2014 (12) TMI 480 - HC - Income Tax

Deletion of profits on unaccounted sales - Whether the Tribunal was correct in deleting the addition made on account of profits earned on unaccounted sales - Additions on account of unexplained cash and unexplained investments in stocks had been restored to the file of the AO for further investigations Held that - The Tribunal held that the assessee had surrendered about ₹ 5 lacs on account of cash found at the time of search and also ₹ 6 lacs on account of excessive stock and therefore no addition should be made on account of profits outside the books of accounts - the factum that the assessee had earned undeclared profits outside the books was accepted - the entries recorded in the diary etc. were treated as incriminating and reliable material - In case the assessee was transacting business outside the books of accounts, necessarily he would have earned profit from the transactions - Some profit would have been used for personal expenses and entertainment etc. - The entire undisclosed profits would not have been redeployed in trade or for purchase of undeclared stocks - The factor and factum has not been taken into account - the assessee was unable to explain and match the entries given in the diary and the loose papers with the entries found in the books of accounts - The transactions were for a substantial amount the assessee had also accepted addition of ₹ 50,000/- and ₹ 1,58,910/- on account of unexplained cash and unexplained excessive stock - assessee had earlier accepted undisclosed income of ₹ 2,78,450/- in the block assessment return - thus, the matter is to be remitted back to the Tribunal for fresh determination Decided in favour of revenue.

Summary

Issues:
1. Addition of profit from undisclosed sales outside the books of accounts for the block period, assessment year 1986-87 to 13.10.1995.

Analysis:
The case involved an appeal by the Revenue challenging the deletion of an addition of Rs. 9,10,000 on account of profit from undisclosed sales made outside the books of accounts during the block period. The substantial question of law framed was whether the Tribunal was correct in deleting this addition despite other additions being restored for further investigations. The respondent assessee had been subjected to seizure operations under Section 132 of the Income Tax Act, 1961, leading to the filing of a return declaring undisclosed income. The Assessing Officer computed the undisclosed income at Rs. 37,81,674 and made additions for excess cash, unexplained investments in stocks, and profit from undisclosed sales.

The Tribunal's analysis revealed that the assessee had surrendered certain amounts and provided explanations for others related to cash and excessive stock. Regarding profit from undisclosed sales, the Assessing Officer had computed a turnover from diary entries and loose papers, applying a gross profit rate to arrive at the undisclosed profit. The assessee claimed these records were for personal purposes and not systematically maintained to match with the books of accounts. The Tribunal considered the surrender made by the assessee and the lack of systematic record-keeping, leading to the deletion of the addition of profit from undisclosed sales.

However, the High Court expressed reservations about the Tribunal's reasoning, noting that the surrender made by the assessee did not absolve them of earning undeclared profits outside the books of accounts. The Court highlighted the substantial amount involved and the inability to match diary entries with the books of accounts. Despite considering a remand, the Court accepted the assessee's concession to surrender an additional amount towards undisclosed profits, totaling Rs. 4,78,450. Consequently, the substantial question of law was answered in favor of the Revenue, directing an addition of Rs. 2 lakhs to the undisclosed income declared by the assessee. The appeal was disposed of accordingly, with no costs incurred.