2018 (3) TMI 2037 - AT - Income Tax

Income surrendered in search proceedings - determination of profit on undisclosed turnover - Disallowance of expenses - assessee during the search seizure operations had surrendered an amount as business income from trading of Pan Masala - AO applied gross profit rate of 3.7% which is based upon earlier years audited accounts whereas during the year under consideration the gross profit earned by the assessee only 1.91% - D. R. stated that in unaccounted turnover the assessee also saves heavy amount on account of non payment of taxes and therefore the application of higher gross profit rate was necessary - as per DR assessee could not produce any evidence to substantiate his claim and moreover during search proceedings he had surrendered commission income and therefore the claim as expenses is an afterthought and rightly not allowed the claim. HELD THAT - Application of gross profit rate of accounted turnover cannot be applied to unaccounted turnover as the assessee generally earns more profit on the unaccounted turnover and moreover to create a deterrent for assessee not to make unaccounted transactions in future and in view of justice to both parties we deem it appropriate that average of gross profit rate of 3.7% and 1.91% should have been applied to the unaccounted turnover. The average gross profit rate of these two years comes out at 2.8%. Therefore AO is directed to apply gross profit rate of 2.8% on the unaccounted turnover as calculated by CIT(A) which after relief given by learned CIT(A) comes out at Rs. 1, 08, 87, 67, 854/-. Out of the gross profit thus arrived the assessee will be allowed deduction on account of expenses to the extent of Rs. 7, 73, 600/- which learned CIT(A) has also given and out of such net profit the profit declared by the assessee to the tune of Rs. 2.35 crore will be reduced and remaining amount is liable to be taxed in the hands of the assessee. In view of the above ground No. 1, 2, 3 4 of the appeal of the assessee are partly allowed. Assessee had declared a commission income and now in the return of income it claimed expenses to earn that income which has not been substantiated - CIT(A) has already allowed relief to the extent of Rs. 5, 00, 000/- and we do not find any infirmity in that order and in view of the inability of the assessee to explain and support the claim of expenses we dismiss ground No. 5 6. Calculation of unaccounted turnover - While calculating the undisclosed turnover the Assessing Officer has reduced an amount of Rs. 27, 33, 82, 332/- which is not correct as learned CIT(A) has held that the turnover of the assessee as per audited account and as per VAT returns worked out to be Rs. 37, 15, 41, 587/- Learned CIT(A) has rightly allowed relief to the assessee by replacing the incorrect accounted figure of sales with the correct figure of accounted sales and therefore there is no infirmity in the order of CIT(A). Therefore ground No. 1 is dismissed.

Summary

Issues Involved:
1. Deletion of addition under Section 69A of the Income Tax Act, 1961.
2. Deletion of addition on account of undisclosed income from commission.
3. Confirmation of addition under the head undisclosed income by applying the G.P. rate.
4. Confirmation of addition on account of expenses deemed to have been incurred in earning commission income.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 69A of the Income Tax Act, 1961:
The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 36,31,910/- made by the Assessing Officer (AO) due to a difference in turnover. The AO had made this addition after examining the facts and applying a gross profit (G.P.) rate of 3.7% based on the previous year's audited accounts. The CIT(A), however, found discrepancies in the figures and reduced the unaccounted turnover. The Tribunal agreed with the CIT(A)'s revised calculation of unaccounted turnover and directed the AO to apply an average G.P. rate of 2.8% (derived from the previous year's 3.7% and the current year's 1.91%) on the revised turnover figure. Consequently, the Tribunal partly allowed the assessee's appeal on this issue.

2. Deletion of Addition on Account of Undisclosed Income from Commission:
The AO observed that the assessee had surrendered Rs. 6,00,00,000/- as undisclosed income from commission during the search proceedings but declared only Rs. 5.5 crore in the return of income, claiming Rs. 50,00,000/- as expenses without evidence. The CIT(A) allowed a relief of Rs. 5,00,000/- and confirmed the addition of Rs. 45,00,000/-. The Tribunal upheld the CIT(A)'s decision, noting the lack of substantiation for the claimed expenses. Therefore, the Tribunal dismissed the assessee's grounds related to this issue.

3. Confirmation of Addition under the Head Undisclosed Income by Applying the G.P. Rate:
The assessee argued that the current year's G.P. rate of 1.91%, which was accepted by the AO for recorded turnover, should be applied to the unaccounted turnover. The Tribunal, however, held that applying the same G.P. rate to both accounted and unaccounted turnover would not deter unaccounted transactions. To balance justice and deterrence, the Tribunal directed the AO to apply an average G.P. rate of 2.8% on the unaccounted turnover, as calculated by the CIT(A). This resulted in a partial allowance of the assessee's appeal on this issue.

4. Confirmation of Addition on Account of Expenses Deemed to Have Been Incurred in Earning Commission Income:
The assessee claimed Rs. 50,00,000/- as expenses to earn Rs. 6,00,00,000/- in commission income. The CIT(A) allowed only Rs. 5,00,000/- due to a lack of evidence for the remaining amount. The Tribunal found no infirmity in the CIT(A)'s order, given the assessee's inability to substantiate the expenses. Thus, the Tribunal dismissed the assessee's grounds related to this issue.

Conclusion:
The Tribunal partly allowed the assessee's appeal by adjusting the G.P. rate applied to the unaccounted turnover and dismissed the Revenue's appeal, upholding the CIT(A)'s relief on account of the revised turnover calculation and the partial allowance of expenses. The final order pronounced that the assessee's appeal is partly allowed, whereas the Revenue's appeal is dismissed.