The Income Tax Appellate Tribunal (ITAT), Lucknow Bench, has ruled that Assessing Officer (AO) is not legally entitled to estimate sales on a hypothetical basis while ignoring documentary evidence. The ruling came in the case of a Kanpur-based trader, where the tribunal set aside an arbitrary addition of ₹31,93,527 made under Section 68 of the Income Tax Act, 1961.
The assessee, proprietor of Shri Shyam Traders, Kanpur, engaged in the business of selling matchboxes, pan masala, cigarettes, and incense sticks, filed his Income Tax Return (ITR) for AY 2017-18, declaring an income of ₹2,36,130.
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His case was selected for scrutiny under CASS due to a significant increase in cash deposits during demonetization. The AO observed that ₹50,60,000 had been deposited in the assessee’s Canara Bank account, with ₹36,01,000 in Specified Bank Notes (SBNs). The AO alleged that the cash deposits were unexplained and estimated sales for October-November 2016 using an average daily sales formula. The AO then treated ₹31,93,527 as bogus sales and added it to the taxable income under Section 68 of the Income Tax Act, 1961.
The ITAT Bench of Judicial Member Sudhanshu Srivastava, rejected the AO’s assessment methodology, holding that:
The assessee maintained proper books of accounts, including cash books, purchase invoices, and sales bills, which were duly audited and accepted by the Commercial Tax Department. The AO had neither rejected the books of accounts nor pointed out any discrepancy in the sales or purchases.
The increase in cash sales was duly recorded in VAT returns, and the AO had no evidence to prove that sales were bogus. Hypothetical calculations based on assumptions cannot override documentary evidence such as VAT filings and purchase bills.
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The tribunal relied on precedents, including ITAT Bangalore’s ruling in Smt. Malapur Mounika vs. ITO and ITAT Visakhapatnam’s decision in ACIT vs. Hirapanna Jewelers, which held that if sales are accepted in tax returns, they cannot be treated as unexplained cash credits under Section 68 of the Income Tax Act, 1961.
The tribunal overturned the additions and directed the AO to delete the ₹31,93,527 inclusion. The decision upholds the principle that tax assessments must be based on tangible evidence rather than hypothetical estimations.
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