ITAT Delhi Dismisses Revenue's Appeals on Bogus Purchases and Warranty Expenses, Quashes Search Assessments for Non-Compliance with Section 148B

ITAT Delhi Bench G dismissed Revenue's appeals across multiple assessment years for Pilot Industries Limited and allowed Ardee Industries Limited's appeal, deleting additions on alleged bogus purchases and warranty expenses while quashing assessments framed under Section 143(3) without the mandatory prior approval required by Section 148B following a search under Section 132.

The Income Tax Appellate Tribunal, Delhi Bench G, disposed of a batch of cross-appeals filed by Pilot Industries Limited, its Revenue counterpart, and Ardee Industries Limited through a common order dated 8 May 2026. The appeals arose from a search and seizure action under Section 132 of the Income Tax Act, 1961 conducted on 30 May 2023, after which the Assessing Officer made additions spanning assessment years 2018-19 to 2024-25 on account of alleged bogus purchases, disallowed warranty expenses, unaccounted sales, inflated expenses, and unexplained investments. The CIT(A) had granted substantial relief by deleting most additions. The Tribunal upheld those deletions, dismissed all Revenue appeals, and additionally quashed the assessments for AYs 2022-23 and 2023-24 on the ground that the Assessing Officer had not complied with Section 148 or Section 148B before framing the orders.

The Dispute Before the Tribunal

Pilot Industries Limited is engaged in manufacturing lead alloys, lead oxide, and lead acid batteries. Following the search on 30 May 2023, the Assessing Officer completed assessments for multiple years making additions under several heads. For AYs 2018-19 through 2021-22, the proceedings were initiated under Section 148. For AYs 2022-23 and 2023-24, assessments were framed under Section 143(3).

The additions included alleged bogus or non-genuine purchases calculated at an estimated rate of 3.27% of certain purchases, disallowance of warranty expenses under Section 37, commission disallowance, unaccounted sales under Section 28, inflated expenses, differences in closing stock treated as undisclosed business profit, and unexplained investments under Section 69. The CIT(A) deleted most of these additions and confirmed only a few. Both the assessee and Revenue filed cross-appeals before the Tribunal.

Ardee Industries Limited, a separate entity, filed an appeal against the CIT(A) order dated 23 July 2025 for AY 2023-24. Its appeal raised the same jurisdictional challenge regarding Section 148B compliance.

Alleged Bogus Purchases: The 3.27% Rate

The Assessing Officer inferred that Pilot Industries had taken accommodation entries in the form of non-genuine purchases. The rate of 3.27% applied to certain purchases was derived from findings in a search conducted in the case of an entirely separate company, M/s Bindal Smelting Private Limited, which had been found to have booked bogus purchases. The AO reasoned that since Pilot Industries operated in a similar line of business, the same practice was likely followed.

The assessee's counsel pointed out that the material relied upon by the AO neither related to Pilot Industries nor to the parties from whom the purchases were made. All purchases were recorded in audited books of accounts, payments were made through banking channels, and the AO had not rejected the books of accounts. The assessee had furnished confirmation of accounts, ledger accounts, invoices, transporter receipts, e-way bills, weighing slips, goods inward registers, GST certificates, and Udyam certificates of suppliers.

On the specific objection that no freight charges were paid, the assessee explained that purchases were made on a FOR (Freight on Road) basis, meaning freight was included in the purchase price. The CIT(A) accepted this explanation and deleted the addition of Rs. 1,36,92,050 for AY 2018-19, observing that the AO had accepted the entire purchases and made only an ad hoc addition without any rational basis. The CIT(A) relied on the Delhi High Court's ruling in PCIT v. Forum Sales Private Limited (ITA No. 862/2019) that an AO cannot make an estimated addition without first rejecting the books of accounts.

The Tribunal agreed. It found that the factual matrix in Pilot Industries' case was different from that of Bindal Smelting Private Limited, and that adopting the same rate to make an addition in the assessee's case was “farfetched.” The Revenue's ground for AY 2018-19 on bogus purchases was dismissed. The Tribunal applied the same findings to AYs 2019-20, 2020-21, and 2021-22, dismissing the Revenue's appeals for those years as well.

Warranty Expenses: Doctrine of Consistency

The Assessing Officer disallowed warranty expenses under Section 37 on the ground that the assessee was consistently creating a surplus provision. For AY 2018-19, the disallowed amount was Rs. 1,58,04,122.

The assessee explained its warranty mechanism: when a defective battery is returned within the warranty period, the company replaces it with a new battery and takes back the old one for recycling as raw material. The warranty expense claimed is the cost of the new battery reduced by the estimated realisable value of the defective battery. The provision for warranty shown in the balance sheet was not claimed as a deduction in the profit and loss account; only the net difference was claimed.

The assessee further demonstrated that warranty expenses had been consistently allowed in assessments under Section 143(3) for financial years 2015-16 through 2020-21, with turnovers ranging from approximately Rs. 471 crore to Rs. 697 crore. No incriminating material relating to warranty expenses was found during the search.

