04.2021 to 28.02.2022. The total sales reflected in the seized Tally Profit and Loss Account for the aforesaid period amounted to Rs.7,94,06,416.96, rounded off to Rs.7,94,06,417/-. Out of the said turnover, the AO identified sales aggregating to Rs.5,91,57,963/- under the heads "Local Credit Sales" and "Local Sales",

The aforesaid factual position assumes considerable significance because the AO, while completing the assessment, proceeded to add the entire amount of Rs.5,91,57,963/- to the turnover of Rs.8,23,38,060/- disclosed by the assessee in its Profit and Loss Account. The consequence of such an approach was that the assessee's total turnover stood enhanced to Rs.14,14,96,023/-. However, the assessment order does not identify any independent sales transactions which, when added to the turnover already disclosed, would justify such an enhanced figure. The AO has not demonstrated that the sales of Rs.5,91,57,963/- were outside the total sales of Rs.7,94,06,417/- appearing in the seized Tally data. Nor has he established that the said sales were excluded from the turnover of Rs.8,23,38,060/- ultimately disclosed by the assessee. The addition has, therefore, proceeded on an assumption that the sales identified as not having been subjected to GST on the date of search necessarily represented additional turnover for income-tax purposes. In our considered view, such an assumption cannot substitute the factual enquiry necessary to establish that the impugned sales were over and above the turnover already disclosed.

We find that the Ld.CIT(A) has examined the seized Tally data in conjunction with the turnover disclosed in the Profit and Loss Account and the GST returns. The comparison undertaken by the Ld.CIT(A) reveals that the aggregate sales up to 28.02.2022, as emerging from the seized Tally data, were :-61-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. Rs.7,94,06,417/-, whereas the assessee had disclosed total turnover of Rs.8,23,38,060/- for the entire previous year ending on 31.03.2022. The difference between the two figures is Rs.29,31,643/-, representing the additional turnover disclosed for March 2022 in the reconciliation accepted by the Ld.CIT(A). Thus, the turnover disclosed in the Profit and Loss Account is reconcilable with the turnover emerging from the seized material, together with the turnover disclosed for the remaining period of the previous year. The AO has not identified any further sales outside these figures. In these circumstances, we are unable to appreciate the basis on which the AO proceeded to treat the sum of Rs.5,91,57,963/-, which admittedly formed part of the seized turnover of Rs.7,94,06,417/-, as an additional component of the turnover disclosed in the Profit and Loss Account.

The Ld.DR has vehemently contended that the existence of unaccounted sales stands established by the seized Tally data and that the Ld.CIT(A) erred in disregarding such incriminating material. We are unable to accept the contention in the manner in which it has been advanced. There is no dispute regarding the existence of the sales transactions identified in the seized Tally data. The assessee has not denied having effected such sales. On the contrary, the assessee has specifically relied upon the seized Tally data to demonstrate that the impugned sales were included in the aggregate turnover reflected therein. The controversy is not whether the assessee effected sales of Rs.5,91,57,963/-, but whether those sales constituted turnover additional to the amount of Rs.8,23,38,060/- disclosed in the return of income. The existence of a sales transaction and its non-inclusion in the turnover ultimately disclosed are two distinct factual propositions. Proof of the former does not, by itself, establish the latter. The Revenue cannot discharge the burden of establishing additional undisclosed turnover merely by repeatedly referring to the existence of sales which the assessee itself admits and claims to have included in the disclosed turnover.

We further find that the assessment order does not disclose any exercise undertaken by the AO to establish that the sales identified under the aforesaid ledger heads were excluded from the turnover disclosed by the assessee. No separate sales register, parallel account, independent statement of turnover, or other material establishing additional sales of Rs.5,91,57,963/- over and above the declared turnover has been identified. The AO has also not pointed out any discrepancy in the aggregate sales figure of Rs.7,94,06,417/- emerging from the seized Tally data as on 28.02.2022. In the absence of such material, the mere description of certain transactions as unaccounted sales cannot justify their addition to the turnover ultimately disclosed, particularly when the assessee has furnished a reconciliation explaining their inclusion therein.

