Jurisdictional Defects Vitiate Entire Assessment: ITAT Strikes Down Additions Based on Search Material

Miraj Products Pvt. Ltd. Vs ACIT (ITAT Jodhpur)

Conclusion: Assessments arising from searches conducted after 01.04.2021 must strictly comply with the reassessment framework under sections 147 and 148. Failure to adhere to statutory jurisdictional requirements, including mandatory approvals and satisfaction for use of third-party material, rendered the entire assessment void.  Loose, handwritten “dumped documents” recovered from a third party hold no evidentiary weight against an assessee. Clandestine manufacturing and sales charges could not stand on raw suspicion or reverse-engineered ledger entries alone. Appellate authorities could not split or recharacterize a singular trading profit estimation into a dual stream of estimated expenditure (Section 69C) merely to artificially trigger the severe, high-rate tax regime of Section 115BBE.

Held: Search under section 132 was conducted. Assessee had already filed its return of income for AY 2022-23 and no notice under section 143(2) was pending on the date of search. Subsequently, AO issued a notice under section 143(2) and completed the assessment under section 143(3). During the assessment proceedings, AO relied extensively on documents and notepads seized during a search conducted in the case of a third party, M/s Montage Enterprises Pvt. Ltd. Based on alleged discrepancies in the pricing of packaging material,  AO inferred unaccounted purchases, production and cash sales by the assessee. Consequently, additions were made under sections 69A and 69C towards alleged unaccounted sales, unexplained expenditure and unexplained cash payments. CIT(A) partly granted relief by deleting substantial additions but sustained additions by estimating gross profit on alleged suppressed sales and by making certain enhancements. Aggrieved, both the assessee and the Revenue preferred cross appeals before the Tribunal. Assessee contended that the assessment itself was void ab initio as, after the search conducted post 01.04.2021, the assessment for AY 2022-23 could only be made under the reassessment framework prescribed under sections 147 and 148 and not under section 143(3). It was further argued that the notice under section 143(2) had been issued without mandatory prior approval and by an officer lacking jurisdiction.  On merits, it was argued that no evidence of unaccounted production, sales, purchases, cash, stock discrepancies or transportation of goods had been found during the search and that the additions were founded merely on assumptions arising from alleged variations in packaging material prices. Revenue contended that the assessee had indulged in unaccounted purchases of packaging material through inflated invoices and had consequently effected substantial unaccounted sales outside the books of account. It was argued that since all corresponding expenses had already been claimed in the regular books, the entire amount of unaccounted sales constituted undisclosed income liable to be taxed under section 69A read with section 115BBE. Tribunal held that assessment framed under Section 143(3) following a post-2021 search was void ab initio. The statutory scheme mandatorily requires reassessment procedures under Section 147/148, and issuing a Section 143(2) notice without prior administrative approval was a fatal jurisdictional defect that Section 292BB could not cure. Recording formal satisfaction and obtaining prior approval from the Principal Commissioner/Commissioner was an absolute prerequisite to assuming tax jurisdiction over material found with a third party. The mechanical use of supplier documents without establishing a direct nexus with the assessee was invalid. CIT(A) had exceeded the scope of powers conferred under section 251 by transforming additions made under section 69A into trading additions based on estimated gross profit. Such action amounted to introducing a new source and character of income, which was impermissible in law. Tribunal observed that there were multiple jurisdictional defects affecting the assessment proceedings at every stage, including assumption of jurisdiction, framing of assessment and sustenance of additions by the appellate authority. Tribunal held that the notice issued under section 143(2) was invalid and void ab initio; the assessment framed under section 143(3) for AY 2022-23, following a search conducted after 01.04.2021, was without jurisdiction and liable to be quashed; additions based on third-party seized material could not be sustained in the absence of mandatory satisfaction and prior approval as required under the amended provisions governing search-related reassessment proceedings. CIT(A) lacked jurisdiction to convert additions made under section 69A into trading additions by estimating business profits and thereby introducing a new source of income. Consequently, the assessment order stood annulled and the assessee’s legal grounds were allowed.

These cross appeals are filed by assessee and revenue against the order of the Commissioner of Income Tax (Appeals) Udaipur-2 [hereinafter referred to as the CIT(A)], dated 22.02.2025 with respect to the assessment year 2022-23.

2. The appellant assessee has taken following grounds of appeal in ITA No. 412/Jodh/2025:-

1. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of Id. AO for issue of notice u/s 143(2) of the Act void sanction. Under the facts and circumstances of the case, the action of assessment is without jurisdiction and in not permissible either in law or on facts.

2. The Ld. CIT(A) has erred in law and on facts of the case in confirming the action of the Ld. AO in treating amount of Rs 27,22,72,905 as Unaccounted/Suppressed Cash Sales of which the CIT(A) has restricted the addition to Gross Profit Element @ 10.68% to Rs 2,94,68,562.

2.1 The Ld. CIT(A) has erred in law and on facts of the case in enhancement of Estimated Unexplained Expenditure for manufacturing of Stock u/s 69C at Rs 18,51,456 relating to Unaccounted Suppressed Sales of Rs 27,22,72,905.

2.2 Both the lower authorities have erred in law and on facts of the case in not relying upon any corroborative evidences and without affording opportunity for cross-examination, in gross violation of principles of natural justice.

2.3 Without Prejudice to the above, the Gross Profit Rate @10.68% Estimated by the CIT(A) is excessive in nature and the addition of Rs 18,51,456 is unwarranted.

3. The Ld. CIT(A) has erred in law and on facts of the case in confirming the action of the Ld. AO in treating amount of Rs 8,07,47,260 as Gross Profit Earned from Unaccounted/Suppressed Cash Sales Enhanced at Rs 75,60,60,489 arising out of dumb documents and thus confirming the alleged corresponding transaction to some alleged enhanced unaccounted purchases of Rs 32,75,90,180.

3.1 The Ld. CIT(A) has erred in law and on facts of the case in enhancement of Estimated Unexplained Expenditure for manufacturing of Stock u/s 69C at Rs 51,41,211 relating to Enhanced Unaccounted Suppressed Sales 75,60,60,489.

3.2 Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and without affording the appellant the opportunity of Cross Examination and therefore deserves to be quashed.

4. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in levying interest u/s. 234A/B/C/D of the Act.

5. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.

2.1 The appellant has raised following additional grounds:

1. “That on the facts and in the circumstances of the case and in law, the assessment order passed for Assessment Year 2022–23 under section 143(3) of the Income-tax Act, 1961 is without jurisdiction and liable to be quashed, inasmuch as the said year falls within the block of three assessment years immediately preceding the year of search, for which assessment/reassessment ought to have been mandatorily made in accordance with the provisions of section 147 read with section 148 of the Act. The search in the present case having been conducted on 21.02.2023, the assessment years covered under the new reassessment regime include A.Y. 2020–21, 2021–22 and 2022–23. The learned Assessing Officer has erred in law in framing the assessment for A.Y. 2022–23 under section 143(3), which is contrary to the statutory scheme governing search-related assessments. Accordingly, the impugned assessment order being passed without following the mandatory procedure prescribed under the Act is invalid in law and deserves to be quashed”

2. “ That on the facts and in the circumstances of the case and in law, the additions made by the learned Assessing Officer on the basis of material / documents found during the course of search in the case of another person are without jurisdiction and liable to be deleted, inasmuch as the mandatory satisfaction as required under the provisions of the Income-tax Act, 1961 has not been recorded. The learned Assessing Officer has failed to record satisfaction, with the prior approval of the Principal Commissioner of Income-tax, that the seized books of account or documents pertain to or relate to the Appellant or contain information relating to the Appellant, which is a sine qua non for invoking jurisdiction based on third-party material.

In absence of such mandatory satisfaction, the reliance placed on such material is invalid in law and the consequential additions made are liable to be deleted”

3. “That on the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in sustaining / enhancing the addition by changing its very nature from an addition made under section 69A of the Income-tax Act, 1961 to a trading addition after rejecting the books of account, which is beyond the scope of powers vested under section 251.The learned CIT(A) has no jurisdiction to substitute a new source and a completely different basis of addition, not considered by the Assessing Officer, and the impugned action is liable to be quashed”

3. The revenue has raised following grounds in its cross appeal in ITA No. 461/Jodh/2025:-

1. Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting addition of Rs. 27,22,72,905/- made on account of unexplained & unaccounted sales and directing to consider GP addition of Rs. 2,94,68.562/- @10.82% of unaccounted sales of Rs. 27,22,72,905/-, by accepting reply of the assessee without appreciating the facts that expenditure of packaging material purchased from Montage Group has been claimed in regular books of accounts by over-invoicing of purchase of packaging material and further, assessee failed to submit any details of other direct and indirect expenses related to unaccounted sales which have not been claimed in regular books of account during assessment as well as appellate proceedings and therefore, all expenditures corresponding to unaccounted sales have already been claimed in regular books of accounts and therefore, total unaccounted sales should be treated as unaccounted and undisclosed income of the assessee and thus, AO has rightly made addition of Rs. 27,22,72,905/-?

2. Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting addition of Rs. 27,22,72,905/- made on account of unexplained & unaccounted sales and directing to consider GP addition of Rs. 2,94,68,562/- @10.82% of unaccounted sales of Rs. 27,22,72,905/-, by accepting reply of the assessee without appreciating the facts that all expenses corresponding to unaccounted sales have been claimed by the assessee in regular books of account as assessee failed to submit any details of expenses which were related to unaccounted sales and not recorded in books of accounts and further, the CIT(A) has not given any finding whether the evidences in respects of the expenses specifically incurred corresponding to the unaccounted sales have been made verified by the assessee with supporting bill/vouchers of the expenses as these bill/vouchers have not been produced before AO during the assessment proceedings and have not been received by the AO as additional evidences furnished by the assessee before CIT(A) for remand report and thus, it is established that there are no expenditures which are not recorded in regular books of accounts?

3. Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting addition of Rs. 27,22,72,905/- made on account of unexplained & unaccounted sales and directing to consider GP addition of Rs. 2,94,68,562/- @10.82% of unaccounted sales of Rs. 27,22,72,905/-, by accepting reply of the assessee without appreciating the facts that unaccounted sales of Rs. 27,22,72,905/- was worked out on the basis of the excess stock of the packing material which is established by the CIT(A) also, and this sales was not recorded in the books of accounts but cost of packaging material has been taken in accounts by over-priced invoicing and all other expenses have also duly been claimed in regular books of accounts as assessee failed to produce details of expenses which were related to unaccounted sales and were not recorded in regular books of accounts and therefore, when all direct and indirect expenses related to unaccounted sales are claimed in regular books of account and the excess stock of finished goods is sold out of books then entire amount of unaccounted sales of Rs. 27,22,72,905/- calculated by AO and confirmed by the CIT(A), should be the unaccounted and undisclosed income of the assessee and therefore, AO has rightly made addition of Rs. 27,22,72,905/-?

4. Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting addition of Rs. 27,22,72,905/- made on account of unexplained & unaccounted sales and directing to consider GP addition of Rs. 2,94,68,562/- @10.82% of unaccounted sales of Rs. 27,22,72,905/-, by accepting reply of the assessee without appreciating the facts that this is not case of complete out of books sate and purchase where sales as well as purchases are out of books but this is the case where all purchases and expenses are recorded in regular books of accounts and sales is out of books & unaccounted and therefore, total sales amount is unaccounted and undisclosed income of the assessee?

5. Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting addition of Rs. 27,22,72,905/- u/s 69A made on account of unexplained money related to unexplained & unaccounted sales, without appreciating the facts that assessee has not accounted for income of Rs. 27,22,72,905/-in books of accounts and failed to explain nature and manner of earning of unaccounted income of Rs. 27,22,72,905/- and therefore, same should be treated as unexplained money as per provision of section 69A of the Act and it should be taxed as per provision of section 115BBE of the Act?

6. Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting addition of Rs. 27,22,72,905/-u/s 69A made on account of unexplained money related to unexplained and unaccounted sales and directing for Gross Profit addition of Rs. 2,94,68,562/- and considering this GP as business income without appreciating the facts that the CIT(A) has not given any finding which can prove that nature and manner of earning of above income was explained by the assessee and it was explained business income as assessee failed to explain nature and manner of earning above income and therefore. same is unexplained income of the assessee and should be taxed u/s 69A of the Act and tax should be charged u/s 115BBE of the Act?

