DCIT Vs Essentia Designs Private Limited (ITAT Delhi)
Summary: The Income Tax Appellate Tribunal, Delhi Bench “E”, considered the Revenue’s appeal against the CIT(A)’s order for assessment year 2022-23 in the case of Essentia Designs Private Limited, engaged in the furniture and modular-kitchen business. Following search proceedings, the Assessing Officer treated ₹9,82,29,444 as unaccounted cash sales and estimated gross profit at 25%, resulting in an addition of ₹2,45,57,361. The CIT(A) rejected this gross-profit approach and restricted the addition to ₹19,64,589 by applying a 2% net-profit rate. The Revenue argued that the CIT(A) should have adopted gross profit rather than net profit because the assessee had already claimed indirect expenses in its profit and loss account and there was no evidence that such expenses were incurred separately in cash. The assessee contended that the gross-profit estimate lacked supporting material and referred to the retraction of the statement of its director, Hardesh Chawla, on which the assessment had substantially relied.
The Tribunal found that the 25% gross-profit estimate rested on conjecture and was not linked to the existing business results. It also observed that the Revenue had not independently established the alleged unaccounted cash sales or shown why the retraction was incorrect. The Tribunal noted that ₹1,84,00,000 in cash was found during the search, of which ₹1,72,93,944 belonged to the assessee, and considered the circumstances as a whole. In the interests of justice, the Tribunal directed the Assessing Officer to restrict the addition to ₹20 lakh, thereby partly allowing the Revenue’s appeal. The assessee did not press its cross-objection, which was accordingly dismissed. The order was pronounced on 27 February 2026 by Judicial Member Satbeer Singh Godara and Accountant Member Amitabh Shukla.
The search proceedings were conducted on 9 February 2022 in the case of M/s Adrem (India) Private Limited and its directors, Hardesh Chawla and Monica Chawla, who were also directors of the assessee company. During the proceedings, cash amounting to ₹1.84 crore was found, and Hardesh Chawla stated under Section 132(4) that the seized cash belonged to Essentia Designs Private Limited. The assessment proceedings also referred to his statement concerning alleged unaccounted over-the-counter furniture sales aggregating to approximately ₹10 crore during Financial Year 2021-22. According to the statement, individual cash transactions did not exceed ₹2 lakh, and customer details were therefore not maintained. Subsequently, Hardesh Chawla retracted his statement through an affidavit dated 17 October 2022. The assessee maintained that the retracted statement could not independently justify the proposed addition without corroborative evidence. Nevertheless, the Assessing Officer rejected the retraction, determined unaccounted cash sales at ₹9,82,29,444 and estimated gross profit at 25%, resulting in the disputed addition of ₹2,45,57,361. On appeal, the CIT(A) concluded that the gross profit estimation was unsupported by demonstrative material and adopted a 2% net profit rate on the alleged unaccounted sales.
FULL TEXT OF THE ITAT DELHI ORDER
This appeal filed by the Revenue is against order dated 22.05.2025 of learned Commissioner of Income Tax (Appeals)-27, New Delhi, [hereinafter referred to as ‘ld. CIT(A)] arising out of assessment order dated 03.04.2023 passed under section 143(3) of the Income Tax Act, 1961 pertaining to Assessment Year 2022-23. The word ‘Act’ herein this order would mean Income Tax Act, 1961. The assessee has filed cross objection.
2. The Revenue has raised following grounds of appeals:-
“1. Whether on facts and circumstances of the case and in law, the Ld. CIT(A) has erred in applying NP rate instead of GP rate when there is no evidence, found in search or submitted by the assessee, that indirect expenses have been made by the assessee in cash and not recorded in books of account?
2. Whether on facts and circumstances of the case and in law, the Ld. CIT(A) has erred in applying NP rate instead of GP rate when the benefit of indirect expenses had already been claimed by the assessee by debiting them to Profit & Loss account?
3. Whether on facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not adopting the GP rate of 25% for determining the profit embedded in unaccounted cash receipts?
4. (a) The order of the Ld. Commissioner of Income Tax (Appeals) is erroneous and not tenable in law and on facts. (b) The appellant craves to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.
ITA No.5145/DEL/2025
3. The Revenue has assailed the relief accorded by the ld. CIT(A). In this case, the AO had made an addition of Rs.2,45,57,361/- by estimating gross profit @25% on the unaccounted sales of Rs.9,82,29,444/-. In appeal, the ld. CIT(A) held the view that no case for making any GP addition was made out and that the ld. AO ought to have adopted net profit ratio for his addition, consequently, he estimated net profit of 2% on the said unaccounted sales of Rs.9,82,29,444/- and restricted the additions to Rs.19,64,589/- only.
