2024 (12) TMI 1332 - AT - Income Tax

Assessment u/s 153A - Addition in respect of undisclosed sales - HELD THAT - The incriminating materials found during search undisputedly revealed that there were unrecorded sales by the assessee and therefore once it is established that there are recorded sales, then only profit rate can be applied to assess the income embedded therein. In the present case the assessee suo-motto disclosed the profit on the said unrecorded sales in the return of income filed in compliance to section 153A of the Act. Therefore, respectfully following the ratios as laid down in the above decisions, we uphold the order of Ld. CIT(A) by dismissing the appeal of the revenue. The appeal of the revenue is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the entire amount of undisclosed sales can be treated as the income of the assessee.
• Whether the assessee is entitled to claim deductions for purchases and expenses against the undisclosed sales.
• Whether the appellate authority was correct in deleting the addition made by the Assessing Officer (AO) regarding undisclosed sales.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Treatment of Undisclosed Sales as Income

• Relevant Legal Framework and Precedents: The judgment refers to Section 153A of the Income Tax Act, 1961, which deals with assessments in cases where a search has been conducted. The court also considers various precedents, including decisions from the ITAT and High Courts, which establish that only the profit element in unaccounted sales should be taxed, not the entire sales amount.
• Court's Interpretation and Reasoning: The court reasoned that the entire amount of undisclosed sales does not represent the income of the assessee. Instead, only the profit margin from such sales should be considered for taxation.
• Key Evidence and Findings: The court noted that the assessee had admitted to undisclosed sales during the search and had declared additional income in compliance with the notice under Section 153A.
• Application of Law to Facts: The court applied the principle that only the profit from unaccounted sales could be taxed, allowing for deductions of related expenses.
• Treatment of Competing Arguments: The court considered the Revenue's argument that the entire sales amount should be taxed but found it unsupported by legal precedents.
• Conclusions: The court concluded that only the profit from undisclosed sales should be taxed, and the addition made by the AO was unjustified.

Issue 2: Entitlement to Deductions for Purchases and Expenses

• Relevant Legal Framework and Precedents: The court referred to legal principles that allow deductions for expenses incurred in generating income, even in cases of undisclosed sales.
• Court's Interpretation and Reasoning: The court held that the assessee is entitled to claim deductions for purchases and expenses related to the undisclosed sales.
• Key Evidence and Findings: The court found that the assessee had provided bills and vouchers to substantiate the claimed expenses, which the AO had overlooked.
• Application of Law to Facts: The court applied the principle that expenses related to income should be deductible, even for unaccounted sales.
• Treatment of Competing Arguments: The court rejected the AO's position that the absence of bills and vouchers justified taxing the entire sales amount.
• Conclusions: The court directed that expenses claimed by the assessee should be allowed, and the addition of Rs. 4,94,43,275/- should be deleted.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales. The sales only represent the price received by the seller of the goods for the acquisition of which it has already incurred the cost."
• Core Principles Established: The judgment reaffirms that only the profit element in unaccounted sales should be taxed and that deductions for related expenses must be allowed.
• Final Determinations on Each Issue: The court upheld the CIT(A)'s decision to delete the addition made by the AO, affirming that only the profit from undisclosed sales should be taxed, and relevant expenses should be deducted.

The judgment in both ITA No. 1006/Kol/2024 and ITA No. 1005/Kol/2024 resulted in the dismissal of the Revenue's appeals, reinforcing the principle that only profits from unaccounted sales are taxable, not the gross sales amount.