2022 (3) TMI 460 - AT - Income Tax

Undisclosed income - gross profit margin on unaccounted sales - HELD THAT - Assessee has not maintained day to day material wise stock register. It is also an admitted fact that the closing stock at the year end is arrived at on estimated basis by applying gross profit rate on sales, i.e., under reverse methodology. It is a fact that such kind of defective stock would command lesser price. Hence it was submitted that the value of stock is arrived on average basis. We also notice that the alleged shortage of stock was arrived at by the search officials by adopting gross profit methodology only. The Ld A.R submitted that the assessee has also agreed to the proposal of the search officials to treat the alleged shortage of stock as unaccounted sales in order to avoid protracted litigation and to buy peace from the department. Thus, we notice that the whole exercise of arriving at the shortage of stock has been done on estimation and presumption. It is a fact that such kind of defective stock would command lesser price. Hence it was submitted that the value of stock is arrived on average basis. We also notice that the alleged shortage of stock was arrived at by the search officials by adopting gross profit methodology only. The Ld A.R submitted that the assessee has also agreed to the proposal of the search officials to treat the alleged shortage of stock as unaccounted sales in order to avoid protracted litigation and to buy peace from the department. Thus, we notice that the whole exercise of arriving at the shortage of stock has been done on estimation and presumption. We notice that the gross profit margin on the unaccounted sales has been arrived at on the basis of facts and figures available on the date of search. However, the AO has proceeded to arrive at the gross profit margin on the unaccounted sales by considering the financials relating to FY 2014-15 covering post search period. It is in the common knowledge of everyone that the quality of marble slabs and granite slabs are not static. Further their selling price and profit margin would differ on the basis of quality. It is quite possible that the assessee was able to generate more profit post search period depending upon the quality of blocks. Hence it may not be correct on the part of the AO to consider the post search period results for determining the gross profit margin of unaccounted sales despite the fact that the gross profit margin worked out by the assessee has been accepted by the search officials, i.e., another wing of the income tax department. Hence, what the AO has done is to substitute one estimation with another one, which is not warranted in the facts of the present case. Addition made by the AO should be telescoped against the income surrendered by the assessee - The additional income was surrendered considering the status of sundry creditors, meaning thereby, the unaccounted income generated has been ploughed back into the business in the form of sundry creditors. Hence we are of the view that the addition resulting from variation of gross profit margin, in the facts and circumstances of the case, requires to be telescoped against the above said surrender. Hence, the alternative ground of the assessee also requires to be upheld. - Decided in favour of assessee.

Issues Involved:
1. Addition of ?4.14 Crores made by the Assessing Officer (A.O.) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].
2. Methodology of arriving at the closing stock and gross profit margin.
3. Discrepancy between physical stock and book stock.
4. Determination of average selling price and gross profit margin.
5. Telescoping of additional income.

Issue-wise Detailed Analysis:

1. Addition of ?4.14 Crores:
The assessee challenged the addition of ?4.14 Crores made by the A.O. and confirmed by the CIT(A). The A.O. determined the gross profit margin on unaccounted sales as ?5.91 Crores, from which ?1.77 Crores was already admitted in the return of income, resulting in an additional undisclosed income of ?4.14 Crores.

2. Methodology of Arriving at the Closing Stock and Gross Profit Margin:
The assessee, a partnership firm engaged in the manufacture and trading of marble and granite slabs, did not maintain a day-to-day material-wise stock register. Instead, the closing stock was estimated by applying the gross profit rate. During the search, a shortage of 402108.08 sq.ft. was identified, which was treated as unaccounted sales. The gross profit margin was initially calculated at 22% based on past financial results.

3. Discrepancy Between Physical Stock and Book Stock:
The search officials found a discrepancy between the physical stock and book stock, leading to a shortage of 402108.08 sq.ft. This shortage was considered unaccounted sales. The assessee voluntarily offered an undisclosed income of ?18.10 Crores, including ?14.19 Crores for the assessment year 2015-16.

4. Determination of Average Selling Price and Gross Profit Margin:
The A.O. proposed to adopt an average selling price of ?467.15 per sq.ft. and a gross profit margin of 40.10%, contrary to the assessee's adoption of ?200 per sq.ft. and 22% gross profit margin. The assessee contended that the gross profit rate was based on the preceding three years, and the average rate of ?200 per sq.ft. was the cost price, not the selling price. The A.O. eventually adopted an average selling price of ?366.93 per sq.ft. and a gross profit margin of 40.10%.

5. Telescoping of Additional Income:
The assessee argued that the additional income of ?12.42 Crores should be telescoped against the upward revision of the gross profit margin. The Tribunal observed that the entire exercise of determining the stock shortage and gross profit margin was based on estimation and presumption. The Tribunal noted that the A.O. substituted one estimation with another, which was unwarranted. The Tribunal accepted the assessee's contention that the additional income should be telescoped with the gross profit addition, as the unaccounted receipts were ploughed back into the business.

Conclusion:
The Tribunal set aside the order passed by the CIT(A) and directed the A.O. to delete the addition of ?4,14,72,998/-. The appeal filed by the assessee was allowed. The Tribunal emphasized that the addition resulting from the variation of the gross profit margin should be telescoped against the additional income surrendered by the assessee.

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