7. Whether on facts and in circumstances of the case, the CIT(A) is justified in making addition of Rs. 18,51,456/- u/s 69C of the Act for unexplained expenditure for first unaccounted sales by applying stock-in-trade to turnover ratio of 0.68% as on 31.03.2022 as per audit report in place of addition of Rs. 27,22,72,905/-u/s 69A of the Act without appreciating the facts that stock-in-trade to turnover ratio as on 31.03.2022 only was considered which is not correct factor and suitable factor i.e. average of monthly stock-in-trade to turnover ratio to determine initial unexplained expenditure for first unexplained sale should be considered?

8. Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting addition of Rs. 2,00,640/-/s 69A of the Act on account of unaccounted and unexplained stock of tobacco by accepting reply of the assessee without appreciating the facts that addition was made on the finding and incriminating documents found during the search that excess stock of 2090 Kg of tobacco confiscated by CGST Department in a vehicle in assessee’s premise with the consignment of the assessee and during statement recorded u/s 132(4) of the Act. Shri Ashirwad Sukhwal admitted the excess stock of 2090 Kg of tobacco and further, the CIT(A) did not mention presence of any documentary evidences which could prove that this excess stock belonged to other person and it was a high priced and high quality tobacco which did not belong to the assessee; and the CIT(A) failed to appreciate the truth that unaccounted stock was found with the consignment of the assessee from its premises and unaccounted stock does not have bill/vouchers?

9. Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting the addition of Rs. 32,75,90,180/- u/s 69A of the Act made for unexplained money in form of cash which was used for unaccounted purchase of packaging material from MEPL by accepting reply of the assessee without appreciating the facts that during assessment as well as appellate proceedings, assessee failed to explain source of cash of Rs. 32,75,90,180/- used for unaccounted purchase of packaging material from MEPI and further, assessee has not objected unaccounted purchase of packaging material and the CIT(A) himself confirmed this unaccounted purchase in the appellate order with remarks that the assessee did not dispute the amount calculated by the AO from the seized notepads for unaccounted purchase of packaging material by the assessee?

10. Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting the addition of Rs. 32,75,90,180/- u/s 69A of the Act made for unexplained money in form of cash which was used for unaccounted purchase of packaging material from MEPL by allowing telescoping effect from the determined unaccounted sales of Rs. 75,60,60,489/-on the basis of use of unaccounted packaging material without appreciating the facts that assessee has not submitted any details and documentary evidences which can proves that unexplained cash payment for purchase of unaccounted packaging material was made from unaccounted sales and the CIT(A) has accepted reply of the assessee without any verification in this regard and allowed telescoping effect which is not as per law?

11. Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting the addition of Rs. 32,75,90,180/- u/s 69A of the Aet made for unexplained money in form of cash which was used for unaccounted purchase of packaging material from MEPI. by accepting reply of the assessee without appreciating the facts that the CIT(A) has not given any finding which can prove that nature and source of unexplained cash of Rs. 32,75,90,180/- was explained by the assessee as assessee failed to explain nature and source of unexplained cash of Rs. 32,75,90.180/- and therefore, same is unexplained income of the assessee and should be taxed u/s 69A of the Act and tax should be charged u/s 115BB of the Act?

12. Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting the addition of Rs. 32,75,90,180/- u/s 69A of the Act made for unexplained money in form of cash which was used for unaccounted purchase of packaging material from MEPI, and only allowing the addition of 51,41,211/- u/s 69C of the Act applying the stock-in-trade to turnover ratio of 0.68% for initial unexplained expenditure for first unaccounted out of total unaccounted sales of Rs. 75,60,60,489/- without appreciating the facts that the assessee has failed to explain source of unexplained and unaccounted cash of Rs. 32,75,90,180/- used for unaccounted purchase of packaging material and further, it is evident from seized documentary evidences that assessee has paid unaccounted cash of Rs. 32,75,90,180/-το ΜΕΡΙ and same was not accounted for in books of accounts?

13. Whether on facts and in circumstances of the case, the CIT(A) is justified in making addition of 51,41,211/-u/s 69C of the Act for unexplained expenditure for first unaccounted sales by applying stock-in-trade to turnover ratio of 0.68% as on 31.03.2022 as per audit report in place of addition of Rs. 32,75,90,180/- u/s 69A of the Act without appreciating the facts that stock-in-trade to turnover ratio as on 31.03.2022 only was considered which is not correct factor and suitable factor l.e. average of monthly stock-in-trade to turnover ratio to determine initial unexplained expenditure for first unexplained sale should be considered?

14. The appellant craves leave to add, amend or withdraw any of the ground of appeal during the course of appellant proceeding.

4. We have heard both the sides, perused the material on record, assessment order, impugned order, written submissions, and case laws cited before us.

5. The Ld. AR submitted that the issues raised in the additional grounds of appeal are legal issues. He contended that it is a well-settled principle of law that a pure question of law, especially one going to the root of jurisdiction (such as the validity of a notice), can be raised at any stage of the proceedings. In income-tax matters, appellate authorities have consistently allowed new legal grounds to be taken up even if they were not raised before the Assessing Officer. The Hon’ble Supreme Court in National Thermal Power Co. Ltd. v. CIT observed that if a question of law arises from the facts on record, the assessee is entitled to raise that legal issue at any stage of the proceeding, including for the first time in an appeal. Likewise, the Hon’ble Supreme Court in Jute Corporation of India Ltd. v. CIT, underscored that the first appellate authority’s powers are co-terminus with those of the Assessing Officer – meaning the CIT(A) can consider and decide any ground, including a new legal contention, that relates to the subject matter of the assessment. There is thus no bar in law to raising a purely legal issue before the CIT(A) even if it was not raised before the AO.

5.1 The three additional grounds on legal issues are raised by the appellants goes to the root of the matter in adjudicating the appeal in view of Hon’ble Apex Court decision delivered in the case of the National Thermal Power Co. Ltd. vs Commissioner of Income Tax (229 ITR 383), where it was observed that the Tribunal has jurisdiction to entertain additional grounds of law, even if not raised earlier. In the present case, all necessary facts are already on record. The Ld. DR has no objection to the admission of legal issues which are bona fide and go to the root of the matter. Accordingly, the three additional grounds on legal issues are admitted for adjudication.

6. The original ground no. 1^st and 1^st additional ground, of the appellant are interrelated to each other where the appellant has challenged that the assessment order passed for Assessment Year 2022–23 under section 143(3) of the Income-tax Act, 1961 and notice issued u/s 143(2) is without jurisdiction and liable to be quashed, inasmuch as the said year falls within the block of three assessment years immediately preceding the year of search, for which assessment/reassessment ought to have been mandatorily made in accordance with the provisions of section 147 read with section 148 of the Act.

6.1 The ld. AR submitted that the validity of a notice is a foundational jurisdictional matter; if the notice is invalid, the entire proceeding fails. No assessee can be estopped from challenging an illegal notice on technical grounds of not having raised it at the earlier stage, since entertaining such a challenge is necessary to prevent a miscarriage of justice. In summary, the CIT(A)’s remark that the appellant did not contest the notice’s validity before the AO does not preclude the appellant from raising this legal plea at the appellate stage. Established jurisprudence makes it clear that questions of law and jurisdiction can be urged at any point of time in the litigation, and the appellate authority has the duty to adjudicate such issues on merits rather than dismiss them on procedural technicalities.

6.1.1 The Ld. Counsel for the appellant contended that in the present case, the search having been conducted on 21.02.2023, the assessment years covered under the new reassessment regime include Assessment Year 2020–21, 2021–22 and 2022–23. The learned Assessing Officer (in short “the AO’) has erred in law in framing the assessment for Assessment Year 2022–23 under section 143(3), which is contrary to the statutory scheme governing search-related assessments. Accordingly, the impugned assessment order being passed without following the mandatory procedure prescribed under the Act rendered it invalid in law and it is deserved to be quashed. The Assessment for Assessment Year 2022–23 has been framed by the Ld Assessing Officer under section 143(3) pursuant to the Notice u/s 143(2) of the Income Tax Act dated 27.06.2023 despite the fact that the said year falls within the block of three assessment years immediately preceding the year of search conducted on 21.02.2023. Return of income for the said Assessment year was filed u/s 139(1) of the Income Tax Act on 22.10.2022. On the date of search. no notice u/s 143(2) was pending. The newly framed statutory scheme applicable to the assessment in search cases in respect of search & seizure action carried out after 01.04.2021 is required to be mandatorily followed to assess or reassess the income of assessee in accordance with the provisions of section 147/148 of the Act. The AR argued that the AO has clearly violated the mandatory jurisdictional requirement by initiating proceeding under section 143(3), which is not permissible in law. The Ld. AR further argued that this is not a mere procedural defect, but it laid down the foundation for the jurisdiction of the AO to initiate assessment proceeding which goes to the root of the matter to decide the jurisdiction of the Assessing Officer.

6.1.2 The legislative intent in this regard is explicit and unambiguous from the Memorandum explaining the provisions of the Finance Act, 2021, which clearly provides that assessments in search cases initiated after 31.03.2021 shall be governed by the new reassessment regime. The deeming fiction introduced therein categorically provides that in search cases, the Assessing Officer shall be deemed to have information suggesting escapement of income for the three assessment years immediately preceding the year of search, thereby mandating recourse to section 147/148. Memorandum explaining the provisions of Finance Act 2021, explained the new scheme of search assessments.

The salient features of new procedure are as under:-

(i) The provisions of section 153A and section 153C, of the Act are proposed to be made applicable to only search initiated under section 132 of the Act or books of accounts, other documents or any assets requisitioned under section 132A of the Act, on or before 31st March 2021.

(ii) Assessments or reassessments or in re-computation in cases where search is initiated under section 132 or requisition is made under 132A, after 31st March 2021, shall be under the new procedure.

(iii) Section 147 proposes to allow the Assessing Officer to assess or reassess or re­compute any income escaping assessment for any assessment year (called relevant assessment year).

…….

…….

(vi) Further, in search, survey or requisition cases initiated or made or conducted, on or after 1st April, 2021, it shall be deemed that the Assessing officer has information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or requisition is made or any material is seized or requisitioned or survey is conducted.

6.1.3 The AR further referred to the statement made by the Hon’ble Finance Minister on the floor of the Parliament in reply to Lok Sabha Starred Question No. 56 dated 06.02.2023, wherein it has been categorically stated that post 01.04.2021, assessments in search and seizure cases have been brought within the ambit of section 148 in place of the erstwhile sections 153A/153C. The AR pleaded that the assessment framed under section 143(3) in pursuant to notice u/s 143(2) is without jurisdiction and liable to be quashed.

6.2 The Ld. DR on the other hand relied on the impugned order, but she did not controvert the contention of the AR or did file any contrary judgement.

6.3 We find that the assessee has filed return of income on 22.10.2022. A search u/s 132 was conducted on 21.02.2023 and the notice u/s 143(2) issued on 27.06.2023 even 27 days prior to transfer order u/s 127 dated 24.07.2023 to the effect of shifting of jurisdiction of the case to Central Circle. Thus, the AO central circle has no jurisdiction on the date of issue of notice u/s 143(2) of the act. The CBDT Guidelines F.No.225/66/2023/ITA-II dated 24.05.2023 (Financial Year 2023– 24 compulsory scrutiny) expressly prescribe that search & seizure cases (on/after 01.04.2021) “shall” be selected for compulsory scrutiny with prior administrative approval of the specified senior authority, who “shall ensure” transfer of search cases to Central Charges u/s 127 within 15 days of service of notice u/s 143(2)/142(1). The notice u/s 143(2) (PB Page 616-618) on record is silent on mandated prior approval. The alleged approval is not part of contemporaneous assessment record or paper-book produced by the assessee; it surfaces only via an AO assertion at remand stage (approval letter dated 23.06.2023 with ref. “Compulsory Scrutiny/mn;/2022-23/1629”), which the Ld. CIT(A) accepts without calling the primary approval record.

6.3.1 Admittedly, the transfer order u/s 127 (Enclosed herewith as Annexure-1) itself contains an internal factual anomaly (“search on 23.11.2023”) that is chronologically impossible vis-à-vis a 27.06.2023 notice, undermining confidence in the “application of mind” in the centralisation chain and accentuating the need for the Tribunal to insist on production of the contemporaneous approval workflow/record.

