During the course of a Search and Seizure action, it is seen in practice that incriminating material in the form of documents, diaries, and other evidence is found which sometimes reflects undisclosed income of an assessee only for a limited period of time and not for all the assessment years to be covered u/s 153A of the Income Tax Act’1961. However, it is seen that during the course of search assessments, the finding of such undisclosed for a particular period is extrapolated to the entire block period of assessments as envisaged u/s 153A of the Income Tax Act’1961.
To illustrate, let us assume that during the search and seizure action on an assessee into manufacturing activity, certain seized documents suggest that there were undisclosed scrap sales for 2 months only. The vital question here is as to whether the Assessing Officer while framing assessments u/s 153A r.w.s. 143(3) for 7 years, can extrapolate the findings of undisclosed income which relate to only 2 months, to entire 7 years.
On a similar note, in the case of search or survey on real estate developers, there may be cases when evidence is found regarding receipt of unaccounted cash or 'on money' from the customers. Such evidence may be found relating to certain units out of the total project or from some of the customers. Whether in such cases, can the Assessing Officer extrapolate receipt of 'on money' to the entire project with respect to all the customers on the pretext that in case 'on money' is being received in certain cases, it reflects that the actual market price is higher and therefore the presumption is that 'on money' has been received from all the customers.
First of all, let us understand what an "extrapolation" is.
The Extrapolation technique is the method of backward and forward projection of income while assessing the income of the whole of the assessment years covered u/s 153A of the Income Tax Act’1961 on the basis of the income found to have been earned by the assessee for a short period. Under this technique, if the assessee is found to have earned the income found as a result of a search based on certain evidence for a period of, say, 10 days, the assessee can be said to have earned the same income for the whole of the year or maybe for all the years covered under assessment.
Having said so, it is pertinent to mention at the outset that it is a matter of settled legal principle that the doctrine of res judicata does not apply to tax laws so far as under the Income Tax Act each year is an independent year and the assessment is to be made for each year independently based upon the evidence available for that particular year.
However, it is seen in practice that the department invariably relies on the extrapolation technique during the course of the search assessments and thereby makes arbitrary additions in the years relating to which no incrimination material has been unearthed on the pretext of some incriminating material pertaining only to a limited period/year.
To support its stand, the department heavily relies on the decision of the Supreme Court in the case of CST v. H.M. Esufali H.M. Abdulali  90 ITR 271 to justify the income estimated by it. In the above case, which pertains to sales tax law, the dealer had disputed the determination of turnover arrived at by the STO. On the basis of incriminating documents found at the premises of the dealer during the course of the survey, while arriving at the best judgment assessment and estimating the assessee’s turnover, the STO observed that there were dealings outside the assessee’s books of account amounting to Rs. 31,171.28 during the period of 19 days. The fact of suppressed sale was established and the STO estimated the assessee’s turnover for the whole of the year on that basis. The assessee conceded that those bills belonged to him and the entries therein related to his dealings. The Supreme Court observed that it was proved and admitted that the assessee was dealing outside the accounts during the period of 19 days and that his dealings outside the books during that period stood at the value of Rs. 31,171.28 and that from this, it was open to the STO to infer that the appellant was dealing outside his books of account. The Supreme Court upheld the estimate of turnover made by the STO for the whole year. However, while upholding the estimate, the Supreme Court had made a qualification to the effect that the estimate should not be arbitrary and should have a nexus with the facts which had been discovered. It was stated that the basis adopted should be relevant to the estimate made. It was also stated by the Court that the assessing authority while making the best judgment assessment, no doubt, should arrive at its conclusion on a rational basis without any bias and should not be vindictive or capricious. The prime issue before the Supreme Court while deciding the matter was whether an estimate made in the best judgment assessment based on proper facts and material could be challenged just because of the fact that a precise estimate has not been made. Where it is purely a question of making an estimate, it has been held by Supreme Court, that the estimate of the Assessing Officer should not be disturbed, provided it is fair and bona fide.
The Hon’ble Punjab and Haryana High Court in the case of Tara Singh V ITO  81 taxmann.com 293 (Punjab & Haryana) held that the assessing officer in the best judgment assessment can resort to a bona fide estimate based on a rational basis.
