ITAT Sides with Clothing Firm, Rules Double Taxation on Already Declared Sales is Illegal [Read Order]

In a significant ruling, the Income Tax Appellate Tribunal (ITAT) in Ahmedabad bench has quashed a major tax addition made against a Gujarat-based company, holding that the tax department cannot subject income that has already been declared and taxed once to a second round of taxation. The bench strongly emphasized that such a practice amounts to illegal double taxation.

The case involved Kartik Clothing & Fabrics Pvt. Ltd., a company dealing in denim cloth. The dispute originated from a reassessment proceeding initiated by the Deputy Commissioner of Income Tax, Circle-2(1)(1), Vejalpur. The department had reopened the company's assessment for the financial year 2017-18, corresponding to the Assessment Year 2018-19, based on information received from an investigation wing.

The investigation wing had conducted a search on one Sanjay Govindram Agarwal, also known as Sanjay Tibrewal, who was allegedly running an accommodation entry business. The tax authorities claimed that Kartik Clothing had received bogus sales entries totaling Rs. 1,16,32,855 from three entities linked to Tibrewal: Ganpati Textiles, Hanuman Fabrics, and Narayan & Co. Treating this amount as unexplained money, the Assessing Officer added the full sum to the company’s income under Section 69A of the Income-tax Act, leading to a final assessed income of over Rs. 1.52 crore. This addition was later upheld by the Commissioner of Income Tax (Appeals).

Before the ITAT, the company’s representative, Chetan Agarwal, argued that the sales to these parties were entirely genuine. He contended that the company had already included these sales in its total revenue for the year, declared an income of Rs. 35,97,610, and paid the corresponding taxes. He presented crucial documentary evidence, including sale bills, ledger accounts, details of cheque payments received from the parties, and even lorry receipts proving the physical transportation of goods. The counsel also highlighted that the Assessing Officer had denied the company a crucial opportunity to cross-examine Sanjay Tibrewal, whose statement was the primary basis for the allegation.

The ITAT bench, after reviewing the submissions, found the department's position unsustainable. The tribunal noted that the company had provided concrete evidence to prove the genuineness of the transactions, which the revenue department failed to rebut. Crucially, the bench agreed that once a sum has been duly recorded in the books of account and offered as taxable income, the same amount cannot be taxed again under a different head.

In its decision, the bench relied on the legal principle against double taxation, as established in past judgments including the Gujarat High Court's ruling in the case of CIT vs. Navinbhai N. Patel (2014) and the Delhi High Court's decision in PCIT vs. Garg Acrylics Ltd. (2025). These judgments have consistently held that re-taxing an already declared income is not permissible. The tribunal also held that the denial of cross-examination violated the principles of natural justice, especially when the entire case rested on a third-party statement.

The two-member bench, comprising Siddhartha Nautiyal (Judicial Member) and Annapurna Gupta (Accountant Member), consequently deleted the entire addition of Rs. 1,16,32,855. The tribunal allowed the appeal filed by Kartik Clothing & Fabrics, providing a clear relief to the company and reinforcing the settled law that income cannot be taxed twice.

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