6.3.2 The notice u/s 143(2) dated 27.06.2023 states that the return has been selected for scrutiny and calls for evidence by 13.07.2023; it does not record, refer to, or annex any prior administrative approval. The notice also identifies the issuing authority as ACIT, C-2, Udaipur (“JAO” at that time). The assessment order records that the case was selected for complete scrutiny under compulsory selection; the 143(2) notice was issued on 27.06.2023 and was served fixing hearing on 13.07.2023, and that “thereafter, the case was centralised with this office” (Central Circle). Notably, despite recording the above chronology, the assessment order does not disclose or identify any approval number/date/authority for compulsory selection-an omission that becomes material when the guideline explicitly mandates such approval as a pre-condition. The first and only place where the alleged approval is described with specificity is the CIT(A) order, which records that “without prejudice” the AO clarified in remand report that PCIT Udaipur granted approval vide letter dated 23.06.2023 with reference “Compulsory Scrutiny/mn;/2022-23 /1629”. Crucially, the CIT(A) order as provided does not reproduce the approval letter, does not annex the approval, and does not record that the primary approval file-notings or ITBA approval workflow were called for and examined. This leaves the present record in a legally unsatisfactory posture.

The assessee is asked to accept a foundational jurisdictional fact (prior approval) solely on an assertion in remand, without production of the primary document and without verification of contemporaneity or application of mind. The assessee submits that such an approach defeats the very purpose of inserting a prior‑approval control into the compulsory scrutiny selection process.

6.3.3 The CIT(A) found comfort in the claim that the Pr. CIT had indeed approved the issuance on 23.06.2023. Even if it is assumed that the document exists, the legal requirement is not just that a piece of paper exist, but that a valid sanction in the legal sense was obtained. The appellant has raised serious doubts about the validity of that sanction as regards to competence and application of mind of the competent authority. The CIT(A) did not address those qualitative aspects at all – he simply took the sanction letter at face value without examining how and by whom the sanction was granted. This approach is flawed because a mere form of approval is not sufficient if the substance is lacking. The CIT(A) also stated that there was “no requirement to mention the approval in the notice”. The appellant never argued that the notice is void because it did not recite the approval; rather, the argument is that the notice is void because no valid approval was obtained prior to issuing it. It is clarified here that the lack of any mention was only a factual indicator supporting that contention. We agree that there may not be a statutory requirement to print the approval number on the notice. However, the absence of any reference to an approval – in a case where such approval was mandatory – certainly calls for closer scrutiny whether the approval was taken at all. The CIT(A)’s reasoning essentially conflates form with substance. He defended the form saying the notice format need not show approval but did not adequately verify the substance whether the approval process met the legal mandate.

6.3.4 The ld. CIT(A) mentioned that the assessee’s rejoinder only stated that approval fact was not mentioned in the notice and dismisses the argument as invalid because “there is no requirement to mention the details of approval in the notice issued under section 143(2)”. In our view, this reasoning is misdirected because the assessee’s jurisdictional challenge is not merely about mentioning approval in the notice; it is about existence, legality and demonstrability of mandated prior approval. The CIT(A) observed that AO clarified in remand report that PCIT Udaipur granted approval vide letter dated 23-06-2023, reference “Compulsory Scrutiny/mn;/2022-23/1629”, for issue of notice u/s 143(2). However, the Ld. AR argued that this assertion, without producing the approval letter and without producing the file-noting/ITBA workflow, is insufficient to decide AO’s jurisdiction. Meaning thereby that a remand report is an explanatory report; it is not primary evidence unless supported by documents forming part of the assessment record.

6.3.5 It is seen that the evidence of prior approval is exclusively within the possession and control of Revenue. When an assessee challenges jurisdictional issue, and the Revenue relies on an internal approval letter, it the duty of the Revenue that Department must produce it. Such non-production warrants an inference that the document does not exist in the required form or does not support the claim of the revenue. This is particularly apt where the Department’s own systems (ITBA/DIN) create an expectation of a traceable audit trail.

6.3.6 The CIT(A) invoked section 292BB to reject the assessee’s objection, recording that the assessee did not raise the contention during assessment and participated actively. The assessee submits that this invocation is legally inapposite on the plain text of section 292BB itself. In the present case, the factual dispute about approval surfaced at 1^stappellate stage and was met by remand assertions indicates that the dispute is not a mere afterthought; it is a genuine jurisdictional contest requiring production of primary documentary evidence on record. In our view, in the given facts of the case, section 292BB cannot operate as a waiver of jurisdictional illegality embedded in the initiation of proceedings itself.

6.4. Admittedly, the search was conducted on 21.02.2023, and consequently, the assessment years covered under the new reassessment regime include Assessment Year 2020–21, 2021–22 and 2022–23. Under the newly framed statutory scheme applicable to the assessment in search cases in respect of search & seizure action carried out after 1.04.2021, such cases are required to be mandatorily assessed or reassessed in accordance with the provisions of section 147 read with section 148 of the Act, where on or before the date of search, no notice u/s 143(2) was issued or pending as in the present case.

6.4.1 In the present case, pursuant to the search action conducted on assessee, any of the 3 preceding years, the assessment can be made u/s 143(3) or is mandatorily required to be made u/s 147 of the Income Tax Act is no more res integra. In our view, the assessment made u/s 143(3) is illegal and without jurisdiction. Our view gets support from decisions delivered by various Benches of the Tribunal.

6.4.2 On parity of facts, vide the Judgment dated 29.12.2025 passed by the Hon’ble Delhi Bench of the ITAT in ITA No. 5458/Del/2025 in Montage Enterprises Pvt Ltd Vs DCIT (2026) 182 Taxmann.com11(Del) it was held the assessment made u/s 143(3) is illegal and without jurisdiction. In another case, relying upon the said decision, Hon’ble Delhi ITAT “F Bench” in its decision dated 27.03.2026 in ITA No 4143/Del/2025 DCIT Vs Vijay Kumar Agarwal has quashed the assessments made u/s 143(3) of the Income Tax Act.

6.4.3 In the light of the factual matrix and the precedents cited, we hold that the notice u/s 143(2) dated 27.06.2023 is void ab initio as being issued without prior administrative approval of the competent authority. Consequently, we annul the assessment u/s 143(3) dated 31.03.2024 as without jurisdiction.

6.4.4 Following the Coordinate Bench decisions (Supra), we hold the assessment framed under section 143(3) is ex facie without jurisdiction and as such assessment order would be liable to be quashed.

7. In the 2^nd additional ground, the appellant has challenged AO’s jurisdiction that the learned Assessing Officer has failed to record satisfaction, with the prior approval of the Principal Commissioner of Income-tax, as the seized books of account or documents pertain to or relate to the Appellant or contain information relating to the Appellant, which is qua sine qua non for invoking jurisdiction based on third-party material.

7.1 The Ld. AR submitted that the additions made by the AO based on the material/documents found during the course of search in the case of another person are without jurisdiction and liable to be deleted, inasmuch as the mandatory satisfaction as required under the provisions of the Income-tax Act, 1961 has not been recorded. The AR contended that the AO was required to record satisfaction, with the prior approval of the Principal Commissioner of Income-tax, that the seized books of account or documents pertain to or relate to the Appellant or contain information relating to the Appellant, which is a sine qua non for invoking jurisdiction based on third-party material.

7.1.1 During the course of assessment proceedings, the AO issued show cause Notice dated 11.01.2024 to the appellant where the said show cause Notice at Para 8-8.1 Pgs 62-63 of the assessment order Point No 10 reads as under:

“8. Vide the point No 10 of the Notice u/s 142(1) of the Income Tax Act 1961, dated, the assessee was asked following query;

8.1 A search action 132 of the Income-Tax Act, l96l was carried on M/s Montage Enterprises Pvt. Ltd. (MEPL) on 21.02.2023 and various incriminating documents/note pads and other evidences were found and seized from the cabin/room of Sh. Manoj Kandpal, AGM of Ms Montage Enterprises Pvt, Ltd. Shri Manoj Kandpal looks after all the bank related work, RTGS, Forex Payment, LC (Bill of Exchange), Fund flow etc. of MDPL and other sister concern of MEPL.

During the course of search and seizure proceedings on MEPL along with various other documents a total of 40 notepads were found and sized from the premise, which were annexurised and marked as D1 to D39 (including D24A). ……….

Reply of the appellant to the Notice of the Ld. AO has been discussed by the Ld AO at Paras 8.2-8.2.1 pg 64 in the assessment order, which reads as under;

“8.2 The assessee has furnished its reply on the said issued on 13.02.2024. The reply of the assessee is made part of the assessment order as per Annexure-2.

8.2.1 Vide the reply dated 20.02.2024, the assessee has submitted as under:-

“It is most respectfully submitted that it is not permitted by law to initiate proceedings against the assessee company on the basis of information /documents uncovered during the course of, search on a party other than the assessee company.

It is imperative to note here that the assessee company was not served any notice u/s 153C after the search that was conducted on MDPL, despite that fact that certain documents implicating our company were discovered. This denial of notice deprived us of the opportunity to submit our own clarifications and submissions pertaining to the seized material.

Furthermore, the AO has made assumptions of cash payments amounting to Rs.28,54,16,000/- made by our company to MDPL in the absence of any corroborative Material obtained from our compony this claim. The Ld. AO has solely relied upon the notepads seized from MEPL and the statements recorded from the employees of MEOL at the time of search, which is a violation of natural justice. “

However, the objections of the appellant were summarily rejected by the Ld Assessing Officer in Para 8.3 Pg 64 which reads as under:

“8.3 The submission of the assessee has been considered but not found satisfactory. Hence, a show cause notice issued to the assessee on 24.03.2024 and amount of unaccounted sale of tobacco was calculated on the basis of unaccounted packaging material being purchased in cash from MEPL. Total sale comes Rs.69,88,01,867/- on cash sale of Rs.25,54,16,000/-proportion of its actual sale show in books of account.”

7.1.2 It is noted that based on the alleged notings discovered during the course of search in M/s Montage Enterprises Pvt Ltd, an independent and unrelated entity and without following the statutory mandate of Section 148, the AO has made huge additions to the total income of the appellant in an arbitrary and illegal manner, brushing aside the strong objection of the appellant to additions in the hands of the Appellant based on documents and material found during the course of search conducted in the case of that third person. In our view, such an action of the AO is wholly without jurisdiction as the mandatory requirement of recording satisfaction to the effect that the seized material either belongs to or pertains to or relates to the Appellant or contain information relating to the Appellant, has not been complied with reference to the provisions of section 148 of the Income Tax Act as per amended law which have replaced the provision of Section 153C of the Income Tax Act. The relevant provisions reads as follows:

“Issue of notice where income has escaped assessment

Section 148;

Explanation 2.—For the purposes of this section, where,—

(i) a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A, on or after the 1st day of April, 2021, in the case of the assessee; or

(ii) a survey is conducted under section 133A, other than under sub-section (2A)of that section, on or after the 1st day of April, 2021, in the case of the assessee; or

(iii) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner, that any money, bullion, jewellery or other valuable article or thing, seized or requisitioned under section 132 or section 132A in case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or

(iv) the Assessing Officer is satisfied, with the prior approval of Principal Commissioner or Commissioner, that any books of account or documents, seized or requisitioned under section 132 or section 132A in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, relate to, the assessee, the Assessing Officer shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee [where] the search is initiated or books of account, other documents or any assets are requisitioned or survey is conducted in the case of the assessee or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person.”

7.1.3 From the above, it is evident that provisions of Section 148 are pari Materia with the provisions of Section 153C of the Income Tax Act except the fact that mandatory satisfaction as to the belonging or pertaining or containing any information therein related to the assessee has to be recorded with the prior approval of the PCIT/CIT. Under the provisions of section 153C of the Income Tax Act, Assessing Officer was competent to record his satisfaction, however, under the New Scheme of taxation in Search cases, the procedure has been made more stringent, requiring prior approval of the Pr CIT/CIT. In this regard, reference can also be made to the reply of the Hon’ble Finance Minister given on the floor of the parliament which reads as under.

“LOK SABHA STARRED QUESTION NO. 56

TO BE ANSWERED ON MONDAY, 06TH FEBRUARY, 2023/ MAGHA 17, 1944 (SAKA)

ALLEGED HARASSMENT BY INCOME TAX AUTHORITIES

56. SHRIMATI MAHUA MOITRA: Will the Minister of FINANCE be pleased to state:

(a) whether amendment to the Finance Act in April 2022 has resulted in changes wherein the Income Tax authorities while assessing the income tax of individuals and companies and conducting searches and raids after April 2021 have to presume the deemed acceptance of previous income that has escaped assessment and if so, the details thereof; and

(b) whether the Income Tax authorities are reportedly using the aforesaid provision to reassess individuals and companies and conduct search and seizes by taking into account the previous income of past three years and earlier without giving prior information to the assessees and if so, the details thereof and the reaction of the Government thereto?