The Hon’ble Mumbai ITAT in case of ACIT V Giriraj Developers 82 taxmann.com 54 (Mumbai - Trib.)
During the course of the survey upon the assessee-firm one document was found with regard to the sale of a shop involving a cash component. The assessee had sold 5 shops during the year and on the basis of document impounded during the course of a survey it was held by the Assessing Officer that during the year under consideration the assessee had also received cash on sale of said shops and brought to tax the same as undisclosed income of the assessee.
The law clearly stipulated and put the burden upon the shoulders of the assessee to show that other shops did not have a cash component at all or the sales consideration of the remaining shops having identical location and other contribution was equivalent to their agreement value only. Nothing had been brought during the course of assessment proceedings in this regard by the assessee. The Assessing Officer also failed in bringing any further information or evidence on record in this regard. In the circumstances, the issue was restored back to the file of the Assessing Officer to give the assessee an opportunity to bring requisite evidence to show that the market value of those shops was equivalent to the amount on which transactions had been done.
Having laid down the above judgments, it is pertinent to mention here is that the courts have predominantly held against the adoption of the extrapolation technique primarily because the judgment of the apex court in the case of CST v. H.M. Esufali H.M. Abdulali  90 ITR 271 was rendered in respect to the best judgment assessment and not in respect of assessment other than best judgment assessment. However, in search assessments, the additions to the income of the assessee have to be based on the material unearthed during the course of the search only. Having said so, in cases where the evidence so unearthed during the course of search and investigation suggests conclusively that any extrapolation is justified, of course, there can be no bar against such an extrapolation.
In the case of Dr. R.M.L. Mehrotra v. Asstt. CIT  68 ITD 288 (All.) , the Tribunal also distinguished the decision of the Supreme Court relied on by the department in H.M. Esufali H.M. Abdulali’s case (supra) on the ground that the said case before the Supreme Court pertained best judgment assessment under sales tax law. The Supreme Court held that it was not possible for the officer to find out precisely the turnover suppressed and he could only embark on estimating the suppressed turnover on the basis of the material before him, in which some guesswork was inevitable. The Tribunal observed that in contradistinction to the decision relied upon by the department, the present case was in respect of search and seizure. Further, no additional evidence was found with respect to the suppressed income. No assets, despite the extreme step of search which amounted to a serious invasion on the rights of the subjects and which was perhaps the last weapon in the arsenal of the department, were found, which could be attributed to any such patently hypothetical receipts. Thus, it can be said that the decision of the Supreme Court in the case of H.M. Esufali H.M. Abdulali (supra) cannot be applied to block assessment, more particularly to justify the application of the ‘extrapolation technique’ discussed above.
In the aforesaid case, the assessee with other members of his family and certain other doctors were running a pathology clinic. They were subjected to a search where certain assets, account books, and other documents were found and seized. During the course of the search, a notebook was also found which contained details of receipts from patients for a period of approximately two months. The aforesaid receipts were classified by the assessee in three groups, i.e., (i) advance received in full, (ii) part payment received in advance and balance received later, and (iii) part payment received in advance and balance not received. In the last category, part payments aggregating to Rs. 85,820 were received while payments aggregating to Rs. 72,915 were never received, as patients did not turn up to collect the report. The Assessing Officer took the percentage of suppression of receipts, (which amounted to Rs. 1,65,405) to the total accounted receipts at 19 percent and applying the same to the total receipts, worked out the suppressed income at Rs. 6,16,004 for the whole year. Before the Tribunal, the assessee objected to such a multiplication formula applied by the Assessing Officer. The Tribunal upheld the view of the assessee and observed that the department was not correct in adopting and applying the multiplication formulae.
It was observed by the Tribunal that as regards the multiplication formula, in the first place, it was a search case in which a search party is supposed and expected to find out all the incriminating documents, and materials as also undisclosed assets. A search assessment much less a block assessment, therefore, stands on a different footing than a normal assessment or an assessment based on the best judgment of the Assessing Officer. In the instant case, the assessee was searched and during this search, no other diary or other records comparable to the notebook was found out by the search party for the remaining period which normally would have been, had it been maintained. It was further observed that though such records pertaining to the remaining period could have been destroyed by the assessee if the assessee had actually made a fortune of similar receipts in respect of the remaining part of the year, they must be reflected by certain movable or immovable assets found during the course of search. In the present case, no such assets were ever found by the department which could be attributed to any of such hypothetical receipts. The Tribunal held that under these circumstances though estimation could be made, such estimation should not be vague and illogical which leads to absurdity. It was held that the department was not correct in applying the multiplication formula adopted by the Assessing Officer.
