2018 (12) TMI 624 - AT - Income Tax

Addition made towards gross profit - undisclosed sales of the assessee - Held that - Admittedly, the taxes paid thereon were out of inflated stocks. It is not the case of the revenue that the assessee had maintained two sets of accounts i.e. one for bank loan purposes and one for the purpose of income tax. Hence it could be safely concluded that the stocks were shown at a higher figure in the earlier years which were the same as submitted to the bank on a periodical basis. The assessee on realizing the shortage of 3093 MT of stock value at ₹ 16,10,67,387/- , had no other option but to recast the opening stock value as on 01.04.2011 or alternatively could have claimed the same as loss of stock which would be allowable as a regular trading loss u/s 28. AR has made an alternative submissions before us stating that from the profit & loss account of the assessee, it could be seen that the assessee had credited a sum of ₹ 3,53,50,000/- in his trading account towards sundry balances written off. This sundry balance written off obviously cannot be part of trading results of the assessee and accordingly the same requires to be ignored while computing gross profit. According to the ld. AR, the said sum of ₹ 3,53,50,000/-, if ignored, would only result in a gross loss of ₹ 2,04,00,547/-. Hence there cannot be any adoption of gross profit percentage thereon on the alleged undisclosed sales of the assessee for the year. We find lot of force in this argument of the AR and hold that in any case there cannot be any addition towards gross profit during the year by adopting the average gross profit rate of 6.48%. Accordingly, grounds raised by the assessee are allowed.

Summary

Issues:
Only issue: Justification of upholding addition made towards gross profit in the sum of ?1,04,37,167.

Detailed Analysis:
The appeal arose from the order of the Commissioner of Income Tax(Appeals) against the order passed by the Income Tax Officer under section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2012-13. The main contention was whether the Commissioner was justified in upholding the addition towards gross profit. The assessee, an individual engaged in trading of Iron & Steel materials, had filed his return declaring total income. The discrepancy in the opening stock value led the Income Tax Officer to suspect sales made outside the books. The assessee explained that the stock was inflated to secure higher credit limits from the bank and that physical verification revealed a shortage. The Income Tax Officer, however, treated the difference as unaccounted sales and taxed the gross profit, which was upheld by the Commissioner. The Tribunal found no evidence to support the revenue's claim of sales outside the books. The assessee's behavior of showing excess closing stock in earlier years, paying more taxes, and maintaining consistent stock figures for bank purposes supported his explanation. The Tribunal allowed the appeal, emphasizing that the alleged undisclosed sales did not warrant an addition towards gross profit. The alternative submission regarding sundry balances written off further supported the decision to disallow the addition. Therefore, the appeal was allowed, and the addition towards gross profit was rejected.

In conclusion, the Tribunal found the revenue's allegations unsupported by evidence and accepted the assessee's explanation regarding the stock discrepancy. The Tribunal emphasized the need to present a true financial picture and rejected the addition towards gross profit. The alternative submission regarding sundry balances written off further supported the decision to disallow the addition. The Tribunal allowed the appeal, emphasizing that the alleged undisclosed sales did not warrant an addition towards gross profit.