Seizure Material Non-Reliable as it contained Numerous Errors, inconsistent Balances: ITAT Deletes Addition [Read Order]

The Jaipur Bench of the Income Tax Appellate Tribunal ( ITAT ) has deleted additions concerning unexplained capital and unsecured loans for multiple assessment years and affirmed that the seized, unofficial accounts were fundamentally flawed and could not be used as a basis for assessment.

The case arose following a search operation on the Karnani Group. During the search, digital Tally data files, named "Jai Shree Ram" (for Shri Ambica Garments) and "Hari Om" (for Shri Sanjay Kumar Karnani), were seized.

The Assessing Officer (AO) relied heavily on the opening balances of capital and unsecured loans found in these seized data files to make massive additions of ₹3,80,43,718 and ₹2,43,50,806 respectively, treating them as unexplained cash credits under Section 68 of the Income Tax Act.

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Section68 of the Income Tax Act reads as,

Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

The AO rejected the assessee's regularly audited books of account on the suspicion of unrecorded transactions based on the comparison with the seized data, yet simultaneously relied on the opening balances within that same seized data to make the additions.

Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (appeals) [CIT(A)]. The CIT(A) confirmed the action of the AO. Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT.

The assessee argued before the tribunal that the seized Tally data was merely a rough, consolidated record prepared by staff primarily for calculating sales incentives, not for accurate financial reporting.

The assessee cited the numerous defects and inconsistencies which included that the data was filled with inaccuracies, notional journal entries, incorrect account postings and improper classification of accounts.

The assessee submitted that It was maintained on a calendar year basis (January to December) instead of the statutory financial year (April to March). The assessee also added that It did not contain proper inventory records or closing stock verification.

The two-member bench, comprising Dr. S. Seethalakshmi (Judicial Member) and Rathod Kamlesh Jayantbhai (Accountant Member), observed the inherent contradiction in the AO's approach.

The Tribunal noted that the AO himself had acknowledged the seized accounts were not reliable, citing their defects and had rejected the accounts under Section145(3) for estimating Gross Profit.

The Tribunal held that the seizure material, being preliminary, incomplete, and full of errors, lacked the reliability required to form the sole basis for substantial additions.

The Tribunal further held that since the AO's action of relying on the defective seized material to frame the assessment was legally flawed, and the mandatory requirement of independent application of mind by the approving authority under Section 153D was not met, the entire assessment proceedings were liable to be quashed.

The tribunal directed the deletion of the additions related to the alleged unexplained opening capital and unsecured loans, granting relief to the assessee. The appeal of the assessee was allowed.

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