ANSWER THE MINISTER OF FINANCE (SHRIMATI NIRMALA SITHARAMAN) (a) to (b): A statement is laid on the Table of the House STATEMENT REFERRED IN REPLY TO LOK SABHA STARRED QUESTION NO. 56 FOR ANSWER ON 06th FEBRUARY 2023

(a) and (b):

No 1. The scheme for re-assessment of income escaping assessment, as laid down in Section 148 of the Income Tax Act, 1961 (‘Act’) was reformed by the Finance Act, 2021 & Finance Act, 2022. The new scheme was introduced with an intent to reduce litigation and provide ease of doing business to taxpayers by reducing the time limit and specifying a higher threshold by which a notice for assessment or reassessment or re-computation can be issued. Simultaneously, assessments/reassessments/re-computation in search & seizure cases initiated after 31st March 2021 have been brought under the ambit of Section 148 in place of the erstwhile sections 153A/153C of the Act.

2. The salient features of the new scheme under Section 148 for search & seizure cases, inter-alia, include:

o. In search cases, the time limit to issue notice for re-assessment was reduced to 3 years from the end of the relevant assessment year as against erstwhile 6 years period.

o. Notices can now be issued beyond 3 years and upto 6 years from the end of the relevant assessment year only for cases wherein income chargeable to tax which has escaped assessment is likely to exceed rupees fifty lakh in the form of: (a) an asset; or (b) expenditure in respect of a transaction or in relation to an event or occasion; or (c) an entry or entries in the books of account as against no such threshold in the earlier regime.

o. For the purpose of issuance of notice beyond 6 years and upto 10 years from the end of the relevant assessment year, the provisions for reopening of assessment are similar with respect to the threshold limit as applicable for search assessment prior to 01.04.2021.

o. Before issuance of notice under Section 148 of the Act by the Assessing Officer, for reopening of assessments in search & seizure cases, prior approval of specified authority is now mandatory, which was not so for initiation of proceedings under Section 153A/153C of the Act.

o. Further, if search & seizure action reveals any evidence/assets/documents, etc. belonging/relating to any person other than the searched person, prior approval of the specified authority is required to ensure that the evidence/ assets/ documents, etc. belongs/relates to that person, before the initiation of re-assessment proceedings under Section 148. As against this, no prior approval of higher authority was required for issuance of notice under Section 153C of the Act.

3. After issuance of notice u/s 148 with the approval of specified authority, the AO, following the principle of natural justice, provides adequate opportunity of being heard to the assessee before framing the assessment.”

7.1.4 Evidently, the new statutory scheme is in fact more stringent than the earlier provisions of section 153C, inasmuch as while earlier satisfaction could be recorded by the AO himself, under the new regime such satisfaction must be recorded with prior approval of the Principal Commissioner/Commissioner. This clearly reflects the legislative intent to introduce stricter safeguards against arbitrary use of third-party material. The use of third-party material is subject to strict jurisdictional safeguards and cannot be resorted to in a casual or mechanical manner.

7.2 The Hon’ble Supreme Court in CIT v. Calcutta Knitwears (2014) 362 ITR 673 (SC) has held that recording of satisfaction is a sine qua non for assuming jurisdiction on the basis of material found in the course of search of another person.

7.2.1 The Hon’ble Delhi High Court in Pepsi Foods Pvt. Ltd. v. ACIT (2014) 367 ITR 112 (Del) has held that absence of proper satisfaction renders such proceedings invalid.

7.2.2 As regards to the New Scheme of taxation in search cases is concerned, Hon’ble ITAT, Chandigarh B Bench in the decision dated 13.01.2026 in the case of DCIT Vs Om Sons Marketing Pvt Ltd in ITA No 193/Chandi/2025 on identical facts held that the assessment order passed u/s 143(3) without obtaining the mandatory approval of the PCIT and without recording satisfaction, as void and without jurisdiction by making the following observations:

“9. After due consideration of material facts on record as well as arguments of Ld. AR, we find substantial merit in legal arguments as urged by Ld. AR. The arguments of Ld. AR are duly backed up by various judicial decisions taking the same view. The pertinent legal ground as raised by Ld. AR is that the assessment has been framed u/s 143(3) without fulfilling the mandatory conditions prescribed u/s 148 read with Explanation 2(iv) thereof. Another pertinent legal issue is that mandatory approval as required u/s 148B has not been obtained from the competent authority even though the impugned AY was immediately preceding the search assessment year. Another line of argument is that approval as obtained by Ld. AO from Addl. CIT before passing the assessment order was invalid one since the approval ought to have been obtained u/s 148B of the Act which was not done in the present case. Further, whatever approval was taken, the same was mechanical and without application of mind. All these legal issues, as rightly been pointed out by Ld. AR, has adequately been dealt with by co-ordinate bench of Chandigarh Tribunal in the case of M/s Homelife Buildcon Pvt. Ltd. (ITA No.880/Chd/2024 &ors. dated 17-07-2024). We find that on identical facts, the coordinate bench held as under:

28. In the present case, the AO did not issue a notice under section 148, nor did he follow the due process of law under the new reassessment framework, including recording of satisfaction and obtaining prior sanction from the PCIT. Therefore, the assessment framed under section 143(3), because of being based on third-party material without adhering to statutory safeguards, is bad in law. The AO was only empowered to verify the return of income and restrict his scope of inquiry accordingly; he was not permitted to expand the assessment by importing and relying upon third-party seized material without following the mandatory procedure laid down under the law.”

7.3 The Ld. DR relied on the impugned order. She did not controvert the factual and legal contention of the appellant.

7.4 In the present case, it is noted that despite specific objections raised by the Appellant, the AO has made huge additions solely based on third-party information/material found and seized during a search action, without establishing any direct or indirect nexus with the Appellant. In the absence of mandatory satisfaction and prior approval of the competent authority, we hold the very assumption of jurisdiction by the AO as invalid and accordingly, the additions made on such basis are liable to be deleted.

8. The 3^rdAdditional Ground, and original ground No. 3 of the appellant and ground no. 5 and 6 of the department appeal are inter-related to each other where the appellant has challenged that the learned Commissioner of Income-tax (Appeals) has erred in sustaining/enhancing the addition by changing its very nature from an addition made under section 69A of the Income-tax Act, 1961 to a trading addition after rejecting the books of account, which is beyond the scope of powers vested under section 251. The learned CIT(A) has no jurisdiction to substitute a new source and adopting a completely different basis of addition, not considered by the Assessing Officer, and the impugned action is liable to be quashed.

8.1 The AR argued that the additions sustained by the Ld CIT(A) suffer from fundamental jurisdictional infirmities arising from impermissible substitution of the nature and source of income by the learned Commissioner of Income-tax (Appeals). The AR submitted that the learned AO had made an addition under section 69A of the Income-tax Act, 1961 by treating alleged out-of-books sales as unexplained money. The learned CIT(A), however, having held that section 69A was not applicable, proceeded to reject the books of account and convert the addition into a trading addition by estimating income. This action clearly amounts to substituting the very basis and character of the addition. The addition made by the Assessing Officer was under a deeming provision attracting section 115BBE, whereas the addition sustained by the CIT(A) is under the head “business income”. This is not a case of mere enhancement or modification but a complete transformation of the source and head of income. It is a settled legal position that while the powers of the CIT(A) under section 251 are wide, they do not extend to introducing a new source of income or making out an altogether new case which was not the basis of addition in the assessment. In support, he placed reliance on various judgement filed on record as part of paper book.

8.2 The Ld. DR relied on the assessment order, but she did not controvert the appellant on the factual and legal contentions with regards to the powers of the CIT(A) under section 251 of the Act and validity of impugned order on legal issue.

8.3 In the present case even a bare look at the grounds of appeal raised by the Department would reveal that the addition sustained by Ld. CIT(A) represents altogether new source of income. Ground No 5 & 6 of the Department’s cross appeal read as under:

“Whether on facts and in circumstances of the case. the CIT(A) is justified in deleting addition of Rs. 27.22.72.905/- u/s 69A made on account of unexplained money related to unexplained & unaccounted sales, without appreciating the facts that assessee has not accounted for income of Rs. 27.22.72,905 in books of accounts and failed to explain nature and manner of earning of unaccounted income of Rs. 27.22.72.905/-and therefore, same should be treated as unexplained money as per provision of section 69A of the Act and it should be taxed as per provision of section 115BBE of the Act?

Whether on facts and in circumstances of the case, the CIT(A) is justified in deleting addition of Rs 27.22.72.905/-u/s 69A made on account of unexplained money related to unexplained and unaccounted sales and directing for Gross Profit addition of Rs. 2.94.68.562/and considering this GP as business income without appreciating the facts that the CIT(A) has not given any finding which can prove that nature and manner of receiving of above income was explained by the assessee and it was explained business income as assessee failed to explain nature and manner of earning above income and therefore. same is unexplained income of the assessee and should be taxed is 69A of the Act and tax should b charged u/s 115BBE of the Act?”

8.3.1 Thus, even the grounds taken by the Department in its appeal clearly demonstrate that the nature of income under section 69A and the trading addition are fundamentally different. The CIT(A) has thus exceeded jurisdiction by converting “head of income” into business income, which is impermissible in law.

8.3.2 The Hon’ble Supreme Court in the case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC) has categorically held that the appellate authority cannot travel beyond the subject matter of assessment and introduce a new source of income not considered by the Assessing Officer. Similarly, in CIT v. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC), it has been held that the power of enhancement does not include the power to discover new sources of income.

8.3.3 In the case of CIT v. Sardari Lal & Co. [2001] 251 ITR 864 (Delhi) (FB), the matter again came up for consideration before the Full Bench of the Hon’ble Delhi High Court regarding the first appellate authority’s power to take into account a new source of income and to consider the correctness of the view expressed earlier in case of CIT v. Union Tyres [1999] 240 ITR 556 and the Full Bench of the Hon’ble Delhi High Court has held that the view expressed in Shapoorji Pallonji Mistry’s case (supra) still holds the field and it was further held as under:

“8. Looking from the aforesaid angles, the inevitable conclusion is that whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the Assessing Officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 and section 263, if requisite conditions are fulfilled. It is inconceivable that in the presence of such specific provisions, a similar power is available to the first appellate authority. That being the position, decision in Union Tyres’ case (supra) of this Court expresses the correct view and does not need re­consideration. This reference is accordingly disposed of.”

8.3.4 In CIT v. Associated Garments Makers [1992] 197 ITR 350 (Raj), the Rajasthan High Court held that the Tribunal was justified in holding that the Appellate Assistant Commissioner’s order considering new sources of income and enhancing the assessment was erroneous.

8.4 Admittedly, it was not disputed fact that the addition was made by the Ld. AO as unexplained monies u/s 69A of the Income Tax Act which was never considered as even remotely arising from the Business activities of the appellant. In the present case, rejection of books and estimation of profit is an independent exercise requiring separate satisfaction, which was never the basis of the assessment order. In view of that matter, the Ld. CIT(A) has no jurisdiction to confirm addition even in part by substituting the ‘head of income’ with less or more income under a specified head of income. The learned CIT(A) has thus exceeded jurisdiction by substituting the nature of addition, rendering the impugned action ultra virus section 251 and liable to be quashed.

8.4.1 In view of the above, we hold that in the present case there are multiple jurisdictional lapses occurred at every stage of the proceedings—right from assumption of jurisdiction, to framing of assessment, to sustenance of addition at the appellate stage by the CIT(A) and each of these defects independently vitiates the assessment proceedings; and cumulatively, they render the impugned assessment order bad in law and as such liable to be quashed. Thus, the three legal issues raised in the additional grounds of the assessee are allowed.

9. In ground no. 2^nd the appellant and ground No. 1 to 6 of the department are related to common issue where revenue has challenged whether on facts and in circumstances of the case, the CIT(A) is justified in deleting addition of Rs. 27,22,72,905/- u/s 69A and that the appellant challenged that the Ld. CIT(A) has erred in law and on facts in confirming the action of the Ld. AO in treating amount 27,22,72,905 as Unaccounted/Suppressed Cash Sales and restricting the addition to Gross Profit Element @ 10.82% to Rs 2,94,68,562/- thereof and that enhancement of Estimated Unexplained Expenditure for manufacturing of Stock u/s 69C at Rs 18,51,456 relating to Unaccounted Suppressed Sales of Rs 27,22,72,905/-.

9.1 The Ld. AR submitted that the Ld. CIT(A)’s was not justified in endorsing the finding of the AO that the Appellant had suppressed unaccounted cash sales of Rs.27,22,72,905 for assessment year under consideration and the consequent confirmation of an addition of Rs.2,94,68,562/- by applying a gross profit rate of about 10.82%. The AR argued that addition confirmed by the CIT (A) is wholly unsustainable on facts, accounting principles, logistic, and under the provisions of the Act. Further, the appellant challenged that the CIT(A) erred in enhancing the income by making a separate addition of Rs. 18,51,456/- under Section 69C (unexplained expenditure) on the reasoning that unaccounted sales would involve some unrecorded expenditure for manufacturing those goods.

