Addition for extra sales on basis of trading account for truncated financial year deleted

Addition for extra sales on the basis of trading account for truncated period of the financial year deleted by ITAT

In a recent judgment, ITAT Allahabad deleted addition for excess sales on the basis of reconstructed trading account for truncated period of the financial year being in contravention of the accounting principles and inconsistent with the provisions of Income Tax Act. 

ABCAUS Case Law Citation:
4625 (2025) (07) abcaus.in ITAT

In the instant case, the assessee was dealing in pan masala/zarda production and sale. A search operation u/s 132 of the Income Tax Act, 1961 (“the Act”) was carried out by Revenue. During the assessment proceedings, additions was made for (i) suppression of production on account of low production yield ratio (ii) bogus purchase and (iii) extra sales.

The additions were confirmed/partly confirmed by the CIT(A). However, the Tribunal on the basis of Co-ordinate Bench decision deleted the entire addition on first two counts.

The addition towards “extra sales” had been made by the Assessing Officer (AO) on the basis of reconstruction of trading account from the start of the financial year to the date of search on the basis of sales and purchases shown by the assessee and found from the seized materials.

The AO observed that it was evident from the trading account that credit side was a loss meaning that above stock has been sold outside the books of account. Therefore, he added the difference to the returned income.

Before the Tribunal, the assessee submitted that the addition had been made by the Assessing Officer and had been confirmed by the CIT(A) because of their erroneous understanding of basic principles of the accountancy. 

It was submitted that the Assessing Officer reconstructed the trading account and on the basis of the reconstructed trading account, computed the difference on the credit side of the trading account. 

It was submitted that the reconstructed trading account was made by the Assessing Officer for the period from the 1^st April to the date of search.  However, according to accounting principle, the trading results for the entire financial year i.e. period from 1^st April to 31^st March should be considered and trading results should be computed for the entire financial year based on which the income of the assessee should be computed for the assessment year under consideration. 

It was submitted that making an allegation of excess sales on the basis of truncated period of the financial year was in contravention of the accounting principles and was inconsistent with the provisions of Income Tax Act. 

It was also contended that in any case, the difference on the credit side of the trading account can never be taken to be the assessee’s income based on even elementary understanding of accounting principles.  The difference on the credit side can only be taken as the assessee’s loss and not assessee’s income. 

The Tribunal held that the Assessing Officer and the CIT(A) failed to make a case for the aforesaid addition of alleged extra sale on the basis of accounting principles and provisions of Income Tax Act. 

Accordingly, the Assessing Officer was directed to delete the addition made on account of “extra sale”.

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