ITAT Ahmedabad Deletes ₹1.33 Crore Stock Addition, Upholds Limited Addition Based on WhatsApp Evidence in Shreenathji Extrusion Search Case

June 18, 2026 : In a significant ruling arising from a search and seizure operation conducted on the KAKA Group, the Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has partly allowed the appeal of Shreenathji Extrusion while dismissing all appeals filed by the Income Tax Department. The Tribunal held that a stock addition of more than ₹1.33 crore made solely on the basis of estimated physical verification during a search could not be sustained in law, while simultaneously upholding a limited addition relating to unaccounted production supported by WhatsApp communications and statements recorded during the search.

The dispute arose from a search conducted under Section 132 of the Income-tax Act, 1961, on 24 October 2018. Shreenathji Extrusion, a manufacturer of aluminium products, was covered in the search proceedings. During the operation, tax authorities examined stock records, digital data, and WhatsApp conversations allegedly showing discrepancies between actual production and figures recorded in the company’s books.

One of the central issues before the Tribunal concerned an addition of ₹1.33 crore made on account of alleged excess stock. The Assessing Officer had concluded that excess stock of 86.36 metric tonnes was found during physical verification and treated the difference as unexplained investment. The Commissioner of Income Tax (Appeals) had affirmed the addition, prompting the assessee to challenge the finding before the ITAT.

Before the Tribunal, the assessee argued that the search team had not adopted any scientific or standard methodology while verifying stock. It contended that the officers relied on approximations and sample-based weighment rather than item-wise physical verification. The company further submitted that several accounting entries, including import purchases received shortly before the search, had not yet been entered into the books, resulting in apparent discrepancies that were later reconciled.

Accepting these submissions, the Tribunal found that the stock determination exercise was based largely on estimates and approximations. The Bench noted that the Revenue had failed to produce detailed working papers or any scientific basis supporting the stock calculations. It also observed that the assessee had provided reconciliations explaining the differences and that the Department had not effectively rebutted those explanations.

The Tribunal observed that “the addition made merely on estimated stock difference without proper verification cannot be sustained.” Consequently, it directed deletion of the entire addition of ₹1,33,70,910 made on account of alleged excess stock.

The case also involved allegations of unaccounted production based on WhatsApp chats recovered during the search. According to the Department, messages exchanged between an employee and a partner of the firm indicated suppression of production of approximately 203 metric tonnes during a one-month period. Using this data, the Assessing Officer extrapolated the alleged suppression across the entire financial year and determined unaccounted production and sales exceeding ₹25.57 crore.

The assessee challenged the addition, arguing that the WhatsApp chats covered only a limited period and were not supported by any independent evidence demonstrating unaccounted production or sales throughout the year. It also contended that accounting records were incomplete at the time of the search and that the figures relied upon by the Department did not represent finalized accounts.

After examining the evidence, the Tribunal held that the WhatsApp chats and statements recorded under Section 132(4) of the Income-tax Act did indicate some degree of suppression of production. However, it rejected the Revenue’s approach of extrapolating one month’s data to the entire financial year without supporting evidence.

The Bench observed that “extrapolation of one month’s data to the entire financial year is not justified in absence of corroborative material for the remaining period.” It approved the approach adopted by the Commissioner (Appeals), who had restricted the extrapolation to a three-month period because the employee concerned had stated that such WhatsApp reporting existed only during the preceding three months.

The Tribunal further held that only the profit element embedded in the alleged unaccounted sales could be taxed. It upheld the estimation of profit at 10 percent and directed computation of profits based on the difference of 203 metric tonnes identified by the Revenue. As a result, the substantially larger addition proposed by the Department was reduced to a limited addition of ₹1.09 crore.

Another important issue involved an addition of ₹2.76 crore under Section 41(1) of the Income-tax Act on account of alleged cessation of liability relating to old sundry creditors. The Assessing Officer had argued that liabilities remaining unpaid for more than three years should be treated as income. The Tribunal rejected this approach and agreed with the Commissioner (Appeals) that mere passage of time does not automatically result in cessation of liability.

The Bench clarified that unless there is evidence showing remission or cessation of liability, Section 41(1) cannot be invoked. Since the liabilities continued to appear in the balance sheet and the Department failed to show that the assessee had obtained any benefit from their remission, the addition was rightly deleted.

The ruling also addressed assessments for earlier years from Assessment Year 2015-16 to 2018-19. The Revenue had attempted to extend the alleged suppression of production detected during the search period to previous years. However, the Tribunal found that no incriminating material relating to those years had been discovered during the search.

Relying on settled law, including the Supreme Court’s decision in Abhisar Buildwell Pvt. Ltd., the Tribunal reiterated that additions in completed assessments under Section 153A can be made only on the basis of incriminating material found during the search. Since no such evidence existed for the earlier years, the additions were deleted. The Tribunal emphasized that “extrapolation without any corroborative material cannot form sole basis for addition.”

The Tribunal also granted substantial relief to the assessee in relation to Assessment Year 2017-18. It deleted a ₹38 lakh addition made under Section 68 concerning unsecured loans after finding that the assessee had furnished confirmations, PAN details, income tax returns, bank statements, and evidence of repayment through banking channels. The Bench held that once the assessee discharged the initial burden under Section 68, the Revenue was required to produce independent material disproving the transactions, which it failed to do.

Similarly, the Tribunal set aside a ₹10.50 lakh addition under Section 69 that had been based on a Tally ledger image recovered from a third-party survey. It found no evidence linking the ledger entry to the assessee and noted that banking records actually showed an RTGS receipt rather than any unexplained investment.

The judgment is likely to have broader significance in tax search cases involving digital evidence, WhatsApp communications, stock discrepancies, and extrapolated assessments. It reinforces the principle that tax additions must be supported by reliable and corroborative evidence and that estimated calculations or assumptions cannot replace proper verification. The ruling also reiterates the legal safeguards available to taxpayers in search assessments under Sections 132, 153A, 68, 69, and 41(1) of the Income-tax Act.