4. As per brief factual matrix of the case, a search under section 132 was conducted on 09.02.2022. The assessee company filed its original return of Income for A.Y. 2022-23 on 03-11-2022 vide acknowledgement number 7749340910031122 declaring total income of Rs. NIL with business LOSS of Rs. 20,49,733/- which was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). The assessee company i.e. M/s Essentia Designs Private Limited is engaged in the business of sale, purchase, trading, manufacture, installation, consultation and designing of furniture, fittings and modular kitchens. The assessee company has two (2) directors namely Sh. Hardesh Chawla and his wife Smt. Monica Chawla. A Search & seizure operation u/s 132 of the Act was conducted on 09.02.2022 by the Investigation Wing, Delhi of the Department, on M/s Adrem (India) Private Limited and its Directors, Sh. Hardesh Chawla and Smt. Monica Chawla, during which, a cash amount of Rs. 1.84 crores was seized from the various premises of M/s Adrem (India) Private Limited and its Directors. During the course of search proceedings in the case of M/s Adrem (India) Private Limited and its Directors, Sh. Hardesh Chawla stated on oath u/s 132(4) dated 09.04.2022, that, cash seized during the search actually belonged to the assessee company.
5. Subsequently, the case was selected for compulsory scrutiny w/s 143(2) of the Act, as per the guidelines issued by the CBDT, vide F.No. 225/81/2022/ITA-II dated 03.06.2022 & 26.09.2022 and accordingly notice u/s 143(2) of the Act, dated 15.12.2022 was issued to the assessee and duly served upon on the assessee, intimating the assessee that its case has been selected for scrutiny.
6. During the search conducted on the assessee company, it was found that the assessee company was engaged in the practices of making unaccounted cash sales of furniture in cash through Over-the-Counter (OTC). During the course of search proceedings carried out in your case, the statement of Sh. Hardesh Chawla was recorded on 09.04.2022 w/s 132(4) of IT Act, 1961, wherein, he admitted that the assessee company realized a net unaccounted income of around Rs 10 crores in FY 2021-22, from over-the-counter (OTC) sale of furniture to walk in customers which has not been recorded in its regular books of accounts and, subsequently, Sh. Hardesh Chawla also provided a list of items that were sold through OTC to its customers. Sh. Hardesh Chawla further stated that since, the amount of sales in these cases did not exceed Rs. 2,00,000/- at any instance during the entire FY, the details of the said customers were not recorded. He also admitted that the cash of Rs 1.88 crore found from his premises during search action also is a part of the above receipt. In response to AO’s queries regarding the said unaccounted sales, the assessee submitted vide letter dated 13.02.2023, that the statement of Sh. Hardesh Chawla has since been retracted by him by filing an affidavit to that effect on 17.10.2022, and that therefore the statements did not carry evidentiary value. The ld. AO rejected the retraction made by Mr. Chawla and held that the assessee had indeed made unaccounted cash sales of Rs.9,82,29,444/-. He estimated a gross profit @25% on the impugned sales so as to make addition of Rs.2,45,57,361/-. In appeal, the ld. First Appellate Authority held that AO’s conclusions qua estimation of GP are not correct and that the same are not supported by any demonstrative materials brought on records. The ld. CIT(A) estimated a net profit of 2% on impugned unaccounted cash sales of Rs.9,82,29,444/- and restricted the addition to Rs.19,64,589/-.
7. We have heard rival submission on the matter in the light of material available on record. The ld. DR, Ms. Ankush Kalra, vehemently argued in favour of the order of the Ld. Assessing Officer. It was stated that the addition was resting upon admission of the assessee qua its indulgence in unaccounted cash sales. It was stated that the retraction was merely an afterthought. The ld. Counsel for the assessee, Shri Rakesh Gupta, reiterated his arguments taken before the ld. CIT(A) and submitted that the impugned appellate order does not requires any intervention at this stage. It was stated that cash seized was merely Rs.1,84,00,000/- and that the AO’s estimation of GP on the impugned unaccounted cash sales of Rs.9.82 crores approximately was unfounded. It was argued that there was no basis for the same, particularly as the assessee has retracted its statement.
8. We have noted that the Ld. AO while estimating GP of 25% has merely relied upon unfounded conjectures and unsubstantiated estimations. No linkage has been established to the existing business results. We have also noted that the assessee had retracted its statement qua indulgence in unaccounted cash sales and the Revenue has not been able to, in anyway, allude that the said retraction was not correct. No evidence has been brought on records to independently established assessee’s indulgence in unaccounted cash sales. It is an admitted facts on records that unaccounted cash found during search was Rs.1,84,00,000/- was found of which Rs.1,72,93,944/- belongs to the assessee. Considering the varied facts of this case, we are of the considered view that ends of justice would be met if the addition is restricted to Rs.20 lakhs. Accordingly, we set aside the order of the lower authorities and direct the ld. AO to restrict the addition to Rs.20 lakhs only. Accordingly, ground of appeal raised by the Revenue are partly allowed.
9. In the result, the appeal of the Revenue is partly allowed. CO No.290/Del/2025
10. The assessee has challenged the order of the ld. CIT(A) through the abovementioned CO. During the course of hearing, the ld. Counsel for the assessee submitted that it would not like to press the CO. Accordingly, the Cross Objection of the assessee is dismissed.
11. Finally, appeal in ITA No.5145/Del/2025 of the Revenue is partly allowed and Cross Objection of the assessee is dismissed.
Order pronounced in the open court on 27th February, 2026.
