2014 (10) TMI 181 - AT - Income Tax

Addition on suppressed sales - Difference between closing cash in hand Held that - During the course of survey operation, no hard copy of the books of account were found - The assessee has maintained the accounts in the computer and from the computer, the survey team has obtained details of sales and opening & closing cash balance - CIT(A) has also extracted the details of total sales according to which the total sales as per the details was at ₹ 21,88,28,854/- in AY 2007-08 - the assessee has shown total sales of the year - The difference was considered to be the suppressed sales by the CIT(A) - CIT(A) has further added the suppressed sales computed by the AO after rejecting the books of account u/s 145(3) of the Act - the difference was considered to be suppressed sales by the CIT(A), there was no justification in enhancing the suppressed sales by the CIT(A) by making addition of the suppressed sales estimated by the AO without any basis after rejecting the books of account of the assessee - During the AY 2007-08, the total suppressed sales would only be of ₹ 5,73,69,778/-. Wherever the details are available from the computer, there is no justification in estimating the suppressed sales by the AO after rejecting the books of account - the mode of computation of suppressed sales on the basis of the material impounded during the course of survey operation is proper/correct - nothing has been brought on record by the Revenue with regard to the unexplained investment in the purchase - addition of the entire suppressed sales is not called for, only gross profit worked on the sales is required to be added to the total income of the assessee. Whether the gross profit is to be estimated or net profit is to be worked out for making the addition Held that - The initial gross profit is to be worked out, the other indirect expenses are to be reduced to work out the net profit - the other indirect expenses have already been booked while computing the normal income of the assessee as per books of account - the gross profit rate is to be applied - the gross profit rate was declared between 10.82% and 13.99% - Since in other years, the gross profit was declared at lesser rate, the gross profit declared by the assessee during the relevant year is to be adopted to compute the income from suppressed sales - in AY 2007-08, the gross profit rate at 14.10% is to be applied on the suppressed sales in order to compute the total income from sales outside the books of account - in AY 2008-09, the gross profit rate is to be applied at 12.02% as disclosed by the assessee to the suppressed sales in order to compute the income from sales made outside the books of account - the addition of the gross profit worked out in terms indicated above is required to be added to the total income of the assessee. Difference in closing cash balance Held that - The survey team has obtained sheets of cash book maintained in the computer, wherefrom different figures were noted as on 31.3.2007 and 1.4.2007 - Though the assessee has contended that it was on account of glitches in the computer, but the onus is squarely upon him to explain how such substantial amount of opening cash balance was taken on 1.4.2007 - It is for the assessee to explain as to how cash balance moves further and how much cash balance was shown in succeeding dates - In the absence of proper explanation of the assessee, difference in opening and closing cash balance is required to be added under section 68 of the Act and this addition is possible only in AY 2008-09 - But there was force in the contention of the assessee that if addition of the difference in opening and closing balance is called for, the credit of the income generated on suppressed sales is to be given therefrom and the net amount is to be added on account of difference in closing and opening cash balance, because the income generated from suppressed sales has to be taken into account while computing the opening cash balance as on 1.4.2007 - profit/income generated on suppressed sales by applying the gross profit rate be reduced from the difference in closing balance as on 31.3.2007 and to make addition of the balance amount on account of difference in closing balance and opening balance thus, the matter is to be remitted back to the AO for re-computation Decided in favour of assessee.

Summary

Issues Involved:
1. Enhancement of assessment by ld. CIT(A)
2. Escaped turnover enhancement
3. Entire sales assessable as income
4. Irrelevant considerations in enhancing additions
5. Legal and factual correctness of assessment order
6. Timeliness of appeal filing
7. Withdrawal of appeal
8. Jurisdiction of order passed u/s 264
9. Confirmation of addition due to cash difference
10. Addition of suppressed sales
11. Credit for purchases and expenses
12. Submission and evidence consideration
13. Corresponding purchases of suppressed sales
14. Practicality and acceptability of entire sales as income
15. Legal and factual correctness of observations
16. Legality of additions and enhancement in first appeal

Detailed Analysis:

1. Enhancement of Assessment by ld. CIT(A):
The assessee contested that the ld. CIT(A) erred in enhancing the assessment by increasing the addition from Rs. 32,48,571 to Rs. 6,93,14,587 instead of allowing the appeal. The Tribunal noted that the CIT(A) re-examined the issue based on impounded materials and issued a notice of enhancement. The total suppressed sales were calculated at Rs. 5,73,69,778, and the CIT(A) further added Rs. 1,19,44,809, resulting in an enhanced income of Rs. 6,93,14,587.

