DUPUTY COMMISSIONER OF INCOME TAX, CHENNAI vs. SOOLAYUDHA PANDIYAN VELKANNAN, CHENNAI

Since identical facts and issues are involved in all these five appeals, these appeals were heard together and disposed of by this common order. For the sake of clarity and convenience, the facts relevant for the in the ITA No.3236/CHNY/2025 for the Assessment Year 2015-16 are stated herein:

The Assessee in ITA No.3236/CHNY/2025 raised the following grounds of appeal : “1. On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income-tax (Appeals) erred in failing to appreciate that the Order passed u/S 143(3) r.w.s 147 of the Ld. Assessing Officer is erroneous on the facts and the merits of the case and provisions of Law as well and hence requires to be quashed.

Briefly, the facts of the case are that the assessee is an Individual engaged in the business of running super market under name and style of M/s.AP Super Market. The assessee filed the Return of Income for the Assessment year 2015- 16 on 31.10.2015. Against the said Return of Income, no scrutiny assessment was made. Subsequently, survey operations under the provisions of section 133A of the Act were conducted in the business premises of the appellant on 26.02.2018. During the course of survey operations, it was found from the print outs taken from the computer system that there was difference in the amount of purchases and sales shown in the Return of Income and sales shown in the print outs. As per the data retrieved from the impounded materials, there was a difference of purchase of Rs.1,44,20,594/- and the difference of sale of Rs.1,98,92,012/- for during the previous year relevant to assessment year 2015-16. The Assessing Officer also recorded the statement from the appellant during the course of survey operations, wherein the assessee had admitted the additional income in respect of both unaccounted purchases and sales as per the printouts from the computer system. Based on this information, the Assessing Officer formed an opinion that the income got escaped assessment from tax. Accordingly, a notice u/s.148 of the Act was issued on 06.06.2018. In response to notice u/s.148 of the Act, the appellant filed Return of Income on 06.04.2019 disclosing same income as shown in the original Return of Income. Against the said Return of Income, the assessment was completed by the ITO, Non Corporate Ward-8(4), Chennai vide order dated 25.12.2019 passed u/s.143(3) r.w.s 147 at a total income of Rs.1,66,50,900/-. While doing so, the Assessing Officer made addition under head “Income from Busies or Profession” of Rs.15,91,360/- by adopting the profit at 8% on differential amount of sales of Rs.1,98,92,011/-. The Assessing Officer also made addition on differential amount of purchase of Rs.1,44,20,593/- as unexplained expenditure unexplained investment u/s.69 of the Act.

Being aggrieved by the above assessment order, the appellant preferred an appeal before ld.CIT(A) contending that the copies of impounded documents during the survey operations were never provided to the assessee despite the request made by the assessee and also the sworn statement recorded during the course of survey operations. It was further contended that the assessment proceedings were completed on an arbitrary manner without providing reasonable opportunity to the appellant. It was further contended that the loose sheet printouts does not constitute conclusive evidence, therefore cannot form the basis for making the addition.

The appellant also submitted analysis of composite value of purchase and sales figures as per impounded records. Based on this analysis, the appellant submitted that the sales figures in any particular month is higher than the purchases made. Thus, it was submitted that the sale proceeds were recycled and ploughed back into the business, hence, it was pleaded that the source for the cost of purchases shown in the printout stands explained.

Without prejudice to the above, it is contended that without purchases, there cannot be a sales and vice-versa and even assuming but not admitting that the information contained in the loose sheets is correct, the total quantum of unexplained purchases is only Rs.8,62,47,206/- and unaccounted sales is Rs.8,92,82,842/-, therefore, it is pleaded that the payment for purchases were made out of sale proceeds made outside of the books of accounts. Thus, it was pleaded that the source for the purchase of unrecorded purchases stands explained.

Without prejudice to above, it is pleaded that the maximum addition that can be made as unexplained expenditure on account of unexplained purchases is only Rs.9,71,723/-, being the amount of differential purchases made during the month of April 2014. However, in the remand report, the Assessing Officer had not accepted the contention of the appellant, for the reason that no basis was furnished. On due consideration of the submissions made by the assessee and the remand report submitted by the Assessing Officer, the ld.CIT(A) reached conclusion that there was discrepancy in respect of purchases and sales between the financial statements and the printouts from the computer found during the survey operations and also rendered a finding that there was no unaccounted excess stock found and further reached the conclusion that sale proceeds were utilized for subsequent month purchases as submitted by the assessee. Accordingly, in the absence of any conclusive evidence brought by the Assessing Officer, the only initial investment in purchase alone had to be brought to tax as unexplained investment and accordingly out of the total purchases for the month of April 2014 Rs.49,00,465/- he sustained addition to the extent of 50% of the purchases made for the month of April 2014 balance addition was deleted by the ld.CIT(A). With regard to the addition made on account of gross profit addition on unaccounted sales, the ld.CIT(A) confirmed the addition.

