Introduction
May Impress a Math Student but not tax law — this was the clear message when the Income Tax Appellate Tribunal (ITAT) recently struck down an Assessing Officer’s (AO) attempt to add ₹5.39 crore to a taxpayer’s income based only on extrapolating two days’ sales bills. Let’s break down this key ruling, its legal base, and what Indian taxpayers can learn.
Background of the Case
- The AO found only two days’ sales bills during a search.
- Using these, the officer estimated total annual sales and made a hefty ₹5.39 crore addition to declared income.
- The taxpayer argued this was baseless and mathematically inflated.
ITAT’s Key Findings
1️⃣ Addition Based on Insufficient Evidence
- The ITAT observed that two days’ data cannot represent the whole year’s business.
- Referenced principles of fair assessment under Section 143(3) of the Income Tax Act, 1961.
- Cited Supreme Court precedent that estimates must rest on reasonable material, not guesswork.
2️⃣ Violation of Natural Justice
- No opportunity given to the assessee to counter the projection.
- Cross-examination rights ignored.
- This breached principles laid down in Kishinchand Chellaram v. CIT (1980).
Legal Angle: How Courts See Additions
- Section 69C (unexplained expenditure) demands direct evidence of actual undisclosed spending.
- Extrapolation alone doesn’t satisfy this.
- CBDT’s instructions also caution against arbitrary estimates without supporting records.
Practical Takeaway for Taxpayers
Expert View:
“Always maintain complete sales records. If data gaps exist, be proactive during assessment to clarify seasonal trends or daily fluctuations,” advises R. Damodaran, senior tax counsel.
FAQ: Common Questions
Q1. Can the AO make additions based on samples?
Yes, but only if the sample is statistically reasonable and supported by facts.
Q2. What if records are lost?
You must explain the loss and provide alternate evidence. Courts dislike estimates based on thin data.
Q3. Where to check CBDT instructions on such issues?
Refer to incometaxindia.gov.in.
Summary for Snippet
ITAT rejects a ₹5.39 Cr income addition based on two days’ bills. Such estimates, while mathematically neat, can’t substitute for real evidence under Indian tax law.
Conclusion
This ruling is a relief for honest taxpayers and a caution for tax officers relying on rough projections. For more updates on ITAT judgments and to handle assessments smartly, explore Efiletax’s Income Tax Representation Services.