2. Escaped Turnover Enhancement:
The assessee argued that the ld. CIT(A) incorrectly enhanced the escaped turnover from Rs. 1,19,44,809 to Rs. 6,93,14,587. The Tribunal found that the CIT(A) computed the total sales from details found in the computer and considered the difference as suppressed sales.

3. Entire Sales Assessable as Income:
The assessee contended that the entire sales should not be assessed as income, which is impractical and against accounting principles. The Tribunal agreed, citing precedents that only the profit portion of suppressed sales should be added to the income, not the entire sales amount.

4. Irrelevant Considerations in Enhancing Additions:
The assessee claimed that the CIT(A) considered irrelevant factors in enhancing additions. The Tribunal found that the CIT(A) based the enhancement on impounded materials and sales details, which were relevant.

5. Legal and Factual Correctness of Assessment Order:
The assessee argued that the assessment order and observations by the AO and CIT(A) were legally and factually incorrect. The Tribunal noted that the CIT(A) enhanced the assessment based on detailed examination of impounded materials, which was justified.

6. Timeliness of Appeal Filing:
The assessee contended that the CIT(A) erred in holding the appeal as filed in time despite being late. The Tribunal did not find this issue relevant to the core matter of suppressed sales and cash difference.

7. Withdrawal of Appeal:
The assessee argued that the CIT(A) erred in not allowing the appeal to be withdrawn without reason. The Tribunal did not address this issue directly in its judgment.

8. Jurisdiction of Order Passed u/s 264:
The assessee claimed that the CIT(A) erred in holding the order passed u/s 264 as non-jurisdictional. The Tribunal did not find this issue relevant to the core matter of suppressed sales and cash difference.

9. Confirmation of Addition Due to Cash Difference:
The assessee contested the addition of Rs. 1,04,20,567 due to the difference between closing and opening cash balances. The Tribunal found that the difference was noted from the computer records, and the onus was on the assessee to explain the discrepancy. The Tribunal agreed with the addition but allowed for credit of profit generated from suppressed sales.

10. Addition of Suppressed Sales:
The assessee argued against the addition of suppressed sales. The Tribunal agreed that only the profit portion should be added, not the entire sales amount. The gross profit rates of 14.10% for AY 2007-08 and 12.02% for AY 2008-09 were applied to compute the income from suppressed sales.

11. Credit for Purchases and Expenses:
The assessee contended that the CIT(A) did not allow for purchases and other expenses. The Tribunal agreed that the entire addition of suppressed sales was unreasonable and only the profit portion should be added.

12. Submission and Evidence Consideration:
The assessee argued that the CIT(A) ignored submissions and evidence. The Tribunal found that the CIT(A) based his findings on detailed examination of impounded materials and sales details.

13. Corresponding Purchases of Suppressed Sales:
The assessee claimed that the CIT(A) erred in holding that corresponding purchases of suppressed sales were already booked. The Tribunal did not address this issue directly but focused on the profit portion of suppressed sales.

14. Practicality and Acceptability of Entire Sales as Income:
The assessee argued that assessing entire sales as income was impractical and against accounting principles. The Tribunal agreed and applied gross profit rates to compute the income from suppressed sales.

15. Legal and Factual Correctness of Observations:
The assessee contended that the observations of the AO and CIT(A) were legally and factually incorrect. The Tribunal found that the CIT(A) based his findings on detailed examination of impounded materials and sales details.

16. Legality of Additions and Enhancement in First Appeal:
The assessee argued that the additions and enhancement in the first appeal were bad in law and on facts. The Tribunal found that the CIT(A) based his findings on detailed examination of impounded materials and sales details, which was justified.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, directing the AO to re-compute the total income by applying the gross profit rates of 14.10% for AY 2007-08 and 12.02% for AY 2008-09 to the suppressed sales and adjusting the difference in cash balances accordingly. The Tribunal emphasized that only the profit portion of suppressed sales should be added to the income, not the entire sales amount.