Being aggrieved by the order of the ld.CIT(A), the appellant is in the appeal before us. The ld.AR submits that the ld.CIT(A) ought not have confirmed the addition made u/s.69C of the Act partly merely based on the loose sheets found during the survey operations. He further submits that without rejecting the books of accounts, the addition u/s.69C of the Act, cannot be made. Without prejudice to the above, he submits that the addition if at all is required to be made can be only restricted to the differential amount between the value recorded in the print outs found during the course of survey and purchase value of printouts recorded in the books of accounts regularly maintained by the appellant. Thus, he submits that the addition cannot be made on arbitrary basis without any evidence. He further submits that estimation of profit of 8% on the undisclosed sales is excessive and arbitrary and it should be based on the Gross Profit disclosed based on the turnover.

On the other hand, Learned Sr.DR vehemently opposed the above submissions and submits that the statement recorded from the assessee during the course of survey operations conducted u/s.133A of the Act as evidentiary value especially in view of the fact that assessee himself admitted the discrepancy between the values of purchases and sales as recorded in the books of accounts and the print out unearthed during the survey operations. In the absence of proper explanation before the Assessing Officer as to the source of the cost of the purchase made outside the books of accounts, the Assessing Officer rightly made the addition as unexplained investment. However, the ld.CIT(A) after thorough analysis of the trend of purchase and sales as held that only 50% of the total purchases made during the first month of April 2014 alone can be treated as unexplained expenditure. Thus, the ld.CIT(A) had passed a very reasoned and speaking order while confirming the 50% of the total purchases made in the month of April 2014 as unexplained investment. Therefore, no interference is called-for.

We heard rival submissions and perused the material available on record. The issue that arises for our consideration is whether the ld.CIT(A) was justified in confirming 50% of cost of purchase made in the month of April 2014 as unexplained expenditure. Admittedly, during the course of survey operations conducted u/s.133A of the act, the Assessing Officer unearthed computer print outs showing total cost of purchases and sales made during the previous year relevant to assessment year under consideration 2015-16, 2016-17 and 2017-18. The Assessing Officer also noticed discrepancy between the amount of purchase and sales shown in the print outs and the financial statements prepared for relevant assessment years. During the course of survey operations, the appellant admitted the discrepancy. Thus, it is an undisputed fact that there was a discrepancy in the amount of purchase and sales between the printouts and the returns of income filed. However, the appellant had not offered any additional income in the Return of Income filed in response to notice u/s.148 of the Act. During the course of assessment proceedings, when the appellant was called-upon as to why the addition should not be made, despite the opportunities given to the appellant, the appellant had not responded to the show cause notice. In the circumstances, the Assessing Officer framed the assessment by making the addition of difference of amount in the purchases as unexplained investment and made addition of gross profit on the differential gross profit addition of 8% sales amount.

