2019 (6) TMI 160 - AT - Income Tax

Assessment of suppressed sales - Gross profit or net profit - HELD THAT - As relying on MAN MOHAN SADANI 2007 (10) TMI 246 - MADHYA PRADESH HIGH COURT , BALCHAND AJIT KUMAR. 2003 (4) TMI 76 - MADHYA PRADESH HIGH COURT and SHRI HARIRAM BHAMBHANI 2015 (2) TMI 907 - BOMBAY HIGH COURT we direct the AO to assess the income from undisclosed sales in question by applying the net profit rate in place of the gross profit rate as undisclosed sales. The net profit rate shall be that which the assessee had disclosed in its regular books of account for the said Assessment Year on recorded sales. In the result, this ground of the assessee is allowed in part. Disallowance u/s 40A(3) and Section 40(a)(ia) - whether addition can be made when profits have been estimated as a percentage of turnover, in the case of the assessee? - HELD THAT - As decided in M/S PRADEEP SINGH WAZIR VERSUS COMMISSIONER OF INCOME TAX AND ANR. 2017 (3) TMI 1268 - SUPREME COURT as income of the assessee on the total contract receipts had been reached at by applying the net rate of profit after reduction and, thus, no further addition could be made under Section 40(a)(ia) of the Act. Taxation of excess stock found by the revenue during the course of survey - survey done u/s 131 wherein the survey team found difference between the physical stock and the book stock - HELD THAT - We find this issue to be no more res integra as co-ordinate bench of this tribunal in M/s Subarna Rice Mill vs. ITO 2015 (7) TMI 522 - ITAT KOLKATA holding only the profit element liability to be added in such circumstances; stand upheld by hon'ble jurisdictional high court's recent judgment 2018 (8) TMI 1475 - CALCUTTA HIGH COURT . We therefore conclude that the impugned former addition of the entire discrepancy in stock deserves to be deleted. Thus we direct the Assessing Officer to tax only the gross profit embedded in the excess stock found for the Assessment Year

Summary

Issues involved:
1. Assessment of income from suppressed sales.
2. Disallowance under sections 40A(3) and 40(a)(ia) of the Income Tax Act.
3. Taxation of excess stock found during a survey.

Detailed Analysis:
1. Assessment of income from suppressed sales:
The primary issue before the Appellate Tribunal was whether the Assessing Officer correctly adopted the gross profit of suppressed sales as the income of the assessee, instead of the net profit. The Tribunal considered relevant case law, including judgments from the Bombay High Court and the Madhya Pradesh High Court, which emphasized taxing the net profit of unaccounted sales. Relying on these precedents, the Tribunal directed the Assessing Officer to assess the income from undisclosed sales by applying the net profit rate disclosed in the regular books of account. Consequently, the Tribunal allowed this ground of the assessee in part.

2. Disallowance under sections 40A(3) and 40(a)(ia) of the Income Tax Act:
The second and third issues pertained to whether disallowances under sections 40A(3) and 40(a)(ia) could be made when profits were estimated as a percentage of turnover. The Tribunal referred to a judgment of the Supreme Court which highlighted that no further addition could be made under section 40(a)(ia) when income had been estimated based on the net rate of profit. As no contrary decisions were presented, the Tribunal deleted the disallowances made under the aforementioned sections, as the income in question had been estimated by the Assessing Officer.

3. Taxation of excess stock found during a survey:
The final issue revolved around the taxation of excess stock discovered during a survey, where the physical stock exceeded the recorded stock. The Tribunal considered a judgment from the Jurisdictional High Court and a decision by the ITAT Kolkata Bench, which emphasized taxing only the gross profit embedded in the excess stock. Following this principle, the Tribunal directed the Assessing Officer to tax only the gross profit related to the excess stock found during the survey, thereby deleting the balance addition. Consequently, the Tribunal allowed this ground of the assessee in part.

In conclusion, the Appellate Tribunal, after thorough consideration of the facts, case law, and contentions presented, partially allowed all the appeals filed by the assessee, addressing the various issues related to the assessment of income, disallowances under specific sections, and taxation of excess stock discovered during a survey.