J. Gopal Rao v. State of Orissa  88 STC 488 (Ori.) - The Orissa High Court also had an occasion to deal with an issue relating to backward projection of materials under the Sales Tax Act. In this case, the assessee was carrying on business in grocery articles. In this case, the liability of the petitioner was determined by estimating daily sales at Rs. 75, Rs. 80 and Rs. 100 for the assessment years 1978-79, 1979-80 and 1980-81, respectively. The petitioner objected to the said liability and approached the Orissa High Court. The Court observed that the department did not have any evidence/materials except the admission of the petitioner that daily sales ranged from Rs. 100 to Rs. 125 in February 1982. It was observed that for making presumption for the assessment years 1978-79 to 1980-81, some material is required. It cannot be stated by way of generalization that the result of survey in one year can be treated as the basis of assessment in another year. If the Assessing Officer wants to do so, some material has to be brought on record to justify just projection. A mere presumption cannot be made the basis for any assessment. What is relevant is the nature of evidence/material discovered. If the materials discovered relate to any particular assessment year, those cannot be utilised for making assessment of other years unless the relevance to other years is established by the officer. This view was taken by the concerned Court in the decisions of Allahabad High Court in Babu Ram Vishnoi v. CST  29 STC 392 and Hukam Chand Mahendra Kumar v. CST  29 STC 394 and relied upon in the present case.
In CIT v. Dr. M.K.E. Memon  248 ITR 310 / 112 Taxman 96 (Bom.) - The assessee was a doctor by profession having the main source of income by way of medical examination fees. A search and seizure action under section 132 of the Act was conducted in 1996 wherein the department found the registration books reflecting the information of fees received from patients. It was noticed that the fees recorded in the registration books exceeded the fees reflected in the cash book. The assessee made a disclosure of a certain amount on account of undisclosed income from the profession. The Assessing Officer estimated the undisclosed income of the assessee by applying the post-1993 weighted average rate of income for the period between 1983 and 1993. The case of the assessee before the Tribunal was that during the earlier period of his practice, the work relating to medical screening of candidates was less as compared to the post-1993 period. To justify the addition made by the Assessing Officer, the department heavily relied upon the decision of the Supreme Court in the case of H.M. Esufali H.M. Abdulali (supra). The Bombay High Court in this regard observed that the said judgment of the Supreme Court must be seen in the context of the facts of each case. It was pointed out that the assessee was a professional. It was highly improbable that the rate of fees charged by a professional in 1983 would remain static for the entire block of ten years. The assessee further pointed out that during the Gulf war, the number of persons who went to the Gulf countries stood substantially reduced. Further, it was observed that under section 158BB, read with section 158BC of the Act, what is assessed is the undisclosed income of the block period and not the total income or loss of the previous year. Therefore, the scope of the regular assessment is quite different from the scope of assessment under Chapter XIV-B. The Bombay High Court explained the difference between the regular assessment and block assessment for the reason that the said distinction is not kept in mind by the Assessing Officer in a large number of cases. It was further held that the scope of the regular assessment is to ensure that the assessee has not understated the income or has not computed excessive loss or not underpaid the tax in any manner whereas what is assessed under Chapter XIV-B is only the undisclosed income for the block period and not the income or loss of the previous year which is only done in the normal regular assessment. Thus, the above decision of the Bombay High Court clearly brings out the difference between regular assessment and block assessment with greater emphasis on the scope of determination of income by the Assessing Officer in both the assessments. It is necessary to note that the special leave petition filed by the department before the Supreme Court has also been dismissed. Thus, the ratio of the decision in the above case rendered by the jurisdictional High Court would certainly set at rest the anomaly as regards the scope of estimation of income by the Assessing Officer in the block assessment.
The Bombay High Court also had an opportunity to deal with a similar issue in CIT v. C.J. Shah & Co.  246 ITR 671 / 117 Taxman 577. In the said case also the High Court observed that in matters of estimation, some amount of latitude may be required to be shown to the Assessing Officer, particularly when relevant documents are not forthcoming. However, it does not mean that the Assessing Officer can arrive at any figure without any basis by adopting an arbitrary method of calculation.
