2024 (6) TMI 858 - AT - Income Tax

Undisclosed sales - NP determination - CIT(A) restricting the addition to the net profit element in the same - contention of the Revenue was that the lCIT(A) ought to have applied 12.5% net profit rate instead of 8% - It was pointed out that during search at the residential premises of the director of the assessee-company, various incriminating material by way of WhatsApp message/images were discovered alongwith material from the mobile phone of the director of the assessee-company, thus discovered assessee had made out of books sales - HELD THAT - Revenue has not given any basis to justify applying higher rate of net profit at 12.5%. It is basic common sense that net profit to be applied is to be at justifiable rate depending upon nature of the business and other facts. It cannot be simply an adhoc rate; there has to be a reasonable basis for applying a particular net profit rate in each case. The ld.DR has not supported his contention of applying 12.5% GP rate with any reasonable basis. The decision of Hon ble Gujarat High Court 2013 (10) TMI 1028 - GUJARAT HIGH COURT has also not been pointed out to be rendered in the context identical to the activities carried out by the assessee so as to justify his stand of applying the rate held by the Hon ble High Court to be a justifiable rate in that case. Therefore, we do not find any merit in the contentions of the ld.DR that the ld.CIT(A) ought to have been applied a net profit of 12.5% in the present case. The contention of the ld.DR is, therefore rejected, and the ground raised by the Revenue is accordingly rejected.

Summary

Issues:
- Delay condonation for filing the Cross Objection (CO) by the assessee.
- Addition made by the Assessing Officer (AO) on account of undisclosed sales.
- Restriction of addition by the Commissioner of Income Tax (Appeals).
- Net profit element embedded in unaccounted sales.
- Application of net profit rate in determining taxable income.
- Benefit of income surrendered by the assessee in the return of income.

Analysis:

1. The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) regarding the addition made to the income of the assessee by the AO on account of undisclosed sales. The assessee also filed a Cross Objection (CO) against the same order, which was noted to be time-barred by 15 days. The delay in filing the CO was condoned by the Appellate Tribunal, and both the appeal and CO were disposed of together.

2. The main issue in the appeal was the deletion by the Commissioner of Income Tax (Appeals) of the addition made by the AO on account of undisclosed sales, with the restriction being on the net profit element in the sales. The Revenue challenged this restriction, seeking the deletion of the entire addition made by the AO. The facts revealed during a search showed that the assessee had made out-of-books sales amounting to Rs.2,35,42,980, which the AO added to the income of the assessee.

3. The Commissioner of Income Tax (Appeals) restricted the addition to the profit element embedded in the undisclosed sales, estimated at 8% of the sales. The Revenue contended that the net profit rate should have been 12.5% instead of 8%, citing a decision of the Gujarat High Court. However, the Tribunal found no merit in the Revenue's contention as there was no reasonable basis provided for applying a higher net profit rate.

4. The Cross Objection filed by the assessee highlighted that the Commissioner of Income Tax (Appeals) failed to consider the income surrendered voluntarily by the assessee in its return of income. The AO had noted this fact in the assessment order, and during the hearing, both parties agreed that the benefit of the income surrendered should be granted to the assessee against the addition confirmed by the Commissioner of Income Tax (Appeals).

5. Ultimately, the Appellate Tribunal dismissed the appeal of the Revenue and allowed the Cross Objection of the assessee. The Tribunal directed the AO to grant the assessee the benefit of the income surrendered voluntarily. The decision was pronounced on 12th January 2024 in Ahmedabad.