2013 (7) TMI 855 - HC - Income Tax

Unaccounted sales - A.O. adopted G.P. rate of 53.76% - Tribunal deleted addition made by A.O. and adopted G.P. rate of 2.25% - Held that - GP rate of the recorded transactions of various years was a fair indicator of the gross profit, which would have been earned by the respondent in unrecorded transactions - Assessee did not challenge amount of unrecorded sales - Decision in case of VIJAY PROTEINS LTD. Versus ASSISTANT COMMISSIONER OF INCOME TAX 2002 (2) TMI 349 - ITAT RAJKOT cannot be followed as in the said case assessee had not been able to produce any evidence regarding purchases made from 33 parties. The books of account were rejected in the said case, with the tribunal holding that 25% of the purchase price accounted for in the books through invoices could be disallowed for working out the income - Decided against Revenue. Unaccounted investment - Tribunal held that assessee did not maintain day-to-day stock record/register and, therefore, it cannot be said that unrecorded sales could not have been of accounted stock - Held that - no evidence of unaccounted investment was found at the time of search. Once the stock register was not there as recorded by the tribunal in its order, the said finding itself apparently is contradictory - it was for the assessee to explain and state the source/funds for conducting and entering into the said transaction - Transactions of high value do require investment. Plea of the assessee that existing or available investment in the books was sufficient, has to be made good with material and proof by the assessee. The assessee had to explain that purchases recorded in the books were sufficient after adjustment of the recorded sales. In cases of unaccounted sales and purchases all documents may not be available and certain amount of guess work is always required as noticed earlier but a realistic and common sense approach is required - Unaccounted sales may result and can contribute towards the investment, but there has to be initial investment. Profits and income earned are also used for personal needs and are taken out of business - Decided in favour of Revenue. Peak credit - whether the peak credit should be added and brought to tax -Held that - Profit earned from unaccounted transactions can be and are used and consumed by the assessee for their own personal uses - Tribunal placed the onus on the Revenue to explain the source of investment made by the assessee though there were unaccounted sale transactions - It has ignored relevant and material facts and has gone on a tangent without examining the real issue and the controversy, i.e., has the assessee explained the source of funds required for making investment to have turnover - Following decisions of Municipal Committee, Hoshiarpur v. Punjab SEB 2010 (10) TMI 932 - SUPREME COURT , Dhirajlal Girdharilal v. CIT 1954 (10) TMI 8 - SUPREME Court , CIT v. Daulat Ram Rawat Mull 1972 (9) TMI 9 - SUPREME Court and CIT v. S.P. Jain 1972 (9) TMI 10 - SUPREME Court - Decided in favour of Revenue.

Summary

Issues Involved:
1. Addition on account of unrecorded purchases and sales.
2. Determination of gross profit (GP) rate for unrecorded sales.
3. Investment in unaccounted purchases.
4. Onus of proof regarding unaccounted investment.
5. Consideration of peak credit for unaccounted investment.

Detailed Analysis:

1. Addition on Account of Unrecorded Purchases and Sales:
The core issue revolves around whether the Income Tax Appellate Tribunal (ITAT) was correct in holding that no addition should be made for unrecorded purchases and sales since an unaccounted income of Rs. 21,90,685/- had already been taxed. The Revenue appealed against the ITAT's decision, arguing that the addition was necessary due to unrecorded transactions.

2. Determination of Gross Profit (GP) Rate for Unrecorded Sales:
The Assessing Officer (AO) initially applied a gross profit rate of 53.76% on a turnover of Rs. 9.73 crores, resulting in a calculated undisclosed income of Rs. 5,23,46,173/-. The Commissioner of Income Tax (Appeals) [CIT (A)] disagreed, noting that the GP rate for the assessee from 1996-97 to 2000-2001 ranged from 1.92% to 2.83%, with an average GP rate of 2.19%. For the preceding assessment year (2001-02), the GP rate was 2.25%. CIT (A) thus applied a GP rate of 2.25%, concluding that the undisclosed income from unrecorded sales was Rs. 21,90,685/-. The ITAT upheld this GP rate, finding it more reasonable than the AO's excessively high rate.

3. Investment in Unaccounted Purchases:
The AO added Rs. 4,50,17,616/- for unaccounted purchases based on seized documents. The CIT (A) deleted this addition, accepting the assessee's explanation that unrecorded sales were made from accounted stock, which was replenished through unrecorded purchases. The CIT (A) found no evidence of excess stock during the search and held that the AO's addition was speculative, lacking material proof. The ITAT agreed, noting that unrecorded sales of Rs. 9.73 crores were accepted, but there was no evidence of unaccounted investment in stock.

4. Onus of Proof Regarding Unaccounted Investment:
The Tribunal's decision was challenged on the grounds that it placed the onus incorrectly on the Revenue to prove unaccounted investment. The High Court held that once unaccounted sales of Rs. 9.73 crores were accepted, the assessee had to explain the source of funds for these transactions. The Tribunal's finding that no evidence of unaccounted investment was found was deemed contradictory and perverse, as it ignored the need for initial investment for such a large turnover.

5. Consideration of Peak Credit for Unaccounted Investment:
The ITAT rejected the Revenue's alternative submission to tax the peak of unaccounted investment, calculated at Rs. 17,03,546/-, reasoning that there was no evidence of undisclosed income in the seized material. The High Court disagreed, stating that the Tribunal failed to consider that the unaccounted income of Rs. 21,90,685/- represented gross profits, which could be used for personal needs, not necessarily for business reinvestment. The Tribunal's approach was found to be irrational, and it was held that the peak credit should be added to the taxable income.

Conclusion:
The High Court found the Tribunal's order partially perverse and not in accordance with the law. It held that the Tribunal incorrectly placed the onus on the Revenue and ignored the need for initial investment for unaccounted sales. The High Court directed the Tribunal to reconsider the matter, emphasizing that the assessee must explain the source of funds for unaccounted transactions. The judgment was partly in favor of the Revenue, with costs of Rs. 20,000/- imposed on the respondent. The parties were directed to appear before the Tribunal for further proceedings.