9.1.1 The AR submitted that the assessment treats an inferred “unaccounted sales” figure as unexplained money u/s 69A read with section 115BBE, based substantially on a pricing hypothesis that packaging material was allegedly billed at a higher rate and therefore “excess quantity” must have been received, to be used for “extra production”, and sold “in cash”. The Ld. CIT(A) while deleting the gross-sale addition u/s 69A of the act, has sustained a profit-element addition by invoking section 145 and by an internally inconsistent margin-adjustment.

9.1.2 The Ld. AR explained that during the search, the search party thoroughly inspected the business premises, godowns and factories of the Company for six days, and yet did not find a single piece of evidence of any concealed production or out-of-book sales or unrecorded sale bills or out of books purchases or any variation in stock, unaccounted cash, unaccounted debtors or unaccounted Creditors, unrecorded transportation evidences of raw tobacco or lime required to produce finished goods to effect unaccounted sales or any incriminating evidences in the assessee’s possession. The ld. CIT(A) and ld. AO failed to establish with positive evidence to sustain charges of clandestine unaccounted sales. The Ld. AO has made addition towards unaccounted sales without finding out any additional quantity of raw material procurement required for corresponding production of finished goods to achieve alleged unaccounted sales.

9.1.3 The Appellant further submitted that the foundational fact, very existence of suppressed/unaccounted sales has not been proved by the department. The AR contended that neither the AO nor the Ld. CIT(A) has established the essential factual bridges: (i) excess physical quantity of packaging material (as opposed to mere price variance), (ii) corresponding extra production, (iii) corresponding unrecorded dispatch and buyers, transportation thereof, (iv) bulk quantity required of raw materials like tobacco leaves, lime, etc and (v) cash realization/trail. A large alleged “cash sales” stream of Rs.27.22 crore cannot legally stand on the slender reed of a single assumed Rs.50/kg adjustment, without technical corroboration and without a cash/dispatch/raw materials like tobacco leaves, lime, etc trail. The Ld. AR argued without admitting that even assuming a profit-rate approach is permissible, the CIT(A)’s computation is arithmetically and conceptually flawed: a purported “excess packing material value” of Rs.23,09,057, if it is to be neutralise, cannot rationally result in only Rs.3.90 lakh of incremental GP (which is what the CIT(A)’s formula actually does). This exposes the estimation as non-scientific.

9.1.4 The assessment’s core narrative is: price variance in packaging material -3 presumed excess quantity received -3 presumed extra production -3 presumed cash sales -3 hence “unaccounted income”. The AO records that, based on DGGI material, the per kg price of packaging material was allegedly higher by Rs.50–Rs. 60, so the AO assumes per kg price by Rs.50 and back-calculates “actual production” and “unaccounted sales”. The AO specifically noted that per kg price of packaging material for the period 01.04.2016 to Feb 2022 was between Rs.356/kg and Rs.402/kg, and after Feb 2022 the same was purchased at Rs.200/kg to Rs.254/kg, treating such variation as incriminating. On that basis, the AO concludes that during Financial Year 2021–22, the Appellant earned income of Rs.27,22,72,905 by “unaccounted sales”, and treated the same as unexplained money u/s 69A. The Ld. AR argued that this was not legally adequate to prove “suppressed cash sales”. Price variability, by itself, is not proof of excess physical procurement, or proof of suppressed production, or proof of unrecorded dispatch, nor proof of cash receipt. The statement material itself records that prices are decided as per company policy and market factors and also indicates the possibility of different technical specifications. A packaging “rate” is not a universal commodity, in flexible packaging it varies with GSM, lamination, thickness, printing, colour, quality, wastage norms, order size, credit period, and delivery schedules. The record shows that the Appellant’s director stated that different technical specifications are possible. There is no technical test or like-to-like benchmark produced by the AO to justify the alleged production and suppressed sales.

9.1.5 As regards to invoking the provisions of Section 69A of the Act by the AO, the Ld. AR argued that the section 69A by its language, is triggered when an assessee is found to be the owner of money/bullion/jewellery/valuable article that is not recorded in the books of accounts. It is not a computation provision to tax estimated sales or inferred turnover. In the present dispute, the AO’s estimation of Rs.27.22 crore is not based on money being “found” as an asset; rather it is an inferred sales value from a pricing hypothesis. This misapplication of statute is precisely the reason why the CIT(A) deleted the gross addition u/s 69A and treated only profit element as business income. In our view, once applicability of section 69A is ruled out for the gross receipts, the Revenue cannot keep the same inferred figure alive as a “sales fact” without proving procurement of corresponding raw materials, production and dispatch. Further, the Section 69A is being a deeming fiction, it cannot be used to convert an accounting hypothesis into a proved sale transaction.

9.1.6 The statutory trigger for section 115BBE is the presence of “income referred to” in sections 68-69D (including 69A and 69C). It does not apply to ordinary business income computed under section 28 unless the income is first characterised as a deemed unexplained item under those sections. The Ld. CIT(A) has deleted the gross-sale addition u/s 69A and treated the surviving addition as business income (profit element). Once that is the character, the 115BBE regime cannot be applied to the GP element on “business sales” as a matter of statutory interpretation. The Revenue is required to defend: (i) whether the alleged suppressed sales exist at all; and (ii) whether GP element can be estimated after satisfying 145(3). But in the present case, the sales are not proved and, therefore, the profit element necessarily collapses.

9.1.7 Section 145(3) is not a carte blanche to estimate profit because an allegation exists. It requires recorded dissatisfaction about correctness/completeness, or irregular method/ICDS non-compliance. The Ld. CIT(A) records that books were rejected after show cause and that reply was “general”. However, for Ground 2, the key question is whether the record discloses year-specific defects showing that correct income cannot be deduced from the books, especially when the allegation is based on third-party GST material and price assumptions. In the present case, the business is subject to audit and the material cycle can be reconciled (opening– purchase–consumption–closing), a section 145 rejection and GP application must be anchored in concrete defects, not a presumed “leakage of revenue”.

9.1.8 The AR explained that Section 145(2) authorises ICDS; and Notification No. 87/2016 notifies ICDS with effect from AY 2017–18 onwards, applicable for assessees following mercantile system, subject to audit. The ICDS themselves clarify that they are for computation of income, not for maintenance of books, and in case of conflict, the Act prevails. In the present matter, the Revenue’s allegation is not an ICDS non-compliance issue; it is a factual allegation of suppressed sales. Therefore, section 145(3) cannot be invoked by a mere incantation of “ICDS”; it must be supported by concrete defects relevant to the year and to the alleged suppression. There is no identification of unrecorded customers, no unrecorded invoice series, no parallel sales ledger, no unrecorded dispatch register, and no transport trail presented as the basis for the figure Rs.27.22 crore.

9.1.9 The allegation is of “cash sales”, yet the assessment does not anchor upon cash discovery, cash utilization patterns, unexplained assets, or a consistent cash-flow that could support a Rs.27.22 crore cash-realization business stream. Even the defence of the department of packaging material differed in technical specifications, as the Revenue failed to rebut it by testing or like-to-like purchase comparison. It is evident from the record that it is pure an assumption without technical testing.

9.1.10 The Ld. AR prayed to delete the addition of Rs.2,94,68,562 estimated and confirmed by the Ld. CIT(A) as GP addition on alleged suppressed/unaccounted sales of Rs.27,22,72,905 which is not proved on the record and, therefore, it cannot be used as the base for any profit estimation.

9.2 The CIT (DR) relied on the assessment order. She submitted that the CIT(A) was not justified in deleting addition of Rs. 27,22,72,905/- made on account of unexplained & unaccounted sales and directing to consider GP addition of Rs. 2,94,68.562/- @10.82% of unaccounted sales of Rs. 27,22,72,905/-, by accepting reply of the assessee without appreciating the facts that expenditure of packaging material purchased from Montage Group as claimed in regular books of accounts by over-invoicing of purchase of packaging material and further, assessee failed to submit any details of other direct and indirect expenses related to unaccounted sales which have not been claimed in regular books of account during assessment as well as appellate proceedings and therefore, all expenditures corresponding to unaccounted sales have already been claimed in regular books of accounts and therefore, total unaccounted sales should be treated as unaccounted and undisclosed income of the assessee and thus, AO has rightly made addition of Rs. 27,22,72,905/-. She contended that the CIT (A) has not given any finding whether the evidences in respects of the expenses specifically incurred corresponding to the unaccounted sales have been verifiable with supporting bill/vouchers of the expenses as these bill/vouchers have not been produced before AO during the assessment proceedings and have not been received by the AO as additional evidences furnished by the assessee before CIT(A) for remand report and thus, she argued that it is established that there are no expenditures which are not recorded in regular books of accounts.

9.2.1 The CIT (DR) further submitted that CIT (A) was not justified on accepting reply of the assessee without appreciating the facts that unaccounted sales of Rs. 27,22,72,905/- was worked out on the basis of the excess stock of the packing material which is established by the CIT(A) also, and this sales was not recorded in the books of accounts but cost of packaging material has been taken in accounts by over-priced invoicing and all other expenses have also duly been claimed in regular books of accounts as assessee failed to produce details of expenses which were related to unaccounted sales and were not recorded in regular books of accounts and therefore, when all direct and indirect expenses related to unaccounted sales are claimed in regular books of account and the excess stock of finished goods is sold out of books then entire amount of unaccounted sales of Rs. 27,22,72,905/-calculated by AO and confirmed by the CIT(A), should be the unaccounted and undisclosed income of the assessee and therefore, AO has rightly made addition of Rs. 27,22,72,905/-. The Ld. CIT (A) deleted the addition without appreciating the facts that this is not case of complete out of books sale and purchase where sales as well as purchases are out of books but this is the case where all purchases and expenses are recorded in regular books of accounts and sales is out of books & unaccounted and therefore, total sales amount is unaccounted and undisclosed income of the assessee. She contended that the CIT(A) is not justified in deleting addition of Rs. 27,22,72,905/- u/s 69A made on account of unexplained money related to unexplained & unaccounted sales, without appreciating the facts that assessee has not accounted for income of Rs. 27,22,72,905/-in books of accounts and failed to explain nature and manner of earning of unaccounted income of Rs. 27,22,72,905/- and therefore, same should be treated as unexplained money as per provision of section 69A of the Act and it should be taxed as per provision of section 115BBE of the Act and that he was wrong in directing for Gross Profit addition of Rs. 2,94,68,562/- and considering this GP as business income without appreciating the facts as the CIT(A) has not given any finding which can prove that nature and manner of earning of above income was explained by the assessee and it was explained business income as assessee failed to explain nature and manner of earning above income and therefore, same is unexplained income of the assessee and should be taxed u/s 69A of the Act and tax should be charged u/s 115BBE of the Act? She has further contended that the CIT(A) is not justified in making addition of Rs. 18,51,456/- u/s 69C of the Act for unexplained expenditure for first unaccounted sales by applying stock-in-trade to turnover ratio of 0.68% as on 31.03.2022 as per audit report in place of addition of Rs. 27,22,72,905/-u/s 69A of the Act without appreciating the facts that stock-in-trade to turnover ratio as on 31.03.2022 only was considered which is not correct factor and suitable factor i.e. average of monthly stock-in-trade to turnover ratio to determine initial unexplained expenditure for first unexplained sale should be considered? She pleaded that the assessment order may be restored. However, she failed to rebut the contention of the Ld. AR made in even challenging the addition restricted by the Ld. CIT (A) by way of GP estimation on alleged estimated unaccounted sales and that non applicability of provisions of section 69A of the Act to the given set of peculiar facts of the present case.

9.3. Admittedly, the department allegation is of “cash sales”, yet the assessment order does not anchor upon cash discovery, cash deposit, cash utilization patterns, unexplained assets, or a consistent cash-flow that could support the alleged unaccounted cash sales Rs.27.22 crore cash-realization business stream. Even the defence of the department of packaging material differed in technical specifications, as the Revenue failed to rebut it by testing it on parity of facts or like-to-like purchase comparison.

