2024 (1) TMI 1436 - AT - Income Tax

Undisclosed investment in 29315 boxes of goods - undisclosed sales detected during the course of search by Excise Department - CIT(A) restricted the addition to the extent of gross profit and deleted balance addition made by the assessee on ground of undisclosed investment u/s 69C - HELD THAT - Entire sale proceeds should be taxed (covering both gross profit and undisclosed investments) or only the gross profit embedded in undisclosed sales should be taxed. In the case of President Industries 1999 (4) TMI 8 - GUJARAT HIGH COURT has held that in case of undisclosed sales only profit margin should be taxed and in absence of any specific findings of any investment routed in undisclosed sales the undisclosed investment cannot be taxed on assessment basis. In the case of CIT vs. Leo Formulations Pvt. Ltd. 2014 (4) TMI 633 - GUJARAT HIGH COURT AO observed that the assessee had not recorded consumption of different raw materials correctly in the books of account and had suppressed production. Accordingly the Assessing Officer estimated unaccounted sales of assessee at 40% of the turnover. The Gujarat High Court held that the contention of the Revenue that entire excess consumption should be added to the income of the assessee could not be accepted as the AO himself has recorded in the assessment order that there has been unaccounted purchases which needed to be considered against unaccounted sales and further excess consumption of raw materials could not automatically result into matching value of excess sales of finished product. High Court held that the entire unaccounted sales cannot be added the income but only the net profit can be added to the income of the assessee. Thus in instant facts in our view Ld. CIT(A) has correctly observed that Assessing Officer has not recorded any finding of any undisclosed investment found as a result of search by Excise Department. The undisclosed investments has only been assumed as the source of purchases recorded for subsequent sales. Accordingly in view of the aforesaid discussions we are of the considered view that Ld. CIT(A) has correctly held that looking into the instant facts the addition should be restricted only to the extent of gross profit and no further additions can be made on account of undisclosed investments. Appeal of the Department is dismissed.

Summary

The issues presented and considered in the legal judgment are as follows:1. Whether the addition made by the Assessing Officer on account of undisclosed investment in goods should be upheld.2. Whether the addition made by the Assessing Officer on account of gross profit embedded in unaccounted sales should be sustained.3. Whether the Ld. CIT(A) erred in deleting the balance addition made by the Assessing Officer on the ground of undisclosed investments.4. Whether the entire sale proceeds, covering both gross profit and undisclosed investments, should be taxed or only the gross profit embedded in undisclosed sales.The detailed analysis of the issues is as follows:Issue 1:- The Assessing Officer added Rs. 1,00,08,317 on account of undisclosed investment in goods.- The Central Excise Department found the assessee involved in clandestine removal of 29315 boxes of finished goods.- The Assessing Officer added Rs. 84,68,575 as unrecorded investment in purchase of raw material.- The Assessing Officer observed discrepancies in sale price calculations.- The Ld. CIT(A) partly allowed the appeal and restricted the addition to the extent of gross profit.- The Ld. CIT(A) relied on Gujarat High Court judgments and ITAT decisions to support the decision.- The Ld. CIT(A) held that undisclosed investment cannot be taxed on assumption basis.- The Ld. CIT(A) directed the Assessing Officer to restrict the addition to the extent of gross profit.Issue 2:- The Assessing Officer added Rs. 14,24,533 as gross profit embedded in unaccounted sales.- The Ld. CIT(A) directed the Assessing Officer to delete the balance addition made on the ground of undisclosed investments.- The Ld. CIT(A) relied on legal precedents to support the decision.- The Ld. CIT(A) emphasized that only profit margin should be taxed in case of undisclosed sales.Significant Holdings:- The Gujarat High Court and ITAT decisions supported the principle that only profit margin should be taxed in case of undisclosed sales.- The Ld. CIT(A) correctly held that the addition should be restricted to the extent of gross profit.- The appeal of the Department was dismissed based on the above reasoning.In conclusion, the legal judgment focused on the taxation of undisclosed sales and investments, emphasizing the principle that only profit margin should be taxed in such cases. The Ld. CIT(A) upheld this principle and restricted the addition to the extent of gross profit, in line with established legal precedents. The Department's appeal was dismissed based on these findings.