2015 (5) TMI 1073 - AT - Income Tax

Addition of unrecorded sales detected during assessment proceedings - Held that - Entire turnover cannot be added to the income of assessee and profits embedded in the turnover can only be taxed. The assessee did not produce vouchers / bills to support the increase in expenditure in his revised P & L account. Therefore instead of 8% of turnover to be included as profits on undisclosed turnover we hold that an amount equivalent to 12% of turnover be included in the income of assessee. In view of the above the A.O. is directed to delete the addition on account of unrecorded turnover and instead make an addition equivalent to 12% of undisclosed turnover.

Summary

Issues:
Appeal against addition of unrecorded sales during assessment proceedings.

Analysis:
The appellant contested the addition of Rs. 47,93,474 made by the Assessing Officer (A.O.) on account of unrecorded sales detected during assessment proceedings. The appellant argued that the audited balance sheet was prepared from corrupted data, leading to discrepancies in the figures. The A.O. did not accept the revised Profit & Loss (P & L) account submitted by the appellant, resulting in the addition. The appellant's contention was reiterated before the Commissioner of Income Tax (Appeals) [CIT(A)], who also upheld the addition. The appellant highlighted that in previous years, net profits ranging from 6% to 8% were accepted, and the same ratio should be applied in the current year. The appellant also cited legal precedents where similar issues were decided in favor of the assessee.

During the proceedings, the A.O. recommended taxing the gross receipts of the assessee at 8%. However, the CIT(A) did not consider this recommendation and confirmed the addition. The appellant argued that the addition resulted in an unrealistic net profit percentage of 55% of gross receipts, which was not credible. The appellant emphasized that not allowing for expenses when adding the entire turnover was against the law. The Tribunal noted that the appellant's net profit for previous years was accepted during assessment proceedings. The Tribunal observed that if there was concealed turnover, there must have been corresponding concealed expenses, which the A.O. failed to consider. The Tribunal referred to Section 44AD, which provides for determining net profits based on a percentage of gross receipts for small traders.

Relying on a case law precedent, the Tribunal held that the entire turnover cannot be added to the income of the assessee, and only profits embedded in the turnover should be taxed. The Tribunal directed the A.O. to delete the addition on account of unrecorded turnover and instead make an addition equivalent to 12% of undisclosed turnover. The Tribunal distinguished the case laws cited by the Department, emphasizing that the primary onus was on the assessee to prove expenses were incurred exclusively for business purposes. Ultimately, the Tribunal allowed the appeal of the assessee based on the above analysis.

The judgment was pronounced on May 22, 2015, by the Income Tax Appellate Tribunal (ITAT) Delhi, comprising Shri G. C. Gupta, Hon'ble Vice President, and Shri T.S. Kapoor, Accountant Member.