1995 (1) TMI 57 - HC - Income Tax

Summary

Issues:
1. Justification of enhancing estimate sales and applying gross profit rate.
2. Addition of income from undisclosed sources and its treatment in assessment.

Analysis:

Issue 1: Justification of enhancing estimate sales and applying gross profit rate
The case involved an application under section 256(2) of the Income-tax Act, 1961, where the assessee requested the Income-tax Appellate Tribunal to draw up a statement of case for the assessment year 1971-72. The Tribunal was directed to refer questions of law to the High Court regarding the justification of enhancing the estimated sales of the assessee to Rs. 9,10,000 and applying a gross profit rate of 21%. The assessee disclosed total sales of Rs. 8,66,179 with a gross profit of Rs. 1,37,235 at a gross profit rate of 16.35%. The Income-tax Officer's order was cancelled by the Commissioner under section 263, leading to a fresh assessment. The Income-tax Officer found discrepancies in the verifiability of opening and closing stocks, leading to a notice under section 145(1) to justify a 25% gross profit rate. The Tribunal upheld the estimated sales at Rs. 9,10,000 and the gross profit rate at 25%. The High Court held that the estimate of the gross profit rate at 25% was justified based on the increase in export sales and upheld the Tribunal's decision regarding the estimated sales.

Issue 2: Addition of income from undisclosed sources and its treatment in assessment
The second question referred by the Tribunal concerned the addition of Rs. 20,714 on account of bogus sales shown on arhat basis to 13 parties. The assessee showed sales on arhat basis to 13 parties amounting to Rs. 29,168, but could only prove the genuineness of sales to two parties. The amount was reduced to Rs. 20,714. The counsel for the assessee argued that no further addition should be made as an amount of Rs. 53,855 was already added due to enhancements in sales proceeds and gross profit rate. Citing a precedent, the High Court concluded that there was no justification for the additional Rs. 20,714 on account of sales from undisclosed sources, as the gross sales and gross profit had already been enhanced. Consequently, the High Court ruled in favor of the Department for the first question and in favor of the assessee for the second question.

In conclusion, the High Court upheld the estimation of gross profit rate at 25% and the estimated sales at Rs. 9,10,000. Additionally, it ruled against the Department for adding Rs. 20,714 on account of sales from undisclosed sources, as the gross sales and gross profit had already been enhanced.