9.3.1 From the record, it is evident that it was a pure assumption without technical testing and support of corroborative cogent material evidence on record. It is noted that the revenue allegation of price manipulation has not been established with cogent evidence regarding use of extra quantity of raw material leading to extra production and corresponding alleged unaccounted cash sales. Thus, the hypothesis of price manipulation and unaccounted sales out of even existing production, the department fails in checking parameters which would ordinarily be required to arrive at a finding of unaccounted cash sales as under:

i. Technical specification testing: For each key packaging material purchased during Financial Year 2021–22, establish GSM/ thickness/ lamination/printing specs through (a) vendor specification sheets, (b) purchase orders, and (c) sample testing of seized/available material.

ii. Inward quantity verification: Correlate vendor invoices with GRNs/gate entries/weighbridge slips and e-way bills; identify whether actual received weights differ from invoiced weights.

iii. BOM and consumption norms: For each product variant/sachet size, establish bill-of-material: how much packaging material per unit, wastage norms, and reconcile with recorded production.

iv. Production and dispatch correlation: Reconcile production logs, packing logs, labour shifts, electricity consumption, and dispatch records for FY 2021–22 against alleged extra production.

v. Buyer-chain verification: Identify unaccounted buyers (dealers/distributors) and corroborate through their records, including their assessment orders and bank trails, if the allegation is of cash sales.

vi. Cash trail and utilization: Demonstrate cash accrual and use: cash deposits, expenses, asset purchases, or cash seized.

vii. Alternative hypothesis testing: If the Revenue alleges “over-invoicing”, then it must also test the possibility that the supplier earns higher margin (no extra quantity) or that different specifications/terms explain the price difference. This alternative must be excluded with evidence.

9.3.2 In absence of the aforesaid checks, the “suppressed sales” conclusion is at best a suspicion, not a proved fact capable of sustaining a profit-element addition. In the present case, the alleged addition is entirely based on mere presumptions and conjectures. It is a settled law that the charges of clandestine procurement of packaging material and clandestine supply of finished goods resulting unaccounted turnover and that accounting for all the purchases and expenses but not accounting of part of sales or sales out of accounted production of stock are required to be proved on the basis of independent concrete evidence and cannot be based merely on presumptions and private records. Such charges cannot be based on preponderance of probability but required positive and cogent evidence to establish the same.

9.3.3 From the record, it is evident that the AO has been guided by the prima facie view of the officials conducted search is figment of their imagination based on surmises & conjectures without bringing any incriminating material either during the search or post search enquires and that the department has not been able to provide any independent evidence to prove the serious charges of clandestine manufacturing and supply of chewing tobacco resulting into unaccounted sales. Thus, burden to prove such charges which is on the Department, has not been discharged. In the case of Pan Parag India Vs. CCE, [2013] (291) E.L.T 81 Hon’ble Delhi Tribunal, dated 23.05.2012 after relying on the judgment of Hon’ble Supreme Court in the case of CBI v. V.C. Shukla, 1988 (3) SCC 410, held that entries made in the records are merely corroborative evidence which cannot prove the charges of clandestine manufacture and clearance; such charges are required to be proved with positive and cogent evidence.

9.3.4 Considering the factual matrix and judicial precedents, we accept the grievance of the assessee as genuine that the addition against the appellant Company on the charges of clandestine procurement of packaging material and clandestine supply of finished goods, consequential bogus unaccounted sales without any independent, positive and cogent evidence brought on record by the department is not sustainable. Therefore, we hold that decision of the Ld. CIT (A) in treating the amount of Rs 27,22,72,905/- as Unaccounted/Suppressed Cash Sales and restricting the addition to Gross Profit Element @ 10.68% to Rs 2,94,68,562/- is perverse to the facts on record and, therefore, the addition of Rs. Rs 2,94,68,562/-is deleted. Thus, ground No. 2 of the assessee is allowed.

9.3.5 Further, in the given set of facts of the present case, the applicability of section 69A is ruled out as the Revenue cannot keep the same inferred figure alive as a “sales fact” without proving procurement of corresponding raw materials, production and dispatch. The revenue’s mere contention that the alleged unaccounted sales was made out of exiting manufactured goods generating unaccounted income is not established with cogent evidence. We are of the considered view that since the Section 69A is being a deeming fiction, hence it cannot be used to convert an accounting hypothesis into a proved sale transaction.

9.3.6 Thus, section 115BBE would not apply to an ordinary business income computed under section 28 unless the income is first characterised as a deemed unexplained item under Sections 68, 69, 69A, 69C and 69D of the Act. The Ld. CIT(A) has rightly deleted the gross-sale addition u/s 69A, however he treated the surviving addition as business income (profit element) without any foundation or following the standard accounting principles. In our view, the 115BBE regime cannot be applied to the GP element on “business sales” as a matter of statutory interpretation. In the present case, the department failed to prove or establish existence of alleged suppressed sales, by way of satisfying conditions for applicability of section 145 (3) and estimation of GP rate. The department failed to prove any unaccounted or suppressed sales, and therefore, the addition made by the AO of Rs. 27,22,72,905/-u/s 69A of the Act without appreciating the facts would be liable to be deleted. Accordingly, the addition of Rs. 27,22,72,905/- made u/s 69A of the Act is deleted. Once the addition is deleted, consequently the applicability of Section 115BBE of the Act did not survive.

9.3.7 In the above view, we find no merit and substance in the contention of the department and therefore, the ground no. 1 to 6 of the revenue are rejected.

10. In ground no. 2.1, the appellant objected to the Ld. CIT(A) decision in enhancement of Estimated Unexplained Expenditure for manufacturing of Stock u/s 69C at Rs. 18,51,456/- relating to Unaccounted Suppressed Sales of Rs. 27,22,72,905/-.

10.1 In facts, an enhancement made by the Ld. CIT(A) of Rs.18,51,456/- as “Estimated Unexplained Expenditure for manufacturing of stock” u/s 69C, linked to alleged unaccounted/suppressed sales of Rs. 27,22,72,905/-. The section 69C requires a finding that expenditure was actually incurred and the source is unexplained. The “ratio method” does not satisfy the statutory threshold. Once the income from the alleged suppressed sales is subjected to a best-judgment profit estimation, a second independent addition u/s 69C, again estimated on the same stream amounts to duplication and an impermissible attempt to re-characterised a trading estimation into deemed income, thereby artificially invoking the punitive regime of section 115BBE. In the present case, the CIT(A) rejects books invoking section 145/145(3), yet relies upon tax audit ratios derived from the same accounts to compute a fresh 69C enhancement. In our view, this “accept–reject–reuse” approach is internally inconsistent.

10.1.1 The Section 69C applies only where the assessee has incurred expenditure in any financial year and the appellant assessee offers no satisfactory explanation about the source of such expenditure. Then, the AO may deem the amount so covered by expenditure as income and the proviso denies deduction for such deemed expenditure. However, in the present case, the section 69C is not attracted because “incurrence of expenditure” is not established; and a ratio cannot replace the statutory fact. Section 69C begins with the statutory condition that the assessee “has incurred any expenditure” and the source is unexplained. The Ld. CIT(A) does not identify any actual unaccounted purchase invoice; any unaccounted wage/payment voucher; any electricity/power outgo outside books; any cash withdrawal or payment trail; any physical stock found outside books and any seized material evidencing out-of-books expenditure. The CIT(A) uses the phrase “stock in trade to turnover ratio”. Stock-in-trade is a balance sheet asset (closing position), not “expenditure incurred” (profit and loss flow). Even if a business needs stock to trade, “stock value” is not the same as “expenditure incurred” in the year. It can be opening stock carried forward, stock financed by trade credit, stock realized and rotated multiple times within the year, or stock which does not exist at year end. Thus, the Ld. CIT (A) has misapplied section 69C at a conceptual accounting level. The ld. DR has also submitted that CIT(A) is not justified in making addition of Rs. 18,51,456/- u/s 69C of the Act for unexplained expenditure for first unaccounted sales by applying stock-in-trade to turnover ratio of 0.68% as on 31.03.2022 as per audit report in place of addition of Rs. 27,22,72,905/- u/s 69A of the Act.

10.1.2 It is pertinent to mention here that the appellant gets relief in ground where we had deleted the hypothesis of the department that the assessee, by alleged over-invoicing/excess receipt of packing material, manufactured alleged unaccounted finished goods effected alleged unaccounted/suppressed sales of Rs.27,22,72,905 for Assessment Year 2022-23 and also deleted the addition made by AO u/s 69A and that also the amount estimated and confirmed by the CIT (A) by applying GP rate @ 10.68% on estimate basis. Consequently, the corresponding entire enhancement of Rs.18,51,456 made/confirmed u/s 69C would be liable to be deleted and consequential direction to tax u/s 115BBE would not survive.

11. In ground No. 3 to 3.2, of the appellant and ground no. 8 to 12 of the revenue common issues raised on identical facts where the appellant challenged confirmation of the additions and the department challenged the amount addition made u/s 69A deleted by the Ld. CIT(A).

11.1 The appellant challenged that CIT (A) has erred in law and on facts of the case in confirming the action of the Ld. AO in treating amount of Rs. 8,07,47,260 as Gross Profit Earned from Unaccounted/Suppressed Cash Sales Enhanced at Rs 75,60,60,489/- arising out of dumb documents and thus confirming the alleged corresponding transaction to some alleged enhanced unaccounted purchases of Rs 32,75,90,180/-.

11.1.1 The Department’s case is that this addition is based on a multi-layered chain of presumptions likely (i) third-party handwritten notepads/diaries seized from the Montage group are treated as “cash receipts”; (ii) occurrences of the word/notation “MIRAJ” are assumed to mean cash purchases by Miraj Products Pvt. Ltd.; (iii) such assumed cash purchases are quantified as Rs.32,75,90,180 (enhanced at remand); and that CIT(A) enhancement by way of unaccounted sales are then “reverse-engineered” through a single ratio and thus, the Estimated suppressed sales = (Book sales × Alleged unaccounted purchases) ÷ Book purchases, producing Rs.75,60,60,489; and a book GP rate is applied to the estimated turnover to compute the “embedded profit. However, this chain is not based on cogent evidence rather it is arithmetic computation on assumption.

11.1.2 It is noted that on evidence, there was a critical and direct rebuttal from the Department’s own relied witness in cross-examination where Shri Dhananjay Singh, Director of the supplier entity, categorically admits that “Miraj brand packing material” is supplied to entities other than Miraj Products Pvt. Ltd. (Cross-examination, Q12, dated 18.05.2023 CIT(A) Page 39). Shri Dhananjay Singh, further states that earlier averments were dictated by investigating officers and were signed under threat, and that supplies to Miraj Products Pvt. Ltd. were under proper invoice/e-way bill, and that no request was received to create firms for supplying goods. These answers directly undermine the Department’s “MIRAJ = MPPL cash purchases” leap and expose the fragility of third-party statements/loose papers when not tested and corroborated.

11.1.3 . Another very crucial fact ignored by the AO was that the packaging materials with the appellant’s brand were not exclusively used by the appellant. In a parallel proceeding, during cross-examination by GST authorities, the director of the packaging supplier (Montage Packaging) testified that Miraj-brand packing material was also being supplied to other firms on their request. This admission (recorded in answer to Question No.12 of the supplier’s director on 18-05-2023, CIT(A) Order page 39 PB page 48, PB Page 1101) is reproduced in the record. The AR argued that this very fact directly undermines the Department’s theory – if other parties obtained packing with “Miraj” branding, those parties could be manufacturing duplicate Miraj products in the market without the appellant’s involvement. In fact, the appellant had lodged multiple FIRs (police complaints) regarding counterfeit Miraj products being sold by unscrupulous elements. Copies of such FIRs were furnished in the proceedings (CIT(A) order page 39, PB page 48, index PB 335, s. no. 18b page 1229-1439 i.e. 211 pages and AO PB page 1045 para 35). This shows that excess packaging could have been diverted to or procured by those counterfeiters, explaining any discrepancy in packaging purchase figures without attributing it to unaccounted production by the appellant. Media reports have documented instances of fake Miraj products; for example, in 2012 a supplier of raw material for duplicate “Miraj” gutkha products was arrested in Rajasthan. The existence of a counterfeit market for the appellant’s product is a plausible alternative explanation for any unexplained packaging procurement – one that does not involve the appellant generating unaccounted income. The AO failed to investigate this fact despite the appellant raising it at the assessment stage, adversely harmed/ Punishing the appellant for alleged extra packaging although that could have been misused by third parties.

11.1.4 Under the law, the statutory presumption regarding documents found in search under section 292C read with section 132(4A) is rebuttable, and (importantly for this appeal) it is triggered where documents are found in the possession/control of the person to whom the presumption is sought to be applied. Even where available, the presumption does not by itself prove that (a) a particular code equals a particular legal entity, (b) the entries constitute taxable income, or (c) the entire inferred turnover is real. Further, where additions are based on third-party statements or third-party loose materials, the assessee must be given effective opportunity to confront, rebut and cross-examine in view of principles of natural justice. It is settled law that the Department cannot use any adverse material “behind the back” of the assessee, to harm or damage the assessee.