In Dr. S. Surendranath Reddy v. Asstt. CIT  72 ITD 205 (Hyd.) - A similar issue was dealt with also by the Hyderabad Bench of the Tribunal in the above case. While dealing with this issue, the Tribunal observed that for the purpose of income-tax assessment, the unit of the assessment is one year covered by the previous year relevant to the assessment year. It is a specific and independent unit of assessment for the purpose of income-tax. This principle of the unit of assessment year is not diluted in block assessment also. In the case of block assessments, the unit of computation is the larger period of previous years covered by the corresponding assessment years falling within the block period. The undisclosed income computed unit wise, on the basis of evidence collected as a result of the search for each unit, is aggregated up to a period of ten years, for the purpose of block assessment. Thus, as per the Tribunal’s view, the additional feature of a block assessment is only the facility of aggregation of income of block period, but the basic unit of assessment remains unchanged. Accordingly, it was held by the Tribunal that the undisclosed income has to be invariably determined with reference to each previous year included in the block period on the basis of matching evidence collected as a result of a search for that particular year. When there is no material at all in relation to a particular previous year falling within the block period, no undisclosed income could be determined for that year in light of the matching principle. Hence, any addition made by the Assessing Officer in earlier years without any specific materials showing undisclosed income for that particular year must be deleted.
In Samrat Beer Bar v. Asstt. CIT  75 ITD 19 /251 ITR (AT) 1 (Pune) (TM) - During the course of search action at the premises of the assessee-firm, a diary was found and it contained certain entries of sale of liquor for the period from September 28, 1988, to August 25, 1989. On the basis of the said entries in the diary, the Assessing Officer concluded that the assessee would have continued the same pattern of suppressing sales even for the broken period for respective financial years. He, therefore, worked out his suppression of sales for all the years under the block period. In the appeal, there was a difference of opinion between the Judicial Member and the Accountant Member on the issue as to whether under Chapter XIV-B, the Assessing Officer is empowered to estimate the suppression of sales for a larger period. On a reference made to the Third Member, it was held that no evidence had been found in the course of search showing suppression of sales in respect of any period other than September 28, 1988, to August 25, 1989. There was also no other indication to suggest that the seized diary was not exhaustive of unaccounted transactions relating to the sale of liquor. The Bench also referred to the decision of the Gujarat High Court in the case of N.R. Paper & Board Ltd. v. Dy. CIT  234 ITR 733 / 101 Taxman 525 wherein it was held that the evidence found and the material available should be the basis for computing the undisclosed income. It was observed by the Bench that to hold that even without any evidence or material the Assessing Officer would be empowered to estimate the income was fraught with dangerous consequences. The Assessing Officer cannot presume that there must be some other material or evidence which has not been found during the search and the assessee must have derived the undisclosed income therefrom. As already discussed above, it has been observed by the Tribunal in the above decision that in the very scheme of a block assessment, any guesswork or estimate is excluded from the reckoning, if there is evidence in the seized material itself, to show that the seized material is not the complete record of unaccounted transactions or where there are indications to show that the assessee had certain other records of unaccounted transactions which were not unearthed. In the case before the Tribunal, there was no indication anywhere in the seized record to show that even in respect of other periods, the assessee was maintaining such a diary which, for some reasons or the other was not found during the course of search. Hence, the addition made by the Assessing Officer was not sustainable.
It was held by Hon'ble High Court of Bombay in the case of CIT Vs C. J. Shah & Co. (246 ITR 671) that estimation of undisclosed profit made by AO for the entire block period on the basis of seized loose papers which indicated undisclosed sales for three months was not justified.
In the case of Dolphin Builders Pvt. Ltd (356 ITR 420), Hon'ble High Court of Madhya Pradesh held that making addition merely on the basis of seized documents without cogent evidence that excess amount mentioned in the seized document was actually passed on to the assessee was not sustainable where books of account of the assessee were duly audited.
In the case of D. N. Kamani HUF (70 ITD 77) Hon'ble ITAT Patna Bench held that documents regarding receipt of on-money by assesses having been found in respect of the sale of flats to one party, the addition could not be made in respect of all the parties to whom assessee sold flats merely on the basis of presumption.
