2024 (9) TMI 1444 - AT - Income Tax

Net Profit (NP) estimation on unaccounted turnover/cash sales - AO estimated the profit % 8% based on seized material - HELD THAT - We find that the AO on the aggregate quantum of sale, 8% profit has been calculated on estimate basis. However, CIT(A) reduced it by 5%. It is well-settled that in case of estimate of profit u/s 145, Revenue has to make an honest and fair estimate of the income by applying the profit rate declared in the preceding years. Considering that the assessee is engaged in the business of trading in Kirana items, we are of the opinion that the profit @ 4% which amounts to ₹ 35,70,673, shall meet justice. Since a sum of ₹ 75 lakh has been offered for taxation as income from business, the additional profit needs to be telescoped with the offer for addition income. No separate addition is required at all in the peculiarity of the circumstances. Unexplained expenditure - Assessee argued once the AO has rejected books of accounts and estimated profits on turnover, the same shall take care of the expenses incurred for earning such profits and any addition made with respect to such expenses would tantamount to double addition - HELD THAT - The expenditure on account of unrecorded cash coupons works out as detailed at table above is treated as unexplained expenditure and assessed u/s 69C of the Act and the same is taxed at maximum marginal rate of 60% u/s 115BEE - There is no scope for estimation of unexplained expenditure because the same is a deeming provision and actual incurring of expenditure is must. The addition itself is fragile and is based on pure surmise and conjunctures. The basic invocation of section 69C is uncalled for merely on estimates. The learned CIT(A) has appropriately decided which needs no interference at our end. Thus, though on a different line of logical line of thinking, we uphold the order passed by the CIT(A) by dismissing the ground no.4. Addition based on 4% net profit estimated on the turnover - We have heard the rival arguments, perused the material available on record and gone through the orders of the authorities below. We find that the CIT(A) has recorded that the appellant has offered ₹ 75 lakh, as additional income, which duly covers the profit @ 4% on the total turnover. Thus, we find that the CIT(A) has correctly considered the additional income and our interference is not called for. Addition on account of profit estimated @ 8% on the difference in the stock physically found vis- -vis as appearing in books of accounts - It is admitted that the Assessing Officer has rejected books of account and estimated turnover and profit on sales from the business. CIT(A) deleted the addition stating the reason that once the books of accounts are rejected and the profit percentage has been estimated, no separate addition is called for the shortage found in stock. The same can also be telescoped with the additional income offered for ₹ 75 lakh. Therefore, CIT(A) has correctly decided to delete the addition. As such, we decline to interfere in his rock solid findings. Accordingly, we uphold the order passed by the learned CIT(A) by dismissing the ground no.5, raised by the Revenue. Additions proposed by the Assessing Officer as modified by the learned CIT(A) is quashed. The returned income is sacrosanct and no addition may be made thereafter in view of the additional income offered for ₹ 75 lakh which has already suffered tax.

Issues Involved:

1. Net Profit (NP) estimation on unaccounted cash sales.
2. Reasonableness of 5% NP versus 8% NP.
3. Additional income declaration and its impact on NP.
4. Deletion of addition on account of estimated unexplained expenditure.
5. Deletion of addition on account of profit estimated on the difference in stock.

Issue-wise Detailed Analysis:

1. Net Profit (NP) Estimation on Unaccounted Cash Sales:
The Revenue challenged the learned CIT(A)'s decision to hold 5% NP on the turnover of Rs. 8,92,60,816/- as reasonable. The Assessing Officer (AO) had estimated an 8% NP on unaccounted cash sales, which were not part of regular books of accounts. The learned CIT(A) found that the AO's application of 8% NP was arbitrary and reduced it to 5%, considering the appellant's historical NP margins ranging from 0.82% to 3.65%. The Tribunal upheld the learned CIT(A)'s decision, stating that the profit rate should be based on past years' accepted results and reduced the NP estimation to 4%, which was already covered by the additional income declared by the assessee.

2. Reasonableness of 5% NP Versus 8% NP:
The AO's application of 8% NP was contested, with the appellant arguing that the NP in their trading business did not exceed 3.65%. The learned CIT(A) agreed and applied a 5% NP, which was deemed reasonable given the appellant's historical NP margins. The Tribunal concurred, reducing the NP estimation to 4%, aligning with past profit ratios and the additional income declared by the assessee.

3. Additional Income Declaration and Its Impact on NP:
The Revenue argued that the additional income declared by the assessee of Rs. 75 lakh was general and should not cover the NP estimation. The learned CIT(A) found that the additional income covered the NP at 5% on the total turnover. The Tribunal upheld this view, noting that the additional income, declared under "Business and Profession," was intended to address discrepancies and avoid litigation. The Tribunal confirmed that the additional income sufficiently covered the NP estimation.

4. Deletion of Addition on Account of Estimated Unexplained Expenditure:
The AO had added Rs. 78,93,431/- as unexplained expenditure under section 69C of the Act. The learned CIT(A) deleted this addition, reasoning that once the books of accounts were rejected and profits estimated, no separate addition for unexplained expenditure was warranted. The Tribunal agreed, citing legal precedents that support the view that once profits are estimated, additional expenses should not be separately added, as it would result in double addition.

5. Deletion of Addition on Account of Profit Estimated on the Difference in Stock:
The AO had added Rs. 3,69,516/- for the difference in stock physically found versus recorded in the books. The learned CIT(A) deleted this addition, stating that once the books were rejected and profits estimated, no separate addition for stock differences was necessary. The Tribunal upheld this decision, noting that the estimated profits already accounted for such discrepancies, and any additional addition would be duplicative.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the learned CIT(A)'s decisions on all grounds. The additional income declared by the assessee covered the NP estimation, and no separate additions for unexplained expenditure or stock differences were warranted. The returned income of Rs. 1,33,18,580/- was deemed sacrosanct, and no further additions were justified. The cross-objection filed by the assessee was also dismissed.

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