11.1.5 On computation, the CIT(A)’s enhancement of estimate is mathematically and accounting-wise defective. It uses book purchases as denominator while simultaneously asserting additional purchases outside books, yielding an inflated output. A corrected denominator (book purchases + alleged unaccounted purchases) reduces the estimated turnover materially. It ignores opening/closing stocks and the basic manufacturing flow. Purchases particularly packaging material cannot be equated with consumption, production, or sales through a single ratio. It performs estimation in value terms (rupees) where the alleged driver is packaging quantity/consumption norms, thereby producing a “precision” of Rs.75,60,60,489/- is illusory.

11.1.6 The book GP rate is mechanically imported into the alleged clandestine stream without any evidence on comparing facts that: (i) price-mix is identical, (ii) incremental costs (raw tobacco, power, labour, wastage, regulatory costs) are identical, or (iii) the alleged stream is even real. Estimation cannot be used as a license to tax an assumed turnover with book margins when neither books are rejected with cogent defects nor the alleged turnover is proved. Section 145(3) requires foundational satisfaction as to correctness/completeness of accounts or non-compliance with notified standards before best-judgment estimation is resorted to.

11.1.7 In our view, the department ought to have proved with reliable corroboration, that “MIRAJ” refers to the appellant (a legal person) and not merely a packaging brand/label used for multiple buyers; that the entries correspond to actual supplies made to the appellant in the relevant year; that the appellant if funded such payments in cash then source and movement of cash, and that such supplies led to incremental clandestine production and sales in that year.

11.1.8 In the present case, the department has failed to prove the aforesaid reliable collaborations with reference to alleged diaries alone. It is noted that neither the AO nor the CIT(A) or the Ld. DR could bring on record any cogent material evidence to support the incremental clandestine production and sales. The Department’s story hinges on the proposition that the supplier records “Miraj”, and it must be Miraj Products Pvt. Ltd. However, this proposition is disproved by the supplier’s own Director in cross-examination which reads as under:

“Record of personal hearing/cross examination of witness” of Shri Dhananjay Singh, Director, Montage Packaging Sales Pvt. Ltd., dated 18.05.2023 (RUD-6 of SCN dated 20.04.2022).

Q12: “Is it correct to say that the Miraj brand packing material was supplied to entities other than Miraj Products Pvt. Ltd.?”

Answer: “Yes, if any firm request for Miraj brand packing material, then, we supply such material to them.”

11.1.9 The aforementioned answer is not peripheral; it is foundational. It means the presence of “Miraj” in a supplier’s record is not unique identification of the appellant. It can refer to either Miraj-brand packaging supplied to any other firm-including entities manufacturing/marketing counterfeit or look-alike products. The Section 292C provides that where books of account, documents, money, etc. are found in possession/control of any person in course of search, it may be presumed-inter alia-that such documents belong to that person and their contents are rebuttable presumption. Thus, the Department ought to have addressed that the presumption is rebuttable and does not by itself establish that the entries represent undisclosed income chargeable to tax, and that where the Department seeks to use third-party seized material to tax a different person, the Department must establish linkage through cogent corroboration.

11.1.10 In the present case, the department ought to have brought on record cogent evidence to support the alleged unaccounted purchases of Rs. 32,75,90,180/- and the suppressed sales of Rs.75.60 crore estimated and confirmed by the CIT(A) for the Assessment Year 2022–23, but the AO, the Ld. CIT (A) or even the Ld. DR failed to bring the following corroborative evidence to support the alleged purchases/sales on the following parameters:

1. Movement of finished goods (transport evidence, dispatch records, third-party confirmations).

2. Unaccounted procurement of other raw materials proportional to production.

3. increased power/labour footprints (or at least inconsistencies).

4. Downstream market evidence (dealer stocks/purchases corresponding).

5. Cash trail (delivery, collection, utilisation).

Thus, the Ld. AR contended that the record does not demonstrate these corroborations for this year. The appellant prays to delete the addition of Rs.8,07,47,260 sustained by the CIT(A) as “estimated gross profit embedded in estimated unaccounted sales of Rs.75,60,60,489” for Assessment Year 2022–23.

11.2 The Ld. CIT (DR) on the other hand reiterated the department’s grounds of appeal and stands by the assessment order.

11.3 Admittedly, the CIT(A) while deleting addition of Rs. 2,00,640/- u/s 69A of the Act made on account of unaccounted and unexplained stock of tobacco has observed by appreciating the facts that the addition was not based on cogent material evidence and incriminating documents found during the search that the finding of the AO regarding the excess stock of 2090 Kg of tobacco confiscated by CGST Department in a vehicle in assessee’s premise with the consignment of the assessee and statement recorded u/s 132(4) of the Act, has not been rebutted to the appellant. The Ld. AR contended that Shri Ashirwad Sukhwal admitted the excess stock of 2090 Kg of tobacco has neither been corroborated nor rebutted to the appellant in the assessment proceeding. The CIT(A) has observed that the appellant established with evidence that there was no excess stock belonged to assessee. Thus, it was not relevant whether it was a high priced and high-quality tobacco once which did not belong to the assessee. The department did not appreciate the truth that no unaccounted stock was found with any specific consignment of the assessee from its premises and that any unaccounted stock does not have bill/vouchers. We find no reason to interfere in the decision of the Ld. CIT(A) in deleting the addition of Rs. 2,00,640/-.

11.3.1 The Department’s next allegation is that “unaccounted purchases” are of Rs.32.76 crore, which the record describes as packaging purchases from the supplier group. If taken at face value, it implies that packaging purchases alone outside books are about 46.9% of all book purchases. This is commercially implausible for a manufacturing entity where raw tobacco and other ingredients constitute major inputs. The implausibility strongly indicates that the “Rs.32.76 crore” is not a clean measure of packaging purchases by the appellant. It is, at best, a third-party internal cash-receipt aggregation that cannot be automatically transported into the appellant’s production and sales. Considering the circumstances and appreciating the facts the CIT(A) is justified in deleting the addition of Rs. 32,75,90,180/- u/s 69A of the Act made for unexplained money in form of cash which was alleged to be used for unaccounted purchase of packaging material from MEPL based on presumption. During assessment as well as appellate proceedings, assessee explained source of cash of Rs. 32,75,90,180/- on telescopic basis as discussed by the Ld. CIT (A) used for alleged unaccounted purchase of packaging material if any from MEPI and further, assessee has also not objected to unaccounted purchase of packaging material as the CIT(A) himself confirmed this unaccounted purchase in the appellate order with remarks that the assessee did not dispute the amount calculated by the AO from the seized notepads for unaccounted purchase of packaging material by the assessee and that the addition of Rs. 32,75,90,180/- u/s 69A of the Act made for unexplained money in form of cash which was used for unaccounted purchase of packaging material from MEPL by allowing telescoping effect from the determined unaccounted sales of Rs. 75,60,60,489/- on the basis of use of unaccounted packaging material by appreciating the facts that assessee has submitted details and documentary evidences which can proves that unexplained cash payment for purchase of unaccounted packaging material was made from unaccounted sales and thus, the CIT(A) has accepted reply of the assessee with any verification in this regard and allowed telescoping effect which is as per law.

11.3.2 The department contention that CIT(A) is not justified in deleting the addition of Rs. 32,75,90,180/- u/s 69A of the Act made for unexplained money in form of cash which was used for unaccounted purchase of packaging material from MEPI by accepting reply of the assessee without appreciating the facts that the CIT(A) has not given any finding has no merits as the Ld. CIT (A) has made detail discussion and accepted the reply of the assessee proving the very nature and source of cash of Rs. 32,75,90,180/- on telescopic basis and therefore, same is no more treated as unexplained income of the assessee to be taxed u/s 69A of the Act to charge tax u/s 115BB of the Act.

11.3.3 It is seen that the Ld. CIT (A) has treated Rs. 8,07,47,260 as Gross Profit Earned from Unaccounted/Suppressed Cash Sales Enhanced at Rs 75,60,60,489/- arising out of dumb documents and thus confirming the alleged corresponding transaction to some alleged enhanced unaccounted purchases of Rs 32,75,90,180/-. However, the revenue’s mere contention that the alleged unaccounted sales was made out of exiting manufactured goods generating unaccounted income is not established with cogent evidence. We are of the considered view that since the Section 69A is being a deeming fiction, hence it cannot be used to convert an accounting hypothesis into a proved transaction of unaccounted purchases.

11.3.4 It is seen that the book purchases of the assessee are Rs.69.88 crore as per CIT(A) formula, covering all raw materials and inputs. The Department’s alleged “unaccounted purchases” are Rs.32.76 crore, which the record describes as packaging purchases from the supplier group. On taking at face value, it implies that packaging purchases alone outside books are about 46.9% of all book purchases. In our view, this is commercially implausible for a manufacturing entity where high quality raw tobacco and other ingredients constitute major inputs. The implausibility strongly indicates that the “Rs.32.76 crore” is not a clean measure of packaging purchases by the appellant. It would be, at the best, a third-party internal cash-receipt aggregation that cannot be automatically transported into the appellant’s production and sales.

11.3.5 From the record, it apparently clear that in the present case, the department failed to bring on record cogent evidence to support the suppressed sales of Rs.75.60 crore for the Assessment Year 2022–23. It is noted that neither the AO, nor the Ld. CIT (A) nor even the Ld. DR could brought on record any corroborative evidence to support the alleged unaccounted purchases/sales by way of that movement of raw material and finished goods with support of transport evidence, dispatch records, third‑party confirmations; that quantification of unaccounted procurement of other raw materials required in proportionate to the production; that increased power/labour footprints or at least some inconsistencies; that the downstream market evidence i.e. dealer stocks/purchases corresponding and that the corresponding Cash trail of delivery, collection, and utilisation thereof. Thus, mere allegation of the department based on suspicion and presumption formed based on dumped documents would not take the place of evidence until or unless supported with cogent material evidence. Since, the record does not demonstrate these corroborations for this year under consideration and accordingly, we hold that the impugned order of the CIT (A) on the issue of addition on account of “estimated gross profit embedded in estimated unaccounted sales of Rs.75,60,60,489/- for Assessment Year 2022–23 is perverse to the facts on record.

11.3.6 In view of the above, we accept the grievance of the assessee as genuine and as such delete the addition of Rs.8,07,47,260/- estimated and sustained by the CIT(A) as “estimated gross profit embedded in estimated unaccounted sales of Rs.75,60,60,489” for Assessment Year 2022–23. Thus, the ground no. 3 of the assessee is allowed.

12 In the next ground 3.1 the appellant has challenged that the Ld. CIT(A) has erred in law and on facts of the case in enhancement of Estimated Unexplained Expenditure for manufacturing of Stock u/s 69C at Rs 51,41,211 relating to Enhanced Unaccounted Suppressed Sales 75,60,60,489/-.

12.1 The Ld. CIT (A) while restricting the addition to Rs. 51,41,211/- u/s 69C of the Act applied the stock-in-trade to turnover ratio of 0.68% for initial unexplained expenditure for first unaccounted profit out of total unaccounted sales of Rs. 75,60,60,489/-. An identical issue of addition u/s 69C on similar facts has been adjudicated above in ground no. 2.1 except variation in quantum disputed. Therefore, our observation and finding given in ground no. 2.1 shall apply in mutatis mutandis, ordered accordingly.

12.1.1. In the present case, even if (hypothetically) excess stock is computed, the natural statutory home is more aligned to “investment/asset” deeming provisions (e.g., sections 69/69B) rather than expense deeming (69C), subject to their respective triggering facts. But here, no excess stock is found; instead, a ratio is used to infer “expenditure.” The section 115BBE would not apply to an ordinary business income computed under section 28 unless the income is first characterised as a deemed unexplained item under the aforesaid sections. The Ld. CIT(A) has rightly deleted the unaccounted purchases addition u/s 69A and however he treated the surviving addition of gross profit on enhanced sales as business income (profit element) without any foundation or following the standard accounting principles. In our view, the 115BBE regime cannot be applied to the GP element on “business sales” as a matter of statutory interpretation. In the present case, the department failed to prove or establish existence of alleged suppressed sales, and that to satisfy conditions for applicability of section 145 (3) and estimation of GP rate. The department further failed to prove any unaccounted or suppressed sales estimated at Rs 75,60,60,489/- and alleged purchases amounting to Rs. 32,75,90,180/-. The addition on account of unaccounted purchases of Rs 32,75,90,180/- u/s 69A of the Act.

