2014 (4) TMI 1232 - AT - Income Tax

Disallowance of 2/3rd of expenses on medicines - estimation of income - this claim of expenditure is an afterthought though entire suppressed turnover could not be considered as income and expenses on such turnover are to be allowed - Held that - In the present case, the AO accepted that there is existence of undisclosed expenditure in the form of medicines and given credit at 1/3rd of that expenditure and rejected 2/3rd of the same. In these circumstances, the AO only doubted the quantum of expenditure. We have gone through the details of suppressed expenditure. We have also gone through the net profit rate as per original and revised return of income. When we compare the original rate of net profit with revised rate of net profit, the revised rate of net profit is very high. From that we can infer that even after considering the suppressed expenditure, the net profit is very high which is higher than the normal net profit in this line of business. The average net profit for the last four years is worked out at 23.02%. Being so, in our opinion, to settle the dispute it is appropriate to consider the average net profit to work out the income of these assessment years which is below the average rate. Thus, for A.Ys. 2006-07 and 2007-08, income is to be estimated at 22.02% of the gross receipts and there is no change in the A.Ys. 2008-09 and 2009-10 as the declared rate of net profit is higher than the average net profit rate. Accordingly, we are of the opinion that entire gross receipts cannot be considered as income of the assessee.

Issues Involved:
1. Disallowance of 2/3rd of expenses on medicines.
2. Acceptance of revised claims for expenses on salaries.
3. Treatment of suppressed turnover as income.

Detailed Analysis:

1. Disallowance of 2/3rd of Expenses on Medicines:
The primary issue in these appeals is the confirmation of the disallowance of 2/3rd of expenses on medicines claimed by the assessee. The Assessing Officer (AO) allowed only one-third of the revised expenditure on medicines, disallowing Rs. 22,53,515 for AY 2007-08 and Rs. 17,82,104 for AY 2006-07. The AO's decision was based on the observation that the revised claim was an afterthought and lacked proper supporting evidence. The CIT(A) upheld this disallowance, noting an abnormal increase in expenditure that was not consistent with trends in other years.

2. Acceptance of Revised Claims for Expenses on Salaries:
The assessee revised the salary expenses claimed in the original returns, stating that the original figures were erroneous due to improper maintenance of books of account. The AO rejected the revised claim for salaries, considering it an afterthought, especially since the books were audited and such significant expenses could not have been missed. The CIT(A) agreed with the AO, emphasizing that the revised claims were not in line with the trends for other years and appeared to be an attempt to offset higher turnovers.

3. Treatment of Suppressed Turnover as Income:
During a survey conducted under Section 133A, it was found that the gross receipts of the firm were significantly higher than those declared in the original returns. The AO treated the entire suppressed turnover as income, following the precedent set in the case of G. Narsing Rao, where the ITAT held that the entire undisclosed turnover should be considered as income if no evidence of corresponding expenses is found. The CIT(A) supported this view, noting that the partner of the firm had accepted the suppressed turnover as income in a statement recorded under Section 131.

Tribunal's Findings:

Disallowance of Expenses on Medicines:
The Tribunal noted that the AO had accepted the existence of undisclosed expenditure on medicines and allowed one-third of the claimed amount. The Tribunal found that the AO only doubted the quantum of expenditure, not its existence. Considering the high net profit rates even after accounting for the suppressed expenditure, the Tribunal inferred that the net profit was still higher than normal for this line of business. Therefore, the Tribunal decided to estimate the income based on an average net profit rate of 23.02%, rather than treating the entire gross receipts as income.

Acceptance of Revised Claims for Salaries:
The Tribunal did not find sufficient grounds to overturn the AO's and CIT(A)'s rejection of the revised salary claims. The Tribunal emphasized the need for proper records and evidence to support such claims, which were lacking in this case.

Treatment of Suppressed Turnover:
The Tribunal referred to the judgment of the Gujarat High Court in the case of DCIT vs. Panna Corporation, which held that only the profit element embedded in undisclosed receipts should be taxed, not the entire receipts. Applying this principle, the Tribunal concluded that the entire gross receipts could not be considered as income. Instead, the income should be estimated based on the average net profit rate.

Conclusion:
The Tribunal partly allowed the appeals for AYs 2006-07 and 2007-08 by estimating the income at 22.02% of the gross receipts, aligning with the average net profit rate. For AYs 2008-09 and 2009-10, the appeals were allowed as the declared net profit rates were already higher than the average rate. The Tribunal's decision emphasized the importance of substantiating claims with proper evidence and maintaining consistency with industry norms and historical data.

Order Pronounced:
The order was pronounced in Open Court on 23rd April, 2014.

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