2010 (3) TMI 937 - AT - Income Tax

Addition on unaccounted sales - business of manufacture and sale of clothes of man made fabrics - discrepancies noted during the course of survey by the Income-tax Department - AO noticed that the sales recorded by the assessee for the purpose of income-tax were more than as compared to the disclosed to the Sales Tax Department he treated it as a defect in the books of account so as to apply the provisions of section 145 - CIT(A) applied the gross profit rate of 6.09 against unaccounted sales for the purpose of making the addition on account of undisclosed income of the assessee. HELD THAT - Assessing Officer was not justified to substitute its own sale price and apply the same uniformly to all the items of stock irrespective of their quality and measurements especially when the recorded sale price was never a matter of discussion in the entire assessment proceedings. The Assessing Officer was obliged to take the unaccounted sale value as was worked out by the excise officials on the spot giving description of different varieties of cloth along with the sale price attached to each one of them. Had the Assessing Officer restricted herself to the sale price of Rs. 3, 86, 14, 825 as was worked out by the excise officials there was no need for her to make unwarranted addition of the balance amount of Rs. 72, 42, 049. The addition to the extent of Rs. 72, 42, 049 (Rs. 4, 58, 56, 874-Rs.3, 86, 14, 825) thus goes off straight away. What treatment should be given to the unrecorded sales? - After making such comparison the stock physically wherever found to be short in comparison to its availability in the stock register has been treated to be sold outside the books of account. In this view of the matter the investment in acquiring these stocks has undoubtedly come from the declared sources of the appellant. In other words the entire amount of unrecorded sales of Rs. 58, 85, 530 cannot be added as their income and only the profit element involved therein needs to be taxed after applying the gross profit at the rate of 6.09 percent on such sales. The addition of Rs. 3, 58, 428 i.e. Rs.58, 85, 530 divided by 100 x 6.09 percent is thus liable to be sustained and balance amount of Rs. 55, 27, 102 is deleted. Whether the total amount is required to be treated as income of the appellant as is done by the learned Assessing Officer or only the gross profit at the rate of 6.9 percent is to be taken as the income element ? - We rely upon the decision of the hon ble Gujarat High Court in the case of CIT v. President Industries 1999 (4) TMI 8 - GUJARAT HIGH COURT in which it was held that addition cannot be of entire undisclosed sale proceeds. Only the profit embedded in sale proceeds can be taxed Commissioner of Income-tax (Appeals) was therefore justified in applying the gross profit rate against unaccounted sales for the purpose of making the addition on account of undisclosed income of the assessee. CIT(A) was justified in considering the issue of deployment of minimum capital investments for the purpose of making and rotating the sales outside the books of account. These facts are sufficient to hold that the book results of the assessee were not reliable and have rightly been rejected by the authorities below. Rejection of book results is also not disputed by the assessee.Assessee has not pointed out any error in the findings of the learned Commissioner of Income-tax (Appeals) to that extent. Commissioner of Income-tax (Appeals) was justified in applying gross profit rate as against undisclosed sales made by the assessee for the purpose of making the addition against the assessee. To that extent the findings of the learned Commissioner of Income-tax (Appeals) are maintained. CIT (Appeals) on proper appreciation of facts and material on record rightly came to the conclusion in making addition on account of profit earned on undisclosed sales. The Assessing Officer also proposed to make addition initially on the same line but the Assessing Officer changed his mind later on and treated the entire undisclosed sales as undisclosed income of the assessee. Therefore there was no need to give any further opportunity to the Assessing Officer with regard to the calculation of the undisclosed income of the assessee. We accordingly do not find any merit in the contention of the learned Departmental representative. The same is accordingly rejected. Assessee declared additional income on the above properties and in case any set off of undisclosed income is given to the assessee against undisclosed investments it would amount to reducing the additional income declared by the assessee - It may also be noted that the assessee claimed set off which are not part of the record of the Excise Department on the basis of which the entire addition is made. The addition made by the Assessing Officer on the basis of the record prepared by the Excise Department is an independent addition which has no co-relation with the survey conducted by the Income-tax Department. CIT(Appeals) was not justified in giving set off of Rs. 11, 91, 746 to the assessee. We accordingly set aside the order of the learned Commissioner of Income-tax (Appeals) to that extent and direct that no such benefit of set off of Rs. 11, 91, 746 be given to the assessee.

Issues Involved:
1. Sustaining the addition of Rs. 63,88,777 out of the addition of Rs. 4,58,56,874.
2. Reducing the addition made on account of unaccounted sales of man-made fabrics from Rs. 4,58,56,874 to Rs. 63,88,777.
3. Rejection of books of account under section 145 of the Income-tax Act.
4. Treatment of unrecorded sales and the application of gross profit rate.
5. Set off of declared income against unaccounted receipts.

Issue-wise Detailed Analysis:

1. Sustaining the addition of Rs. 63,88,777 out of the addition of Rs. 4,58,56,874:
The assessee challenged the addition of Rs. 63,88,777, arguing that the entire unaccounted sales could not be treated as profit. The Tribunal considered that the Commissioner of Income-tax (Appeals) applied a gross profit rate of 6.09% to calculate the undisclosed income, which was justified. The Tribunal upheld this approach, noting that the entire undisclosed sales could not be treated as profit, citing the Gujarat High Court decision in CIT v. President Industries [2002] 258 ITR 654 (Guj).

2. Reducing the addition made on account of unaccounted sales of man-made fabrics from Rs. 4,58,56,874 to Rs. 63,88,777:
The Revenue appealed against the reduction of the addition. The Tribunal found that the Assessing Officer (AO) had incorrectly substituted the sale price, leading to an inflated addition. The Commissioner of Income-tax (Appeals) correctly restricted the addition to Rs. 63,88,777 by considering the actual unaccounted sales and applying the gross profit rate. The Tribunal agreed with this reduction, noting that the AO's higher sales figure was without basis.

3. Rejection of books of account under section 145 of the Income-tax Act:
The Tribunal upheld the rejection of the books of account under section 145 due to discrepancies noted during the survey, including unaccounted sales and investments. The Tribunal agreed with the Commissioner of Income-tax (Appeals) that the trading results declared by the assessee were not reliable and correct, justifying the rejection of the books of account.

4. Treatment of unrecorded sales and the application of gross profit rate:
The Tribunal agreed with the Commissioner of Income-tax (Appeals) that only the profit element from unrecorded sales should be taxed, not the entire sales amount. The Commissioner of Income-tax (Appeals) applied a gross profit rate of 6.09% to the unrecorded sales, which the Tribunal found appropriate. The Tribunal also noted that the AO initially proposed this approach but later treated the entire unaccounted sales as income, which was incorrect.

5. Set off of declared income against unaccounted receipts:
The Tribunal found that the Commissioner of Income-tax (Appeals) erred in allowing a set-off of Rs. 11,91,746 for unaccounted investments in plant and machinery, building, and excess cash. The Tribunal noted that the assessee never claimed that these investments were made from unaccounted profits. Therefore, the Tribunal set aside the order of the Commissioner of Income-tax (Appeals) to the extent of allowing this set-off and directed that no such benefit be given to the assessee.

Conclusion:
The Tribunal dismissed the assessee's appeal and partly allowed the Revenue's appeal. The addition of Rs. 63,88,777 was sustained, and the set-off of Rs. 11,91,746 was disallowed. The Tribunal upheld the application of the gross profit rate to unaccounted sales and the rejection of the books of account under section 145. The Tribunal emphasized that the entire unaccounted sales could not be treated as profit, aligning with the Gujarat High Court's decision in CIT v. President Industries.

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