2017 (5) TMI 1835 - AT - Income Tax

Undisclosed sales - application of a 22% profit rate on undisclosed sales - HELD THAT - Following the law laid down in CIT vs. Balchand Ajit Kumar 2003 (4) TMI 76 - MADHYA PRADESH HIGH COURT we are of the considered view that total sales cannot represent the income of assessee on account of undisclosed sales which is price received by the seller of the goods for the acquisition of which the assessee has already incurred the cost. So in the given circumstances the only way out is to adopt the net profit by the Revenue authorities but the same has to be adopted judiciously in the facts and circumstances of the case. In the instant case there is not an iota of evidence on file as to how the net profit is estimated at exorbitant rate of 22%. Assessee cannot be compared broadly with M/s. Bhaskar Traders which has shown gross profit @ 22%. So keeping in view the net profit shown by the assessee in the earlier year @ 16% we do not find any evidence on record to reach at the conclusion that in the next year net profit is increased by 6%. So in these circumstances we find it appropriate to estimate the net profit @ 16% on the undisclosed sales of Rs. 1, 58, 75, 339/-. Both the appeals filed by the Revenue as well as assessee are partly allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the Commissioner of Income-tax (Appeals) was justified in deleting a portion of the addition made by the Assessing Officer (AO) regarding undisclosed sales of the assessee.

2. Whether the income of Rs. 2,96,000 should be classified as income from interest (other sources) or as income from business, affecting the claim of remuneration to partners.

3. Whether the application of a 22% profit rate on undisclosed sales to determine undisclosed income was justified.

ISSUE-WISE DETAILED ANALYSIS

1. Deletion of Addition by CIT (A)

Relevant Legal Framework and Precedents: The legal framework involves the assessment of undisclosed sales and the appropriate method for estimating profits from such sales. The precedent set by the case of CIT vs. Balchand Ajit Kumar was considered, which emphasizes adopting a net profit rate rather than treating total sales as income.

Court's Interpretation and Reasoning: The Tribunal examined whether the CIT (A) correctly limited the addition to Rs. 34,92,575 by applying a 22% profit rate on the undisclosed sales of Rs. 1,58,75,339. The Tribunal found that the CIT (A) followed the precedent but questioned the appropriateness of the 22% rate.

Key Evidence and Findings: The AO made the addition based on an entry found during a search, which the assessee could not reconcile. The CIT (A) reduced the addition by estimating profits at a 22% rate.

Application of Law to Facts: The Tribunal applied the precedent and found that the total sales could not be equated to income. The net profit rate should reflect the actual business conditions and historical profit rates.

Treatment of Competing Arguments: The assessee argued for a lower profit rate, citing historical rates, while the Revenue supported the AO's original addition. The Tribunal balanced these by considering historical profit rates.

Conclusions: The Tribunal concluded that a 16% profit rate, reflecting historical performance, was more appropriate than the 22% rate used by the CIT (A).

2. Classification of Income of Rs. 2,96,000

Relevant Legal Framework and Precedents: The classification of income affects deductions and tax treatment. The legal framework distinguishes between business income and income from other sources.

Court's Interpretation and Reasoning: The Tribunal considered whether the income should be classified as business income, which would allow for partner remuneration claims.

Key Evidence and Findings: The AO classified the income as interest, impacting deductions. The assessee argued for business classification to claim partner remuneration.

Application of Law to Facts: The Tribunal assessed the nature of the income and its alignment with business activities.

Treatment of Competing Arguments: The assessee's argument for business classification was weighed against the AO's classification as interest income.

Conclusions: The Tribunal did not explicitly resolve this issue in the provided text, focusing instead on the profit rate for undisclosed sales.

3. Application of 22% Profit Rate

Relevant Legal Framework and Precedents: The legal framework involves the estimation of profits from undisclosed sales, guided by precedents like CIT vs. Balchand Ajit Kumar.

Court's Interpretation and Reasoning: The Tribunal questioned the basis for the 22% profit rate, comparing it to historical profit rates of the assessee.

Key Evidence and Findings: The CIT (A) applied a 22% rate, influenced by comparisons to other traders and historical data.

Application of Law to Facts: The Tribunal found no evidence justifying a 6% increase over the historical 16% profit rate.

Treatment of Competing Arguments: The Tribunal considered the assessee's historical profit rates and the lack of evidence for a higher rate.

Conclusions: The Tribunal adjusted the profit rate to 16%, aligning with historical performance and evidence.

SIGNIFICANT HOLDINGS

The Tribunal's significant holdings include:

Core Principles Established: The judgment reinforces the principle that total sales cannot be treated as income and that profit rates must reflect historical performance and evidence.

Final Determinations on Each Issue: The Tribunal partially allowed both appeals, adjusting the profit rate on undisclosed sales to 16%. The cross-objection by the assessee was dismissed as infructuous, given the resolution of related issues in the appeal.