2018 (1) TMI 727 - AT - Income Tax

Unaccounted purchases - Profit determination - Held that - Adoption of average over four years may not result in assessment of correct incomes in respect of that year. Either CIT(A) should have directed to adopt the same ratio or should have adopted a higher rate than what was declared by assessee. Since AO was not given any opportunity, the reduction by CIT(A) seems to be arbitrary. Therefore, we are unable to uphold the order of CIT(A) in adopting average rate of profit. As informed that the issue before the Central Excise Authorities is pending adjudication in the appellate tribunal therein. Assessee has no objection for adopting the turnovers in income tax proceedings. Therefore, accepting the turnovers as quantified by the Excise Authorities, AO is directed to adopt the same profit ratio as offered by assessee on the disclosed turnovers to the undisclosed turnover as well, in each of the assessment years. Accordingly, modifying the order of CIT(A), we direct the AO to verify the profit ratio in each of the assessment years and adopt the same ratio on the undisclosed turnover as well. The order of CIT(A) is modified to that extent. Entire unexplained turnover brought to tax - Held that - Bringing to tax the entire turnover is not correct. Even the case law relied on by assessee before the Ld.CIT(A) supports the view that only profit/income can be brought to tax, not the entire turnover. Keeping that in mind, we agree with the findings of CIT(A) to the extent that the accrued turnover cannot be brought to tax. Revenue grounds are accordingly considered partly allowed Addition of amount paid in cash - Held that - Why AO brought this amount to tax in all the assessment years is not understandable. We have perused the show cause notice. There is only one payment determined by the Excise Authorities and accordingly, we are of the opinion that addition of ₹ 10 Lakhs in each of the assessment years is not correct. Therefore, assessee s grounds on this issue are allowed

Summary

Issues:
Cross-appeals by Assessee and Revenue against the common order of the Commissioner of Income Tax (Appeals)-1, Hyderabad, involving the treatment of turnover as income, addition of unaccounted purchases, and cash payment of ?10 Lakhs.

Analysis:

Issue 1: Treatment of Turnover as Income
The Assessing Officer (AO) reopened assessments based on information from Central Excise Authorities, considering the turnover determined by them as the assessee's sales income. The Commissioner of Income Tax (Appeals) directed the AO to estimate income at 6.2% of turnover, differing from the AO's approach of treating the entire turnover as income. The ITAT Hyderabad found the CIT(A)'s method arbitrary, as the average profit ratio was calculated over four years instead of five. The ITAT directed the AO to adopt the profit ratio declared by the assessee on disclosed turnover for the undisclosed turnover, considering the unique nature of the business.

Issue 2: Addition of Unaccounted Purchases
In the case of unaccounted purchases, the CIT(A) confirmed the addition in AY 2008-09, despite the ground not being pressed by the assessee. The ITAT Hyderabad held that since the entire turnover was already taxed, separately adding unaccounted purchases was unwarranted. The ITAT deleted the addition of unaccounted purchases, emphasizing that all turnover was considered for assessing income.

Issue 3: Cash Payment of ?10 Lakhs
Regarding the addition of ?10 Lakhs based on a cash payment, the ITAT found the CIT(A)'s confirmation unjustified. The ITAT ruled that whether the payment was made in cash or by cheque, the Central Excise amount paid should be deductible. As the payment was made outside the impugned assessment years, the ITAT directed the AO to delete the amounts added in each assessment year.

Conclusion:
The ITAT Hyderabad partly allowed Revenue appeals, allowed all assessee's appeals, and dismissed the Cross-Objections. The judgment clarified the treatment of turnover as income, the addition of unaccounted purchases, and the cash payment issue, providing detailed reasoning for each decision.