On appeal before the ld.CIT(A), the ld.CIT(A) on due analysis the trend of the purchase and sales during the financial years 2015-16, 2016-17 and 2017-18, the ld.CIT(A) had come to conclusion that the sale proceeds were ploughed back into the business and same were available to meet the cost of the purchases made by the appellant. He, therefore concluded that the addition is required to be made only to the extent of 50% of the cost of purchases made in the first month of the period i.e.for the month of April 2014. These findings of the ld.CIT(A) is under challenge before us in the present appeal by the appellant. Though the appellant had failed to offer any explanation in support of the sources of the payment for the differential amount of the purchase made by the appellant, during the course of proceedings before the ld.CIT(A), the pleadings of the appellant that the sale proceeds were ploughed back into the business and recycled for the purpose of meeting the cost of purchases was accepted by the ld.CIT(A). The ld.CIT(A) also accepted that the submission of the appellant that there was an opening stock of Rs.81,43,955/- as on 31.03.2014. Though, the findings of the ld.CIT(A) are not under challenge before us. The ld.CIT(A) rendered the above finding based on the explanation offered by the appellant in support of the source of the differential amount of the purchases made. Therefore, it cannot be said that the appellant had not offered any explanation in support of the differential amount of the purchases made. The explanation offered by the appellant also found to be correct by the ld.CIT(A). However, the ld.CIT(A) restricted the quantum of addition to the extent of 50% of the total purchases made in the month of April 2014 rejecting the contention of the appellant that if at all addition is required to be made, the addition can only be made to the extent of differential amount of purchases amount of Rs.9,37,073/-. We are of the considered opinion that the question of addition u/s.69C in respect of the cost of purchases recorded in the books of account regularly maintained by the assessee does not arise, in as much as, the source of the cost of purchases are duly recorded in the books of accounts maintained by the assessee nor was it the case of Assessing Officer. Even the Assessing Officer restricted the addition to the extent of differential amount of the purchases made. Therefore, the ld.CIT(A) had patently fell in error in confining the addition to the 50% of the total purchases made in the month of April 2014. The addition if at all is required to be made can be only made to the extent of differential amount. However, in view of the admitted fact that there was an opening stock of Rs.81,43,955/- the presumption is that the sales are made out of the opening stock and the sale proceeds were utilized for the purpose of meeting the cost of purchases made. In such scenario, the question of addition on account differential amount of purchase does not arise even for the month of April, 2014. Therefore, the directions of the ld.CIT(A) restricting the addition to 50% of cost of purchases are reversed. Therefore, we direct the Assessing Officer to delete the entire addition made on account of unexplained expenditure of Rs.1,44,20,593/-.

The next ground of appeal challenges the addition of 8% on differential sales. We had carefully perused the assessment order and find that the Assessing Officer adopted 8% of profit on the differential amount of sales and made addition accordingly. The Assessing Officer had not shown any basis for adopting 8% of Gross Profit. We are of the considered opinion that the estimation of profit cannot be arbitrary and it should be based on past history of the appellant or the comparable cases in the similar line of business. However, in the present case, the Assessing Officer had accepted the Gross Profit Ratio shown by the appellant in respect of disclosed turnover, the same Gross Profit Ratio can be adopted for the purpose of making addition on account of differential sales amount. Therefore, this ground of appeal is restored to the file of Assessing Officer on the above lines.

In the result, appeal filed by the assessee in ITA No.3236/CHNY/2025 stands partly allowed for statistical purpose.

The present two appeals are filed by the Revenue challenging the correctness of the finding of ld.CIT(A) deleting addition made u/s.69C of the Income Tax Act, 1961.

For the Assessment Year 2015-16, in assessee’s appeal involving identical issue and facts, we directed the Assessing Officer not to make any addition on account of unexplained expenditure on account of differential amount of purchases for the reasons stated therein.

On the parity of the same reasoning, the findings of the ld.CIT(A) are sustained. We do not find any illegality and perversity in the findings of the ld.CIT(A) deleting the addition made u/s.69C of the Income Tax Act.

In the result, both appeals filed by the Revenue in ITA No.3267/CHNY/2025 and ITA No.3268/CHNY/2025 are dismissed.

The present two appeals are filed by the Assessee challenging the correctness of the finding of ld.CIT(A) confirming the addition at 8% of the differential sales amount. In the assessee’s appeal in ITA No.3236/CHNY/2026 for the A.Y.2015-16 above, we had restored the matter back to the file of Assessing Officer for denovo assessment for the reasons stated therein.

On the parity of the same reasoning, the findings of the ld.CIT(A) confirming adoption of Gross Profit Ratio of 8% on differential amount of sales are reversed. The matters are restored to the file of Assessing Officer for denovo assessment on lines indicated for the Assessment Year 2015-16 in ITA No.3236/CHNY/2025.

In the result, both appeals filed by the assessee are partly allowed for statistical purpose.

To sum up, appeal filed by the assessee in ITA No.3236/CHNY/2025 for the A.Y.2015-16 is partly allowed for statistical purpose, appeals filed by the assessee in ITA Nos.3237 & 3238/CHNY/2026 for A.Y. 2016-17 & 2017- 18 are partly allowed for statistical purpose and cross appeals filed by the Revenue in ITA Nos.3267 & 3268/CHNY/2025 for A.Y.2017-18 & 2016-17 are dismissed. Order pronounced in the open Court on 30th July, 2026.