12.1.2. In an appeal against an assessment order, CIT(A) under Section 251(1)(a) of the act, may confirm, reduce, enhance or annual assessment and it is conditional subject to granting opportunity to the assessee and cannot create jurisdictional authority. It is seen that the audited opening inventory is Rs.41.26 crores, the hypothesis that the assessee “must have incurred” a separate unaccounted “initial stock expenditure” of Rs.51.41 lakhs to commence any alleged suppressed sales is factually incoherent. A going concern’s “first sale” in the financial year is ordinarily made out of opening inventories and continuous production funded by disclosed working capital and trade credit. Therefore, the CIT(A)’s “first unaccounted sale requires first unaccounted stock” narrative is internally inconsistent with audited accounts reality and ignores the existence of substantial opening stock and WIP.

12.1.3 The Income-tax Act taxes “income” Where transactions are treated as trading transactions, taxable additions must correspond to real income embedded in the stream (typically profit element). A method that first taxes profit and then taxes a notional stock value as deemed income-without being supported with separate evidence of unexplained funds-does not measure income as it measures a theoretical stock holding. In our view, Section 69C is not meant to transform ordinary business necessities into deemed incomes. It is meant to catch unexplained outflows where the source is not explained. Hence, the impugned notional Addition made U/s 69C would be liable to be deleted because it represents an impermissible attempt to tax something other than real income, and because it duplicates the already-taxed trading profit conceptually attributable to the same alleged stream.

12.1.4 The CIT(A) has recorded that for unaccounted purchases and unaccounted sales, the addition should be restricted to profit element, but the AO has already made addition of profit element embedded in such transactions. The CIT(A) has also telescoped substantial alleged unaccounted purchases against estimated unaccounted sales. In such a framework, the Impugned 69C Addition produces a layered taxation problem as explained by the appellant in a structured forensic way.

12.1.5 Considering the facts of the case, we hold that the CIT (A) was not justified in making addition u/s 69C amounting to Rs.51,41,211 by way of enhancement as “Estimated Unexplained Expenditure for manufacturing of stock” as being perverse to the facts on record and contrary to the provisions of section 69C, as the statutory preconditions of section 69C are not satisfied and the computation has been a conjectural ratio-based inference. Accordingly, the addition of Rs. Rs.51,41,211/- is deleted. Thus, Ground No. 3.1 of the assessee is allowed. Consequentially Section 115BBE has no application to addition so deleted and that no such tax rates would be applicable.

13. In ground No.2.2 and 3.2 the appellant objection is that the lower authorities have not relied upon any corroborative evidence and without affording opportunity for cross-examination, violated the principles of natural justice.

13.1 The Ld. AR contended that the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and without affording the appellant the opportunity of Cross Examination and therefore deserves to be quashed. The AR argued that Denial of Cross-Examination is a Serious Flaw Nullifying the Orders.

13.1.1 In the present case, the appellant was denied the opportunity to cross-examine crucial evidence that the AO relied upon. Specifically, the assessment heavily based on certain documents and statements which are “dumb documents” seized from third parties, which were used to determine alleged unaccounted income. The appellant had expressly requested to cross-examine the persons from whom these documents were seized or who allegedly authored those entries, since the contents were unverified and adverse to the appellant. However, no such opportunity was afforded. The AO proceeded to draw conclusions from those documents without the test of cross-examination, thereby depriving the appellant of a chance to refute or clarify the contents.

13.1.2 The Ld. AR submitted that the department failure to allow cross-examination is a grave infraction of natural justice. When a document or statement is used against a taxpayer, the law mandates that the taxpayer be allowed to verify the veracity of that evidence in view of the principle of audi alteram partem (no one should be condemned unheard). The AR referred to numerous precedents reinforcing this principle, the relevant one reads as under:

i) In Andaman Timber Industries (SC), the Supreme Court set aside the order because the assessee was not allowed to cross-examine the witnesses, whose statements were the sole basis of the demand. The Court ruled that if those statements (untested by cross-exam) are excluded, the department had no material to support its case, underscoring how critical the cross-exam right is.

ii) Similarly, in Kishinchand Chellaram v. CIT (SC), the Supreme Court refused to accept a third-party letter as evidence of income because the person making the statement was not produced for cross-examination and the evidence remained unverified hearsay. The Court emphasized that any material gathered behind the back of the assessee must be subjected to cross-examination if the assessee disputes it.

iii) The Income Tax Appellate Tribunal (ITAT) has also repeatedly held that when the Revenue relies on statements of third persons to implicate an assessee, the assessee must invariably be given the chance to cross-examine those persons; otherwise, such statements cannot be given evidentiary value.

13.1.3 In sum, the use of untested documents and the denial of cross-examination is a judicial illegality that vitiates the assessment. The appellant was put to tax burden on the basis of material, he had no fair chance to challenge – a classic breach of natural justice that rendered the entire additions be struck down as unsustainable.

14. The Ld. AR further argued that department Reliance on Uncorroborated “Dumb Documents” is not a Substantive Evidence to form basis of the additions made by the AO/CIT(A). The assessment is based on certain loose papers/printouts which are undated, unsigned, and unauthenticated – essentially “dumb documents” lacking context or confirmation. It is well-settled that additions cannot be made merely on the basis of such documents, unless they are supported by other credible evidence or linked conclusively to the assessee’s transactions. The lower authorities relied on documents and notings that lacked any independent corroboration.

14.1 The term “dumb document” has been coined for undated, unsigned seized papers that have no explanatory value on their own – especially when such papers don’t even mention the assessee’s name or cannot be tied to the assessee’s actual business records. In such scenarios, unless the Revenue produces further evidence to show the entries are genuine and pertain to the assessee (for instance, by examining the author of the document or matching the entries with actual transactions), the document remains a meaningless piece of paper in the eyes of law.

14.1.1 In the instant case, the documents used by the AO fit this description of dumb documents. They were loose papers allegedly found elsewhere, containing rough figures that the AO interpreted as the appellant’s unaccounted sales. Not only were these papers not proved through any witness (no cross-exam, as noted above), but critically, no other evidence was led to support what those figures imply. There were no purchase invoices, no trail of money, no stock discrepancy, no buyer statements – nothing to corroborate that the scribbled figures represented real, untaxed transactions of the appellant. The lower authorities simply assumed the notings to be true in isolation, which is a patent error of law. If these papers are set aside (as they should be, having no evidentiary weight on their own), the entire addition collapses for want of any supporting material. This aligns with the Supreme Court’s observation in Andaman Timber that once the tainted evidence (untested witness statements in that case) is removed, “there was no material with the Department” to support the allegations. Here too, absent the unreliable loose sheets, there is no material evidence of any undisclosed income.

14.1.2 Thus, the lower authorities have erred in relying on uncorroborated documents, contrary to law. If the Revenue “wants to make use of dumb documents, then the onus is on the Revenue Department to collect cogent corroborative evidence” to substantiate them. That onus was not discharged in this case. Therefore, the addition based on such papers deserves to be deleted as unsustainable.

15. It is seen that department has not considered the Appellant’s Submissions and Evidence furnished. This is another facet of the violation of natural justice owing to the failure of both lower authorities to consider the appellant’s explanations, evidence, and submissions. The impugned orders have been passed in a cavalier manner, ignoring vital material furnished by the appellant from time to time. This has resulted in a non-speaking order that does not deal with the core defense raised by the appellant. Passing an order without addressing the assessee’s key contentions is itself an act of unfairness and illegality. It is seen that the appellant had made several pertinent submissions which the orders scarcely mention or engage with.

15.1 It is noted that the appellant submitted detailed records of its packaging materials (e.g. bottles, cartons, labels used in production) to demonstrate that the consumption of packaging was fully in line with the disclosed production and sales. This evidence was critical because it directly contradicted the department’s allegation of higher unaccounted production – if the alleged suppressed sales were true, the appellant would have needed significantly more packaging materials, which was not reflected in the records. This logical rebuttal was backed by quantitative data submitted during assessment/appellate proceedings. However, neither the AO nor the CIT(A) addressed this submission at all. The assessment order does not discuss the packaging consumption analysis, and the appellate order also remains silent on it. By ignoring this evidence, the authorities have shown a non-application of mind to a crucial defense, rendering their conclusions flawed and one-sided.

15.1.1 The appellant had also explained other discrepancies and offered clarifications (as detailed in earlier grounds of appeal). For instance, explanations regarding the so-called “unaccounted purchases” were given with reference to stock registers, and the unreliability of third-party statements was highlighted. Yet, the lower authorities “grossly ignored” these various submissions and explanations. The impugned orders simply reiterate the allegations without rebutting the appellant’s points. This suggests that the orders were pre-decided or at least not impartially adjudicated, which is against settled law.

15.1.2 We find that in the present case, the issue challenged by the revenue is regarding deleting unaccounted purchases of Rs. 28,54,16,000/- as against Rs. 32,75,90,180/- discussed in the Assessment Order. However, the Department’s own completed scrutiny assessments in the case of multiple distributors for Assessment Year 2022–23 materially corroborate the genuineness of the distribution chain and negate any sweeping inference of “non-genuine/sham” distributors. In these assessment orders, the very same Assessing Officer record that the submissions were perused/verified and the declared income is accepted, expressly recording that “no adverse inference” was found. Having accepted these distributors’ results on scrutiny for the same Assessment Year, the Revenue’s attempt to treat the very same distribution chain as a vehicle for unaccounted/suppressed transactions in the appellant’s hands is internally inconsistent and cannot substitute the strict requirement of independent corroborative evidence for the impugned additions. The brief of such assessment orders in the case of the distributor are given in tabular form by the appellant in support:

Distributor name	PAN	AY	Assessmen t date	Declared income accepted ?	Key AO finding
Aadesh Enterprises Private Limited	AAECS7 617N	2022–23	28/03/2024	Yes	“No adverse inference… income… Rs. 4,47,13,290/-is accepted”; assessed u/s 143(3).
Anil Kumar Bhatiya	ACOPB3 557D	2022– 23	16/03/2024	Yes	Returned income Rs. 23,76,900/- accepted; (acceptance follows recorded verification/no adverse inference).
Bhatia Trading Company	AAUFB4 189R	2022– 23	16/03/2024	Yes	Declared income Rs. 13,20,540/- accepted; business described as purchase/sale of pan masala & tobacco.
Harikrupa Marketing Private Limited	AAACH6 637F	2022– 23	15/03/202 4	Yes	Declared income Rs. 3,01,85,010/- accepted; business described as trading of tobacco product.
Maheshwara Enterprise Private Limited	AAJCM0 579Q	2022– 23	16/03/202 4	Yes	Declared income Rs. 1,51,45,210/- accepted; business described as trading of tobacco product.
Manorath Sales Private Limited	AAMCM5 799B	2022– 23	15/03/202 4	Yes	Declared income Rs. 5,24,20,310/- accepted; business described as trading of tobacco product.
Muthyam Suryanarayana	ADDPM3 608A	2022– 23	26/03/202 4	Yes	Declared income Rs. 83,57,000/- accepted; business described as tobacco trading (through
Srinivas Tradelink LLP	AAKFH0 857N	2022– 23	16/03/202 4	Yes	“SR Agencies”). Declared income Rs. 2,75,90,630/- accepted; wholesale of food/beverages & tobacco.

15.1.3 The appellant submitted that the impugned income-tax additions travel substantially on allegations contained in a GST “show cause cum demand notice” dated 23.12.2022 issued by DGGI, which the AO treated as a foundational fact for inferring out-of-books procurement of packing material and clandestine diversion of production. A show-cause notice is, by definition, an allegation-stage instrument and cannot be elevated to a conclusive finding of fact for income-tax purposes unless independently corroborated by admissible evidence brought on record in the income-tax proceedings. In the paper book placed before this Hon’ble Tribunal, while the SCN material and allied records form part of the record, no final GST adjudication order is relied upon to establish the allegations as concluded facts. In past also, Excise authorities raised demand which ultimately nullified.(PB 1046-1047, PB 740) Accordingly, the Revenue’s attempt to draw high-pitched income-tax additions by extrapolating from an allegation-stage GST notice, without independent corroboration, is legally unsafe and factually untenable.

15.1.4 It is pertinent to mention that even on the merits of the case, once the improperly admitted evidence (seized papers and third-party assertions) is excluded and the appellant’s unrefuted evidence (like the packaging consumption analysis) is considered, there remains no basis to uphold the addition. Thus, both on legal and factual grounds, the impugned addition fails and the appeal of the appellant deserves to be allowed.

16. In the above view, we find no merit and substance in the contention of the department and therefore, the ground no. 8 to 12 of the revenue are rejected.

17. In the result, the assessee’s appeal is allowed and that of revenue is dismissed.

Order pronounced on 30/04/2026 in the open court.