2024 (12) TMI 1421 - AT - Income Tax

Estimation of gross profit on unaccounted sales - Unaccounted purchases is to be taxed by applying gross profit rate of 8.49% OR net profit applied by AO at 12% - HELD THAT - A reasonable profit rate should be estimated and if the gross profit rate is to be added that can be added at the rate of 2%, going by the nature of business of the assessee and similar line of business only on the unaccounted part or payment made in cash for which cash was utilized for making purchases and consequent sale of MJPL. Hence, we are of the view that a reasonable estimate of gross profit of 2% will meet the ends of justice for both sides i.e., for the Department as well as for the assessee for all these six assessment years for unaccounted purchases only of gold from MJPL not recorded in the regular books of accounts. Hence, we direct the AO to apply gross profit rate of 2% on cash payment made for unaccounted purchases of gold from MJPL for these relevant six assessment years and not on recorded purchases Disallowance of cash payment u/s.40A(3) - We direct the AO to delete this disallowance as in this case, the income of the assessee is assessed applying flat gross profit rate and assessee has not claimed any deduction with regard to the purchases made by him, hence the provisions of section 40A(3) cannot be invoked. We reverse the findings of the CIT(A) on this issue and accordingly, this issue of assessee s appeal on enhancement is allowed. Accordingly, interconnected issue with regard to applicability of section 40A(3) of the Act, is decided in favour of the assessee and as regards to application of profit rate, we direct the AO to apply gross profit rate of 2% in all the six assessment years. Addition of excess stock jewellery incorrectly added when there was no excess stock - We note that the assessee has specifically filed invoices and tried to correlate the excess gold stock and if these invoices are correct then it seems that there is no excess stock but these things need verification at the level of AO. Hence, we set aside the order of AO and CIT(A) on this issue and remand this issue back to the file of the AO for fresh adjudication. In term of the above, this issue of the assessee is allowed for statistical purposes.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment involves several core legal questions:

Whether the estimation of profit on unaccounted sales should be based on gross profit or net profit.
Whether the disallowance under Section 40A(3) of the Income Tax Act is applicable to cash payments made for unaccounted transactions.
Whether the assessment should be framed under Section 153A or 153C of the Income Tax Act when incriminating material is found during a search conducted on another person.
Whether the addition of excess stock of jewelry was justified when there was no excess stock after considering pending invoices.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Estimation of Profit on Unaccounted Sales

Relevant legal framework and precedents: The court considered various precedents that establish only the profit element in unaccounted sales should be taxed, not the entire sales amount.
Court's interpretation and reasoning: The court opined that a reasonable profit rate should be estimated. It decided on a gross profit rate of 2% for unaccounted cash purchases, considering the nature of the business and similar cases.
Key evidence and findings: The court relied on the ledger account 'Amanullah KDR' found in J-Pack software, which recorded unaccounted transactions.
Application of law to facts: The court applied the principle that only the profit from unaccounted sales should be taxed, setting a gross profit rate of 2% for unaccounted purchases.
Treatment of competing arguments: The court rejected the assessee's argument for using net profit estimation, citing the need for a consistent approach with similar cases.
Conclusions: The court directed the AO to apply a 2% gross profit rate on unaccounted cash payments for unaccounted purchases.

Issue 2: Disallowance under Section 40A(3)

Relevant legal framework and precedents: The court considered precedents where Section 40A(3) was deemed inapplicable when income is computed using a flat gross profit rate.
Court's interpretation and reasoning: The court concluded that Section 40A(3) does not apply when no deduction is claimed for purchases, and profit is estimated on a flat rate.
Key evidence and findings: The court noted that the assessee did not claim deductions for unaccounted purchases, aligning with the precedent that Section 40A(3) should not apply.
Application of law to facts: The court applied the principle that Section 40A(3) is not applicable when profit is estimated on a flat rate without claiming deductions.
Treatment of competing arguments: The court rejected the CIT(A)'s enhancement under Section 40A(3), favoring the assessee's argument supported by precedents.
Conclusions: The court directed the AO to delete the disallowance under Section 40A(3) as it was not applicable.

Issue 3: Section 153A vs. Section 153C

Relevant legal framework and precedents: The court considered the applicability of Sections 153A and 153C regarding assessments based on materials found during searches.
Court's interpretation and reasoning: The court noted the assessee did not pursue this issue actively, indicating a lack of interest in prosecution.
Key evidence and findings: No specific arguments or evidence were presented by the assessee on this issue.
Application of law to facts: The court dismissed the issue due to the assessee's lack of interest in pursuing it.
Treatment of competing arguments: The court did not engage in detailed analysis due to the absence of arguments from the assessee.
Conclusions: The issue was dismissed as the assessee did not actively pursue it.

Issue 4: Addition of Excess Stock

Relevant legal framework and precedents: The court examined whether the addition of excess stock was justified when pending invoices were not considered.
Court's interpretation and reasoning: The court noted the need for verification of invoices that might explain the alleged excess stock.
Key evidence and findings: The court considered the invoices provided by the assessee, which could potentially account for the excess stock.
Application of law to facts: The court remanded the issue back to the AO for verification of the invoices to determine if there was indeed excess stock.
Treatment of competing arguments: The court acknowledged the assessee's argument regarding pending invoices and allowed for further verification.
Conclusions: The court remanded the issue for fresh adjudication by the AO to verify the invoices and determine if excess stock existed.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "It is well established law that entire unaccounted purchases or Unaccounted sales can't be subjected to tax. But only profit element embedded in it."
Core principles established: Only the profit element in unaccounted sales should be taxed, and Section 40A(3) is inapplicable when income is computed using a flat profit rate without claiming deductions.
Final determinations on each issue: The court directed a 2% gross profit rate on unaccounted purchases, dismissed the Section 40A(3) disallowance, dismissed the Section 153A/153C issue, and remanded the excess stock issue for verification.

← Previous Next →