2024 (7) TMI 1279 - AT - Income Tax

Addition made on the basis of sale made outside of the books of account - HELD THAT - It is true that on the basis of Whatsapp chat, AO has brought out some of the parties on record to whom the Assessee has made sales outside the books of account. As no other incriminating document was found in the case of other parties, therefore, action of the CIT(A) in restricting the addition to the parties whose names figure in Whatsapp chat is very much logical and justified. We have also considered the various case laws brought on record by Assessee as well as CIT(A) on this issue in support of their arguments. The addition could be confirmed only on sales made outside the books made to the parties which figures in the Whatsapp chat only. CIT(A) s action of restricting the addition made on the basis of sales made during the year under consideration outside the books of account to parties which figures in the Whatsapp chat only are justified and therefore, Assessee s appeal on this Ground of appeal is allowed. Estimation of GP - Addition made on the basis of sales outside the books of account - The confirmation of addition of entire amount of sales made outside the books of account to other parties by the ld. CIT(A) does not look logical or justified. It is because whatever sales of cycle parts have been made to these parties outside the books of account, must have been procured / purchased / manufactured by the Assessee firm outside the books of account only. In this case, the addition of GP ratio of 8.60% of such sales of Rs. 26,58,600/- could only be sustained along with addition of G.P. on the sales made to M/s Dhanawat to the tune of Rs. 6,11,043/-. We confirm the addition of 8.60% (GP ratio declared by the Assessee) on total sales of Rs. 26,58,600/- Rs. 6,11,043/- as calculated and confirmed by the CIT(A). Thus, Assessee s appeal on this Ground is partly allowed.

Summary

Issues Involved:
1. Addition on account of alleged under-invoicing.
2. Calculation basis for alleged under-invoicing.
3. Reliance on statements and WhatsApp messages.
4. Addition on account of sales outside the books of accounts.
5. Rejection of books of accounts under Section 145(3) of the Income Tax Act.

Detailed Analysis:

1. Addition on Account of Alleged Under-Invoicing:
The Assessee argued that the CIT(A) erred in confirming an addition of Rs. 22,77,606/- for alleged under-invoicing involving three parties: M/s Dhanawat Enterprises, M/s Ashoka Trading Co., and M/s A.K. Sales India. The CIT(A) relied on statements and WhatsApp messages to sustain the addition. During a search operation, statements from employees and WhatsApp chats indicated a suppression of sales by 25% to 30%. The Assessing Officer (A.O.) extrapolated this to the entire turnover, resulting in an addition of Rs. 27,01,59,518/-.

2. Calculation Basis for Alleged Under-Invoicing:
The Assessee contended that the CIT(A) incorrectly calculated under-invoicing by adopting a basis of 30% of disclosed sales. The CIT(A) concluded that only 30% of sales to three specific parties were under-invoiced and added Rs. 22,77,606/- to the income. The Assessee argued that the sales outside the books should only attract gross profit addition, not the total sales amount.

3. Reliance on Statements and WhatsApp Messages:
The CIT(A) relied on statements and WhatsApp messages from employees to uphold the addition. The Assessee argued that the WhatsApp chats were misinterpreted and that no corroborative evidence supported the alleged under-invoicing. The CIT(A) rejected the retraction of statements by the Assessee's partners, considering them an afterthought.

4. Addition on Account of Sales Outside the Books of Accounts:
The CIT(A) confirmed an addition of Rs. 26,58,600/- for sales outside the books of accounts. The Assessee argued that only the gross profit rate of 8.60% should be applied to these sales, not the entire sales amount. The Tribunal agreed, stating that the sales outside the books must have been from unrecorded purchases, and only the gross profit on these sales should be added.

5. Rejection of Books of Accounts Under Section 145(3):
The CIT(A) upheld the A.O.'s rejection of the books of accounts under Section 145(3) of the Income Tax Act. The Assessee argued that no negative or excess stock was found during the search, and the extrapolation of sales based on WhatsApp chats was unjustified. The Tribunal found that the CIT(A)'s restriction of the addition to sales outside the books for specific parties was logical and justified.

Conclusion:
The Tribunal concluded that the CIT(A) was justified in restricting the addition based on sales outside the books to specific parties identified in the WhatsApp chats. The addition of Rs. 26,58,600/- was confirmed with the application of a gross profit rate of 8.60%. The Assessee's appeal was partly allowed, and the Revenue's appeal was also partly allowed, confirming the CIT(A)'s findings on restricting the extrapolation and deleting the larger addition based on the entire turnover.