No estimation can be made by extrapolation and multiplication for the period for which no incriminating material were found – ITAT
In a recent judgment, ITAT Delhi has held that the AO is not legally empowered to make estimation for the period, where incriminating materials do not exists, on the basis of extrapolation.
ABCAUS Case Law Citation:
4773 (2025) (10) abcaus.in ITAT
In the instant case, the Revenue had challenged the order passed by the CIT(A) in deleting the addition on account of suppression of profit.
A search and survey operation was carried out at the business and residential premises of the a Group of restaurants where various documents, tally data, hard disk, pen-drive and other documents were found and seized which mainly pertained to the undisclosed cash sale, un-disclosed cash receipts from the investors, un-disclosed cash restaurant expenses, undisclosed cash payment to the investors and personal expenses of the directors and the partners.
The promoters, along with five private limited closely held companies filed applications u/s. 245C(1) of the Act for six Assessment Years ending with the relevant Assessment Year before the Hon’ble Settlement Commission wherein the promoters owned up all the impugned cash receipts and all cash payments including all the undisclosed sales and expenses of all the restaurants managed and controlled by the them including the restaurant of the assessee.
The undisclosed additional income as offered by the promoters and as calculated by the Interim Settlement Board (ISB) was determined vide its Final Order u/s. 245D(4) of the Act. The sales for the relevant Assessment Year, made by the instant restaurant, outside the books, was also declared.Â
As a result of the search operations, the assessment of the assessee was made under section 153A of the act for five preceding AYs and under section 143(3) of the act for the relevant Assessment Year.
In the course of assessment the AO, from examination of seized documents, and analysis of seized material tally data sets, Excel, found that in the AY 2017-18, upto 30.09.2016, there was a sales suppression and suppressed profit. Â Thereafter, the AO, for the remaining part of the year, extrapolated the undisclosed suppressed profit and brought it to tax.
On first appeal, the CIT(A) found that the suppressed sales and profit for relevant Assessment Year upto the period of 30.09.2016, was covered in the order of Interim Settlement Board (ISB).
The CIT(A) observed that there was no incriminating material in the possession of the Id. AO for the period beyond 22.10.2016 and logically there cannot be any material in the possession of the AO as this period was beyond the search date. Therefore, the AO had resorted to extrapolation of undisclosed income on the basis of undisclosed income of the 1st half of the year.
The CIT(A) further observed that the issue of extrapolation of income has been decided by the ITAT Mumbai which held that it is settled issue that no estimation can be made by the AO for which no incriminating material were discovered and no estimations were made based on the theories of extrapolation and multiplication.
For the remaining part of the year, the suppressed profit was deleted on the ground that the AO had no incriminating material for the period after 22.10.2016 and therefore he cannot extrapolate the undisclosed income on the basis of undisclosed income of the 1st half of the year.
The Tribunal noted that the assessee had settled the issues of suppressed income before the Settlement Commission, for the period covered under search, on the basis of seized materials found during the search. The fact that amount surrendered before the ISB by the assessee, was based on the materials seized during the search upto 22.10.2016, has remained uncontroverted.
The issue before the Tribunal for adjudication was whether the seized materials utilized for determining the suppressed sales and profits upto 22.10.2016 i.e., the period covered under search, can be utilized for determining the suppressed sales and profits for the part of year after 22.10.2016 which is not covered by search.
In view of the findings of the CIT(A) and decision of the Co-ordinate Bench, the Tribunal opined that the additions made for the period after 22.10.2016 were not supported by any seized materials and the AO was not legally empowered to make estimation for the period, where incriminating materials do not exists, on the basis of extrapolation.
Accordingly, the appeal was dismissed.
Download Full Judgment Click Here >>
- Onus to prove bad financial condition is on assessee in prosecution proceedings u/s 276B
- Security guard expenses disallowed as deduction from capital gain from sale of plot
- Penalty u/s 270A @ 200% upheld for claiming fake deductions under Chapter VIA
- Ten new offices of Regional Directors MCA established under LLP Act / Companies Act
- Non-redemption not make preference shareholders creditors or debt of company