The Ld.DR has further submitted that the assessee was required to establish a one-to-one correlation between the individual transactions aggregating to Rs.5,91,57,963/- and the corresponding entries in the regular

In particular, the contention that the disclosed turnover of Rs.8,23,38,060/- is merely higher than the disputed sales of Rs.5,91,57,963/- does not correctly represent the assessee's case. The assessee's case is that the disputed sales are included in the aggregate sales of Rs.7,94,06,417/- reflected in the seized Tally data and that the aggregate sales, together with the turnover disclosed for March 2022, reconcile with the annual turnover of Rs.8,23,38,060/-. This is a materially different proposition from a claim based solely upon the fact that the annual turnover exceeds the disputed sales. The Ld.DR's objection, insofar as it proceeds on the latter understanding, fails to address the actual reconciliation accepted by the Ld.CIT(A).

We are conscious that an aggregate reconciliation, standing alone, may not conclusively establish the inclusion of every individual transaction where the underlying records disclose material inconsistencies. However, in the present case, the Revenue has not identified any particular transaction which is shown

We now advert to the GST records relied upon by the assessee. It is the specific case of the assessee that the sales of Rs.5,91,57,963/-, which had not been subjected to GST as on the date of search, were subsequently reported in the GST returns filed for the quarter ending March 2022. The assessee has furnished a reconciliation showing that sales of Rs.6,16,10,811/- were reported for the said quarter, comprising the impugned sales of Rs.5,91,57,963/- and further sales of Rs.24,52,848/- effected during March 2022. The Ld.CIT(A), after considering the submissions and the relevant GST records, has recorded a finding that the impugned sales were subsequently reported in the GST returns and that the applicable GST was discharged. The Revenue has not brought on record any material demonstrating that the GST disclosures relied upon by the assessee were fictitious, that the transactions disclosed therein were different from the transactions identified during search, or that the reconciliation furnished by the assessee was materially incorrect.

We find considerable force in the submission of the Ld.AR that the GST disclosures furnish independent corroboration of the assessee's explanation. Out of the disputed sales of Rs.5,91,57,963/-, an amount of Rs.4,26,99,223/- pertaining to M/s.P S Blue Metals was reported as B2B sales in GSTR-1. The assessee has specifically explained that no fresh sales were effected to the said

The Ld.DR has contended that subsequent GST compliance cannot automatically establish that the sales were included in the income-tax turnover. As an abstract proposition, we find no difficulty in accepting that GST compliance and income-tax disclosure are governed by different statutory requirements and that a GST return, by itself, may not conclusively establish the correctness of the turnover disclosed for income-tax purposes. However, the Ld.CIT(A) has not deleted the addition merely because the assessee subsequently discharged GST. The GST returns have been considered as corroborative evidence in conjunction with the seized Tally data and the Profit and Loss Account. The question is whether the cumulative effect of these records supports the assessee's explanation. Having regard to the facts discussed hereinabove, we find that the Ld.CIT(A) has correctly appreciated the GST disclosures as part of the overall reconciliation rather than treating them as conclusive evidence in isolation.

The assessee has also furnished a comparison of the annual turnover reported in GSTR-3B with the turnover disclosed in the Profit and Loss Account. The turnover reported in GSTR-3B was Rs.8,22,49,874/-, whereas the turnover disclosed in the Profit and Loss Account was Rs.8,23,38,060/-. The difference between the two figures is Rs.88,186/-, with the turnover disclosed for income-

The contention of the Ld.DR that the absence of GST being charged on the identified sales and the non-generation of regular sales invoices support the inference of suppression also does not advance the Revenue's case to the extent necessary to sustain the impugned addition. The failure to comply with GST requirements at the relevant point of time may constitute a matter for examination under the applicable GST law. However, such non-compliance cannot automatically lead to the conclusion that the corresponding sales remained outside the turnover ultimately disclosed for income-tax purposes. The two issues must not be conflated. The assessee's explanation is that the sales had been recorded in the seized Tally data, were subsequently reported for GST purposes, and were included in the annual turnover disclosed in the Profit and Loss Account. Unless the Revenue establishes that the sales remained excluded from the disclosed turnover, the fact that GST had not been discharged as on the date of search cannot independently justify their addition once again.