In the case of Fort Projects Pvt. Ltd (63 DTR 145) Hon'ble ITAT Kolkata Bench held that AO was not justified in extrapolating a few notings in a seized diary to balance flats in three projects given that no incriminating evidence pertaining thereto was found in the course of search.
On a similar note, the Hon’ble ITAT Jaipur Bench in the case of ACIT V. M.M. Sales Agencies (2006) 153 Taxman 13 held that the income cannot be estimated for the period for which no information is available on the basis of the seized record.
A similar issue was also dealt with by the Pune Bench of the Tribunal in Hotel Vrindavan v. Asstt. CIT  67 TTJ (Pune) 139 wherein it was held that the undisclosed income under Chapter XIV-B cannot be based on the presumption that if the assessee suppressed sales and expenses in later years, he must have done so in the earlier years also.
Similarly, the Hon’ble ITAT Ahmedabad Bench in case of DCIT V. Royal Marwar Tobacco Product Pvt. Ltd (2009) 29 SOT 53 held that the Assessing Officer was not justified in making estimated additions for earlier assessment years based on the documents seized for A.Y. 2004-05.
The High Court of Delhi in case of Commissioner of Income-tax, Delhi v. H.C. Chandna (P.) Ltd.  163 TAXMAN 654 (DELHI) upheld the finding of the tribunal that no income can be estimated on the basis of the evidences found for a particular period.
Similarly, the Delhi High Court in case of CIT V. Anand Kumar Deepak Kumar  294 ITR 497 (Delhi) held as under:-
"7. The Commissioner as well as the Tribunal found that in fact there was no discrepancy noted in the books of account in the post search period. The assumption of the Assessing Officer may have perhaps been valid if the Assessing Officer had found some discrepancy in the books of account or if the search had been conducted after the accounting year and the books of account had brought out some discrepancies. But in the present case, the books of account were examined by the Assessing Officer in the middle of the accounting year. Merely because there were some discrepancies in the pre-search period, it cannot lead to any presumption that the discrepancies would have continued in the post-search period particularly when there was factually no evidence at all as found by both the authorities below to support such a view."
On the similar lines recently the Hon’ble ITAT Ahmedabad in case of Savaliya Developers Pvt. Ltd V. DCIT in ITA No. 401/Ahd/2014 & 3188/Ahd/2015 vide order 30.06.2019 held as under in context to extrapolation:-
"Besides, estimated cash receipts on-money of sale of all flats merely on the basis of a statement of two purchasers without any tangible corroboration clearly falls in the realm of conjunctures and surmises. It is obvious that driven by misplaced suspicion, the AO has presumed the presence of on-money in respect of each of the residential flat sold. The action of the AO is a mere ipse dixit which is not objectively justifiable by some inculpatory evidence. It is only elementary to say that estimation of unaccounted money cannot be made only on the basis of contemplation. The order of the AO in making additions of Rs.3.28 Crores is thus clearly arbitrary and unsustainable in law. It is well settled that the Revenue authorities cannot base its findings on suspicions, conjunctures or surmises nor should it act on no evidence at all or on vague considerations partly on evidence and partly on suspicion, conjunctures or surmises. The Revenue could not demonstrate any material except unsupported statements of two persons. Such unverified statements without an y proof towards its assertions are not good evidence and do not raise any estoppel against the assessee. Therefore, the addition made by the AO is in the realm of speculation without any basis whatsoever. Hence, we decline to interfere with the order of the CIT(A) in so far as appeal of the Revenue is concerned."
Therefore, in view of the aforementioned discussion and judicial precedents mentioned above, in my considered opinion, the application of the extrapolation technique shall depend on the facts and circumstances of each case and there can be no universal law on this issue. For instance there may be cases where a seized document unearthed the undisclosed income on a subject matter for a limited period only but thereafter accepted voluntarily in totality for several years by the assessee in his statement recorded u/s 132(4) of the Income Tax Act’1961 which have never been retracted. Such a case definitely warrants the application of the extrapolation technique. To the contrary, in a case where the mere seized document highlights undisclosed income for a limited period, application of the extrapolation technique shall not be warranted for the entire assessment period as envisaged u/s 153A of the Income Tax Act’1961.
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