2014 (8) TMI 63 - AT - Income Tax

Reduction of GP Unaccounted expenses Held that - The assessee had adopted 5% rate of profit for all the years - As against that the AO had adopted an average profit at 5.17% - The net profit percentage by CIT(A) had varied from 5.4% to 8.9% in AY 2001-02 and AY 2002-03 - It has further varied from 8.5% to 0.79% in AY 2003-04 to 2007-08 as per the calculation appeared of the appellate order - overall average arrives at 5.8% for those four years - But in a situation when there is no uniformity and vast variation in the percentage of year wise profits, which had shown steep rise up to 8.9% and thereafter steep fall up to 0.79% hence seems to be impractical method of calculation of profit - there were no sales/purchase Bills were detected, no unaccounted coal stock was unearthed, no assets beyond the income offered was seized and the application of unaccounted income has matched with the assets/expenditure hence the income so offered by and large appears to be reasonable - Still to cover up the difference between the disclosure of 1.07crore and income offered for all the years by adopting rate at 5%, for the AY 2001- 02, 2002-03, 2003-04, the profit is to be calculated by adopting net profit rate at 5.2% - Decided partly in favour of Revenue. Unaccounted transactions of cash purchases Disallowance u/s 40A(3) Held that - The transaction being not a purchase and sale of the assessee in his own rights, there was no question of disallowance of any expenditure because the profit was declared on estimation - hence, the provisions of Section 40A(3) was not to be attracted relying upon Commissioner of Income-Tax Versus Hynoup Food And Oil Ind. P. Limited 2005 (2) TMI 99 - GUJARAT High Court the issue of the applicability of the provisions of Section 40A(3) is to be decided on the merits and facts of this case only - even after the search was carried out there were no evidence of expenditure and the AO was not able to lay hands on unaccounted purchases - Because the evidence of total expenditure or purchases was not available to the Revenue, the assessee as well as the AO, both have decided to determine the income by applying a reasonable estimate of profit the estimation was very close to the income offered by the assessee Decided against Revenue. Undisclosed closing stock Held that - CIT(A) has correctly appreciated the facts of the case and held that in the absence of any stock found at the time of search there was no justification to tax unaccounted stock in the hands of the assessee - the AO was not definite about the stock - no authentic finding was given but it was held by him that there might be stock in godown - in such a situation CIT(A) was correct in deleting the addition which according to him was based upon conjecture only Decided against Revenue.

Summary

Issues Involved:

1. Estimation of Gross Profit.
2. Applicability of Section 40A(3) of IT Act.
3. Addition of Undisclosed Closing Stock for A.Y. 2007-08.
4. Cross Objections by the Assessee regarding estimated total unaccounted income and related issues.

Detailed Analysis:

1. Estimation of Gross Profit:

The primary issue revolves around the estimation of gross profit for the Assessment Years 2001-02 to 2007-08. The Assessee, engaged in coal trading, was found with unaccounted transactions recorded in "kaccha notebooks" during a search. The AO computed the unaccounted profit based on these transactions, leading to a dispute over the correct profit estimation method.

The AO rejected the Assessee's 5% profit estimation on unaccounted sales, computing a higher profit. The CIT(A) compared the profit ratios and found the Assessee's 5% estimation reasonable, considering the lack of unaccounted sale invoices, purchase bills, and stock registers during the search. The CIT(A) noted discrepancies in the AO's method and upheld the Assessee's profit estimation in certain years, leading to mixed findings.

The Tribunal found both lower authorities' methods inconsistent and impractical, given the absence of unaccounted sales/purchase bills and unaccounted coal stock. The Tribunal ultimately directed a uniform profit rate of 5.2% for the disputed years, partially allowing the Revenue's ground and the Assessee's cross-objections.

2. Applicability of Section 40A(3) of IT Act:

The AO disallowed certain expenses under Section 40A(3) due to unaccounted cash purchases. The Assessee argued that the income was estimated, and thus, Section 40A(3) should not apply. The CIT(A) agreed, noting that the Assessee acted as a commission agent, not recording these transactions in regular books, and no unaccounted purchase bills were found during the search.

The Tribunal upheld the CIT(A)'s decision, emphasizing that when income is estimated, disallowance under Section 40A(3) is not warranted. The Tribunal dismissed the Revenue's grounds for all years on this issue.

3. Addition of Undisclosed Closing Stock for A.Y. 2007-08:

The AO added Rs. 20,02,602/- as undisclosed closing stock for A.Y. 2007-08, assuming the goods purchased in June and July were unsold. The CIT(A) deleted this addition, noting that the actual stock found during the search did not support the AO's assumption.

The Tribunal agreed with the CIT(A), finding no justification for the AO's addition based on conjecture. The Tribunal dismissed the Revenue's ground on this issue.

4. Cross Objections by the Assessee:

The Assessee's cross-objections for A.Y. 2007-08 included disputes over the estimated total unaccounted income and interest levied under Sections 234A/B/C/D. The AO computed a loss, while the CIT(A) assessed a minor profit of Rs. 36,083/-.

The Tribunal found no uniformity in the approaches of the AO, CIT(A), and the Assessee. The Tribunal affirmed the CIT(A)'s profit estimation of Rs. 36,083/-, dismissing the Assessee's cross-objections for A.Y. 2007-08.

Summary of Results:

1. Appeal for A.Y. 2001-02 of the Revenue Department is partly allowed.
2. Appeals for A.Y. 2002-03 to 2006-07 of the Revenue Department are dismissed.
3. Appeal for A.Y. 2007-08 of the Revenue Department is dismissed.
4. Cross Objections of the Assessee for A.Y. 2001-02 to 2003-04 are partly allowed.
5. Cross Objection of the Assessee for A.Y. 2007-08 is dismissed.