We also find that the Ld. CIT(A) has specifically recorded that the AO failed to bring any adverse material to disprove the reconciliation furnished by the assessee. The Revenue has not demonstrated before us that the first appellate authority overlooked any material discrepancy in the GST records or :-67-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. misread any entry in the seized Tally database. The findings of the Ld.CIT(A) are founded upon identifiable figures and the documents considered in the appellate proceedings. In the absence of any specific infirmity being demonstrated in those findings, we see no justification for substituting the general apprehension expressed by the Revenue for the factual conclusion reached by the Ld. CIT(A).

Another important aspect which, in our considered view, goes to the root of the matter is the consequence of the addition made by the AO. The assessee has disclosed turnover of Rs.8,23,38,060/- in its Profit and Loss Account. By adding Rs.5,91,57,963/- thereto, the AO has effectively determined the turnover at Rs.14,14,96,023/-. This figure is not supported by any independent computation of sales, any separate seized sales register, or any other material demonstrating that the assessee actually effected sales of such magnitude during the relevant previous year. The AO has merely aggregated the declared turnover and one component of the seized turnover without first establishing that the two amounts represent distinct sets of transactions.

The infirmity in the aforesaid approach becomes apparent when the enhanced turnover is compared with the sales reflected in the seized Tally data. The seized records disclose aggregate sales of Rs.7,94,06,417/- up to 28.02.2022. If the turnover of Rs.14,14,96,023/- determined by the AO were to be accepted, it would necessarily imply additional turnover of Rs.6,20,89,606/- over the sales reflected in the seized records for the period ending 28.02.2022. In the absence of any other identified sales outside the seized records, such an approach would require the Revenue to establish substantial additional turnover during the remaining period of the previous year. However, the AO has not identified any corresponding sales transactions, purchasers, invoices, transport records, production records, or other evidence supporting such additional turnover.

We clarify that the absence of evidence of additional production or mining capacity is not, by itself, determinative of the issue, since sales may, depending upon the facts, also arise from existing stock or purchases. Nevertheless, where the AO seeks to sustain additional turnover of Rs.5,91,57,963/- despite the reconciliation furnished by the assessee, the absence of any corresponding evidence of additional sales or business activity assumes relevance. The Ld.CIT(A) has considered this circumstance along with the seized Tally data, the GST disclosures and the Profit and Loss Account. We find no infirmity in such an appreciation of the evidence.

The Ld. AR has also referred to the turnover figures of the preceding two assessment years. The total turnover, including the sales identified by the search team, amounted to Rs.7,01,87,020/- for assessment year 2020-21 and Rs.9,45,47,777/- for assessment year 2021-22. The average of these figures is Rs.8,23,67,398.50, which is broadly in line with the turnover of Rs.8,23,38,060/-

In our considered opinion, an addition cannot be sustained merely because the AO entertains a suspicion that the assessee may have effected additional sales. Such suspicion must be supported by material capable of establishing that the impugned transactions remained outside the turnover disclosed. The present addition suffers from a fundamental factual defect, namely, the failure to distinguish between sales identified during search and sales remaining undisclosed in the return of income. The seized material establishes the former. It does not, without further reconciliation or independent evidence, establish the latter. The Ld.CIT(A) has correctly appreciated this distinction and has rightly held that the enhanced turnover determined by the AO lacks the necessary evidentiary foundation.

