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Facts
The assessee firm, engaged in engineering and contracting, had a mismatch between its VAT returns and audited profit and loss account regarding sales and purchases. The Assessing Officer rejected the books of account and made additions due to this discrepancy, which was attributed by the assessee to an error in filing VAT returns.
Held
The Tribunal held that the mismatch, if arising from a bona fide and rectifiable error in VAT filing, requires proper verification. The Tribunal found that the corrected VAT Audit Report, presented by the assessee, was not duly examined by the lower authorities.
Key Issues
Whether additions made by the Assessing Officer are sustainable solely on account of a mismatch between VAT returns and books of account without proper verification of a subsequently filed corrected VAT audit report.
Sections Cited
145(3)
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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: SHRI SIDDHARTHA NAUTIYAL & SHRI NARENDRA PRASAD SINHA
O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), ADDL/JCIT(A)-4, Mumbai vide order dated 13.10.2025 passed for A.Y. 2015-16.
The assessee has taken the following grounds of appeal:
“1. The Learned Commissioner of Income Tax (Appeals) erred in disregarding the submission, reconciliation and evidences furnished during the course of appellate proceedings.
The Learned Commissioner of Income Tax (Appeals) erred in holding that the appellant had not submitted the revised Annual VAT report during the course of appellate proceedings.
The learned Commissioner of Income Tax (Appeals) erred in holding that the Assessing Officer justifiably relied on the discrepancy to make the addition.
ASP Engineers & Contractors vs. ITO Asst. Year –2015-16 - 2– 4. The Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs. 27,43,374/- on account of undisclosed sales and further erred in confirming the addition of disallowance of purchases amounting to Rs. 10,20,486/-.
The Learned Commissioner of Income Tax (Appeals) erred in not considering the submission, evidences and factual reconciliation submitted during the course of appellate proceedings.
The appellant firm craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal.”
The brief facts of the case are that the assessee is a partnership firm engaged in the business of engineering and contracting activities, which filed its return of income for A.Y. 2015-16 declaring total income of Rs. 4,88,950/-. The case was selected for limited scrutiny under CASS and during the course of assessment proceedings, the Assessing Officer called for reconciliation of sales and purchases as per the return of income vis-à- vis VAT returns. On verification, the Assessing Officer observed a mismatch between the figures reported in the VAT returns and those reflected in the audited profit and loss account. The purchases as per VAT returns were shown at Rs. 53,41,035/- as against Rs. 63,61,521/- in the books, resulting in a difference of Rs. 10,20,486/-. Similarly, the sales as per VAT returns were shown at Rs. 2,14,27,323/- as against Rs. 1,86,83,949/- in the books, resulting in a difference of Rs. 27,43,374/-.
The assessee submitted before the Assessing Officer that the discrepancy had arisen on account of an error committed by the accountant while filing VAT returns and that steps were being taken to rectify the same by filing the Annual VAT Audit Report. The assessee also contended that the figures of sales and purchases as per the return of income were duly supported by audited financial statements, tax audit report under ASP Engineers & Contractors vs. ITO Asst. Year –2015-16 - 3– section 44AB and Form 26AS. However, the Assessing Officer did not accept the explanation on the ground that no supporting documentary evidence viz. the corrected VAT audit report was furnished during the assessment proceedings. Accordingly, the Assessing Officer rejected the books of account under section 145(3) of the Act and made additions of Rs. 27,43,374/- on account of alleged undisclosed sales and Rs. 10,20,486/- on account of disallowance of purchases, thereby assessing the total income at Rs. 42,52,810/-.
Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(Appeals). In Ground No. 1, the assessee contended that the Assessing Officer erred in not considering that the discrepancy arose due to an error in VAT return filing. The CIT(Appeals) dismissed this ground holding that the contention was not substantiated with sufficient documentary evidence and that VAT records, being statutory in nature, carry a presumption of correctness unless duly rectified. In Ground No. 2, the assessee contended that it was in the process of rectifying the error by filing the Annual VAT Audit Report and that adequate opportunity was not granted by the Assessing Officer. The CIT(Appeals) rejected this contention observing that no such certified VAT audit report was furnished either during assessment or appellate proceedings and that mere intention to rectify cannot invalidate the completed assessment. In Ground No. 3, the assessee submitted that the sales and purchase figures disclosed in the return of income were in consonance with the audited profit and loss account. The CIT(Appeals) dismissed this ground holding that in the ASP Engineers & Contractors vs. ITO Asst. Year –2015-16 - 4– absence of proper reconciliation with VAT records, the audited financial statements alone could not be relied upon. In Ground No. 4, the assessee relied upon the tax audit report in Form 3CB/3CD to substantiate the correctness of the figures. The CIT(Appeals) held that the tax audit report did not resolve the discrepancy with VAT returns and therefore upheld the action of the Assessing Officer. In Ground No. 5, the assessee contended that the sales as per Form 26AS matched with the return of income. The CIT(Appeals) dismissed this ground observing that Form 26AS reflects only TDS-related transactions and cannot be considered as conclusive evidence of total turnover when discrepancies exist with VAT data.
Accordingly, the CIT(Appeals) dismissed all the grounds of appeal and confirmed the additions made by the Assessing Officer. The assessee is in appeal before us against the order passed by the CIT(Appeals) dismissing the appeal of the assessee.
We have heard the rival submissions and perused the material available on record.
It is observed that the additions made by the Assessing Officer are primarily based on the mismatch between the figures reported in the VAT returns and those reflected in the books of account and return of income. The consistent contention of the assessee is that such mismatch arose on account of an inadvertent error committed while filing the VAT returns, which was subsequently rectified by filing the Annual VAT Audit Report in Form 217 under the Gujarat VAT Act on 14.01.2018, wherein the ASP Engineers & Contractors vs. ITO Asst. Year –2015-16 - 5– figures of sales and purchases were duly reconciled with the audited financial statements, return of income and Form 26AS.
We find that the corrected VAT Audit Report, which is a crucial piece of evidence going to the root of the matter, was not duly examined either by the Assessing Officer or by the CIT(Appeals). The Authorities below have proceeded primarily on the basis that no such reconciliation was furnished, whereas the assessee has now placed on record the corrected VAT audit report demonstrating that the figures of turnover and purchases are in agreement with the books of account and return of income. In our considered view, this aspect requires proper verification at the level of the Assessing Officer.
It is a settled principle of law that no addition can be sustained merely on account of mismatch without proper verification and reconciliation of records, particularly when the assessee claims that the discrepancy is due to a bona fide and rectifiable error.
Considering the entirety of facts and in the interest of justice, we deem it fit to set aside the impugned order and restore the matter to the file of the Assessing Officer for de novo adjudication. The Assessing Officer is directed to specifically examine and give a categorical finding with respect to the contention of the assessee that the mismatch in turnover and purchases occurred solely on account of defects in the originally filed VAT returns, which were subsequently rectified by filing the corrected VAT Audit Report on 14.01.2018. The Assessing Officer shall verify whether ASP Engineers & Contractors vs. ITO Asst. Year –2015-16 - 6– the figures of sales and purchases as per the corrected VAT Audit Report are in agreement with the return of income, audited financial statements, tax audit report and Form 26AS.
The Assessing Officer shall grant adequate opportunity of being heard to the assessee and after due verification of all relevant evidences, including the corrected VAT Audit Report, shall decide the issue afresh in accordance with law and grant appropriate relief to the assessee.
In the result, the appeal of the assessee is allowed for statistical purposes. This Order is pronounced in the Open Court on 09/04/2026