The CIT(A) deleted the addition, invoking the doctrine of consistency and relying on the Supreme Court's observations in CIT v. Excel Industries Ltd. (2013) 358 ITR 295 and PCIT v. Maruti Suzuki India Ltd. [2019] 107 taxmann.com 375 (SC). The Tribunal upheld this reasoning, observing that the method of calculating actual warranty expenses had been followed consistently and accepted by Revenue over the years. The Revenue's ground on warranty expenses for AY 2018-19 was dismissed, with the same conclusion applied to AYs 2019-20, 2020-21, and 2021-22.

Commission Disallowance for AY 2021-22

For AY 2021-22, the Assessing Officer disallowed commission of Rs. 36,74,805 on the basis of certain WhatsApp chat material, treating the commission as non-genuine. The CIT(A) confirmed this addition.

Before the Tribunal, the assessee's counsel pointed out that all commission payments were made through banking channels after deduction of TDS, and that notices under Section 133(6) issued to the payees had been responded to with confirmations of receipt. More significantly, in the original assessment under Section 143(3) for AY 2021-22, the AO had disallowed the same commission, but the CIT(A) had deleted that addition and the Revenue had not appealed to the Tribunal.

The Tribunal found it untenable that the same commission, once accepted by the first appellate authority in the original assessment proceedings without further challenge by Revenue, could be disallowed again in the search assessment proceedings. With payees having confirmed the transactions, the Tribunal allowed the assessee's ground. The appeal for AY 2021-22 was partly allowed.

Jurisdictional Challenge: Section 148 and Section 148B

For AYs 2022-23 and 2023-24, the assessee raised additional grounds challenging the jurisdiction of the Assessing Officer. The search under Section 132 was conducted on 30 May 2023, which falls in financial year 2023-24 relevant to AY 2024-25. The assessee argued that for the two years preceding the search year — AYs 2022-23 and 2023-24 — the only permissible statutory route was to issue notice under Section 148 and obtain prior approval under Section 148B before passing the assessment order.

Explanation 2 to Section 148 provides that where a search is initiated under Section 132 on or after 1 April 2021, the Assessing Officer shall be deemed to have information suggesting escaped income. Section 148B, inserted by the Finance Act 2022 with effect from 1 April 2022, requires that no order of assessment or reassessment in respect of an assessment year to which Explanation 2 to Section 148 applies shall be passed by an officer below the rank of Joint Commissioner without the prior approval of the Additional Commissioner, Additional Director, Joint Commissioner, or Joint Director.

The assessee submitted that the AO had framed the assessments for AYs 2022-23 and 2023-24 under Section 143(3) without issuing notice under Section 148 and without obtaining the mandatory prior approval under Section 148B. The Tribunal admitted the additional grounds, following the Supreme Court's decision in NTPC Limited v. CIT (1998) 229 ITR 383 (SC), on the basis that the grounds went to the root of the matter and raised a jurisdictional issue.

After considering the submissions and the provisions, the Tribunal held that the assessments for AYs 2022-23 and 2023-24 were bad in law and without jurisdiction. The assessee's appeals for those two years were allowed on this ground. The same conclusion applied to Ardee Industries Limited's appeal for AY 2023-24, which was also allowed.

Unexplained Investment in Stock for AY 2024-25

For AY 2024-25, the Assessing Officer found differences between physical stock and book stock at the Pant Nagar Plant and Bhiwadi Plant during a survey. The excess stock was treated as unexplained investment under Section 69, with additions of Rs. 33,12,076 and Rs. 5,23,711 respectively. The CIT(A) had initially deleted these additions in the appeal order dated 25 July 2025, but subsequently upheld them through a rectification order under Section 154 of the same date, treating the deletion as a typographical error.

Before the Tribunal, the assessee argued that since the CIT(A) had confirmed an addition of Rs. 42,27,240 on account of profit on unaccounted sales — a ground the assessee did not press — there was an available source of funds within the business. Treating the stock difference as unexplained investment would amount to a double addition, and the assessee was entitled to telescoping benefit.

The Tribunal examined the nature of the stock differences. For raw material, it found that the book stock was higher than the physical stock, meaning the assessee had booked purchases properly but the physical shortage indicated excess consumption had been booked. This could not be treated as undisclosed investment; it could only be treated as a loss. The addition on this count was deleted.

For finished goods, the physical stock exceeded the book stock. The Tribunal observed that since the assessee had undisclosed sales confirmed by the CIT(A) and not challenged before the Tribunal, there was an additional source of funds within the business from which the excess finished goods stock could have been financed. The Tribunal allowed the telescoping benefit and deleted the addition on finished goods as well. The appeal for AY 2024-25 was partly allowed.

Outcome

The Tribunal disposed of all appeals by a common order pronounced in open court on 8 May 2026. In the case of Pilot Industries Limited: the assessee's appeal for AY 2020-21 was dismissed; appeals for AYs 2021-22 and 2024-25 were partly allowed; appeals for AYs 2022-23 and 2023-24 were allowed in full on the Section 148B jurisdictional ground. All Revenue appeals in the case of Pilot Industries Limited were dismissed. The appeal filed by Ardee Industries Limited for AY 2023-24 was allowed. The order was authored by Shri S. Rifaur Rahman, Accountant Member, and signed by both members.