The Ld. DR has placed considerable reliance upon the sworn statement of Shri Subramani Perumal recorded u/s.132(4) of the Act on 06.03.2022, particularly the response to Question No.38, wherein the existence of accounted as well as unaccounted purchases and sales was acknowledged. We have carefully considered this contention. The statement recorded during search is undoubtedly a relevant piece of evidence and cannot be disregarded merely because the assessee subsequently furnishes an explanation. However, the evidentiary value of such a statement must be appreciated with reference to the precise question under consideration and the other material

It is pertinent to note that Shri Subramani Perumal, while acknowledging the existence of such transactions, had sought time to verify their exact quantum with reference to the Tally records and supporting documents. The statement, therefore, cannot be read as an unequivocal admission that the amount of Rs.5,91,57,963/- constituted income or turnover additional to the amount ultimately disclosed in the Profit and Loss Account. The statement must be read in its proper factual context. The Revenue has not pointed out any specific answer wherein Shri Subramani Perumal admitted that the impugned sales were independent of, and over and above, the aggregate turnover of Rs.7,94,06,417/- reflected in the seized Tally data or the turnover of Rs.8,23,38,060/- subsequently disclosed.

The assessee has not sought to retract the existence of the sales transactions identified during search. Its explanation is that the said sales were subsequently included in the disclosed turnover and reported for GST purposes. Thus, the question of disregarding or retracting the statement does not arise in the manner suggested by the Revenue. The admission regarding the existence of transactions and the explanation regarding their subsequent accounting are capable of being considered together. The statement establishes that certain transactions had not been properly accounted for or reported at the time of search. Whether those transactions continued to remain undisclosed in the return of income is a separate factual enquiry. The Ld.CIT(A) has undertaken that enquiry by examining the seized Tally data, GST disclosures and the Profit and Loss Account.

We now deal with the contention of the Ld.DR that the assessee had declared a net profit ratio of merely 3.48% for the assessment year under consideration, as against approximately 17% for assessment year 2020-21 and the profit rates of 19.7% and 25% referred to in the proceedings relating to the earlier assessment years. According to the Ld.DR, the substantial decline in profitability, when considered in conjunction with the seized Tally data, reinforces the inference that the assessee had suppressed its sales and understated its business income. The Ld. AR, on the other hand, has submitted that the AO neither rejected the books of account u/s.145(3) of the Act nor doubted the expenditure and made any specific disallowance of the expenditure debited in the Profit and Loss Account. It is further contended that the assessment order does not make any addition on account of the fall in the net profit ratio.

Having considered the rival submissions, we find that the issue concerning the correctness of the profit ratio is distinct from the issue of alleged suppression of turnover. The impugned addition of Rs.5,91,57,963/- was made by the AO on the premise that the sales identified in the seized Tally data had not been included in the turnover disclosed by the assessee. The addition was :-72-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. not made on the basis of a determination that the net profit declared by the assessee was understated by reason of inflated expenditure, incorrect valuation of stock, or any other identified defect in the computation of business income. The assessment order does not contain a finding that the assessee's books of account were unreliable for the purpose of computing the business income, nor does it disclose any exercise undertaken to determine the correct profits of the business by adopting a particular rate of profit.

We are conscious that a fall in the gross profit or net profit ratio may constitute a relevant circumstance warranting further examination of the books of account. However, a decline in profitability, by itself, does not establish that the assessee has effected sales outside the turnover disclosed. Profitability may vary from year to year for several commercial reasons, including changes in the cost of production, operating expenditure, sale prices, product mix and other business circumstances. It is not necessary for us to determine which of these factors, if any, contributed to the decline in the assessee's profitability, since the AO has not undertaken such an examination or recorded any finding thereon. The mere comparison of profit ratios, without identifying a defect in the accounts or establishing additional sales, cannot justify the addition of the entire disputed turnover.

More importantly, even if the Revenue's contention regarding the decline in profitability were accepted as a circumstance requiring examination, it would not establish that the sales of Rs.5,91,57,963/- were over and above the turnover of Rs.8,23,38,060/- disclosed by the assessee. The two propositions are not interchangeable. The question whether the assessee has correctly computed its profit on the disclosed turnover is different from the question whether the assessee has failed to disclose additional turnover. A low profit ratio cannot be employed to overcome the absence of evidence establishing

We further find that the profit rates of 19.7% and 25% referred to by the Ld.DR relate to earlier assessment proceedings as voluntarily admitted by the assessee on unaccounted sales unearthed during the course of search. No material has been brought to our notice demonstrating that the factual circumstances, the accounting results and the basis for adopting those rates were identical to those prevailing during the assessment year under consideration. The mere fact that a particular rate of profit was adopted in an earlier assessment year does not justify its mechanical application to another assessment year. Each assessment year is a separate unit of assessment, and any estimation of income must have a rational nexus with the material relevant to that year. In the absence of such an exercise by the AO, the comparative profit rates relied upon by the Ld. DR cannot provide an independent foundation for sustaining the impugned addition.

This brings us to the further contention of the Ld.AR that the Ld.DR is seeking to improve the assessment order by introducing, for the first time before the Tribunal, an alternative basis for sustaining the addition. The submission deserves careful consideration, since the distinction between defending an assessment order on its existing factual foundation and seeking to sustain it upon an altogether different factual foundation is of considerable importance in appellate adjudication. The Ld.DR is entitled to support the assessment order by advancing legal submissions, drawing attention to material already forming part of the assessment record, and explaining the findings recorded by the AO. However, such entitlement cannot be extended to supplying a missing factual foundation or substituting an entirely different basis for the addition which the AO himself has not adopted.

We find that the contention now advanced regarding the fall in profitability does not merely constitute an additional legal argument in support of the existing addition. In substance, it seeks to introduce a different factual premise, namely, that the disclosed business income is unreliable and that a higher profit ought to be determined by reference to the rates adopted in earlier assessment years. Such a contention would require an independent examination of the accounts, identification of defects in the computation of business income, consideration of the comparability of the earlier years, and determination of an appropriate basis for estimation. These are matters which have not formed the foundation of the impugned addition. The Ld.DR cannot, through oral submissions before the Tribunal, undertake an assessment exercise which the AO himself has not undertaken.

It is a settled principle of appellate adjudication that an order must ordinarily be examined with reference to the reasons and factual findings upon which it has been made. The Revenue cannot be permitted to substitute an unrecorded factual premise for the premise actually adopted by the AO and thereby seek to sustain an addition which is otherwise unsupported by the :-75-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. material relied upon in the assessment order. To permit such a course would render the findings recorded by the AO inconsequential and would require the assessee to meet, for the first time at the appellate stage, an altogether different case from the one made out in the assessment proceedings.

We may, however, clarify that the juri iction of the Tribunal u/s.254 of the Act is not confined to a mechanical examination of the language employed in the assessment order. The Tribunal possesses wide powers to decide questions arising in the appeal, subject to the statutory framework, the material on record and the requirements of natural justice. A party may, in an appropriate case, seek permission to raise an additional ground or a legal contention arising from facts already available on record. Nevertheless, the existence of such appellate powers does not dispense with the requirement that an addition must possess a sustainable factual and legal foundation. Nor does it entitle the Revenue, as a matter of course, to replace the case made out by the AO with a different case requiring fresh factual investigation.

In this context, the distinction between an additional legal argument and a new factual basis for assessment must be maintained. If the Revenue advances an alternative legal interpretation of the same facts upon which the AO has proceeded, such a contention may fall within the permissible scope of appellate submissions. On the other hand, where the Revenue seeks to sustain an addition by alleging a different factual defect, invoking an estimation methodology not adopted in the assessment order, or introducing an independent source of income not considered by the AO, the matter cannot be treated as a mere improvement in legal argument. The latter course would amount to reconstructing the assessment order rather than defending it.

The Hon'ble Supreme Court, in CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891 (SC) and CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66

We also bear in mind that the Tribunal's power to entertain additional grounds is governed by Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, and the principles explained by the Hon'ble Supreme Court in National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC). The said principles recognise the Tribunal's power to consider an additional question of law arising from facts already on record, subject to the requirements of a fair opportunity of hearing. They do not establish an unrestricted right to introduce fresh factual allegations or to sustain an addition upon an entirely new factual basis without the necessary examination of the underlying material.

Applying the aforesaid principles to the facts before us, we find that the Revenue's reliance upon the comparative net profit ratios cannot cure the fundamental defect in the addition. The AO has not demonstrated that the disputed sales were outside the turnover disclosed by the assessee. The Ld.CIT(A) has recorded a contrary finding upon appreciation of the relevant material. The Ld.DR cannot displace that finding by contending that the assessee's profitability was comparatively low, since the correctness of the profit ratio was not the basis upon which the entire disputed sales consideration was brought to tax. The Revenue's argument, therefore, fails both on its own factual merits and insofar as it seeks to substitute a different basis for the impugned addition.

We shall now consider the alternative prayer of the Ld.DR that, even if the entire addition of Rs.5,91,57,963/- is not sustained, the profit element embedded in the impugned sales ought to be estimated. The Ld.DR has submitted that the existence of the sales identified during search is not in dispute and that the Ld.CIT(A) ought not to have deleted the entire addition without determining the profit attributable to such sales. The Ld.AR, on the other hand, has submitted that the question of estimating profit on unaccounted sales arises only when the existence of sales outside the disclosed turnover has first been established. Since the disputed sales were already included in the disclosed turnover, any further estimation would result in duplication of income.

We find considerable merit in the submission of the Ld.AR. The question whether the entire sales consideration or only the profit element embedded therein is liable to be brought to tax ordinarily arises where the existence of unaccounted sales outside the disclosed turnover has been established. In such a situation, the nature of the business, the treatment of corresponding purchases and expenditure, and the material available on record may become relevant for determining the income attributable to those sales. However, the :-78-: ITA. Nos.2285 & 2286/Chny/2026 IT(SS)A Nos.19 & 20/Chny/2026. present case stands on a different factual footing. The Ld.CIT(A) has found that the disputed sales of Rs.5,91,57,963/- were already included in the turnover of Rs.8,23,38,060/- disclosed by the assessee. Once that finding is accepted, the foundation for a separate estimation of profit on the very same sales ceases to exist as the entire addition itself is deleted.

The profit attributable to sales included in the disclosed turnover forms part of the business results computed in the Profit and Loss Account. If the Revenue seeks to contend that the income computed on such turnover is incorrect, it must establish the relevant defects in the computation of business income and proceed in accordance with law. It cannot merely isolate a component of the disclosed turnover and subject that component to a further estimation of profit without demonstrating that the income attributable thereto has escaped assessment. The alternative prayer of the Ld.DR proceeds on the assumption that the disputed sales remain unaccounted for, whereas the Ld.CIT(A) has recorded a finding, supported by the reconciliation discussed hereinabove, that the sales were already included in the disclosed turnover.

We further find that the AO has not rejected the books of account u/s.145(3) of the Act or adopted any separate rate of profit for the assessment year under consideration. No specific expenditure relatable to the impugned sales has been disallowed. The assessment order does not contain any computation demonstrating that the profit attributable to the disputed sales remained excluded from the returned income. In these circumstances, the alternative plea for estimation of profit would require us to proceed upon a factual premise which has not been established and to adopt an estimation methodology which has not been supported by any independent examination of the accounts for the relevant assessment year.

The alternative prayer of the Ld.DR, therefore, suffers from the same fundamental infirmity as the principal addition. The Revenue has failed to establish that the disputed sales represent turnover outside the disclosed accounts. The alternative plea for estimation cannot be employed to overcome that failure. The question of determining the profit element embedded in unaccounted sales does not arise merely because certain sales were not subjected to GST as on the date of search, when those very sales have been found to be included in the turnover ultimately disclosed both under GST as well as income-tax purposes. We, therefore, reject the alternative prayer of the Revenue for estimation of profit on the impugned sales of Rs.5,91,57,963/-.

We also find that the AO has effectively enhanced the turnover to Rs.14,14,96,023/- without bringing on record material establishing sales of such magnitude. The addition has been made by aggregating the turnover disclosed in the Profit and Loss Account and a component of the turnover appearing in the seized Tally data, without establishing that the two represent distinct transactions. Such an approach results in duplication of turnover. The Ld.CIT(A) has rightly appreciated this fundamental factual infirmity and has correctly held that the addition of Rs.5,91,57,963/- cannot be sustained.

In the result, the appeal of the Revenue in IT(SS)A No.20/Chny/2026 for the A.Y.2022-23 is dismissed.