2020 (7) TMI 366 - AT - Income Tax

Undisclosed income on undisclosed investment in sales and profit on undisclosed sales - basis of reason to believe that there was undisclosed sales detected during the course of search operation by the office of Directorate General of Central Excise intelligence - addition u/s 69C - HELD THAT - Assessee as per his own admission had made the undisclosed sales from undisclosed purchases. In business there is rotation of purchase and sales. The initial investment in the purchase gets rotated throughout the year in the form of purchase and sales resulting in the total turnover. The initial investment in the undisclosed sales would constitute undisclosed investment in undisclosed sales. The A/R of the assessee during appellate proceedings could not provide any details of this undisclosed investment. Therefore ld CIT(A) in the absence of any material on record the entire undisclosed investment in undisclosed sales had been estimated. CIT(A) noticed that assessee s undisclosed sales as detected during search and seizure operations carried out by the Officers of the Directorate General of Central Excise Intelligence amounts to Rs. 2, 76, 07, 339/- during the assessment year 2010-11. The average sales per month amounts to Rs. 23, 00, 611/-. The average GP on sales as disclosed in the returns is 3.90% which amounts to Rs. 89, 724/-. The average purchase per month amounts to Rs. 22, 10, 887/-. The undisclosed investment was therefore estimated at Rs. 22, 10, 887/- (Rs. 23, 00, 611/- -89, 724/-) on undisclosed sales of Rs. 2, 76, 07, 339/-. CIT(A) also computed the profit on undisclosed sales of Rs. 2, 76, 07, 339/- at the rate of 3.90% at Rs. 10, 76, 686/- 3.90% of Rs. 2, 76, 07, 339 . Therefore addition was restricted to Rs. 32, 87, 573/- (Rs. 22, 10, 887/- plus Rs. 10, 76, 686/-) instead of Rs. 2, 76, 07, 339/- as undisclosed income on undisclosed investment in sales and profit on undisclosed sales. The conclusions arrived at by the CIT(A) are therefore correct and admit no interference by us. We approve and confirm the order of the CIT(A). Appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Validity of reopening of assessment under Section 147 of the Income Tax Act, 1961.
2. Addition of Rs. 2,65,30,653/- as unexplained expenditure under Section 69C of the Income Tax Act, 1961.
3. Computation of undisclosed income from undisclosed sales.

Detailed Analysis:

1. Validity of Reopening of Assessment:
The assessee’s case was reopened under Section 147 based on the belief that there were undisclosed sales detected during a search operation by the Directorate General of Central Excise Intelligence. The Assessing Officer (AO) issued a notice under Section 148, and the assessee requested the reasons for reopening. The AO provided these reasons and the evidence from the Excise Department. The assessee filed objections against the reopening, but the AO did not dispose of these objections through an order. However, the assessee participated in the assessment proceedings, and the appellate authority held that a minor procedural lapse by the AO did not vitiate the entire assessment proceedings, citing the Bombay High Court’s decision in M/s Amaya Infrastructure Pvt Ltd vs I.T.O.

2. Addition of Rs. 2,65,30,653/- as Unexplained Expenditure under Section 69C:
The AO added Rs. 2,65,30,653/- as unexplained expenditure, which was the difference between undisclosed sales and gross profit. The assessee admitted that the sales and purchases were not recorded in the books and argued that every sale has a corresponding purchase. The AO, however, required proof of the source of purchases, which the assessee failed to provide. The AO treated the entire amount of undisclosed sales minus the gross profit as unexplained expenditure under Section 69C. The CIT(A) reduced this addition to Rs. 22,10,887/- after estimating the average purchase per month based on the average gross profit rate of 3.90%.

3. Computation of Undisclosed Income from Undisclosed Sales:
The AO added Rs. 10,76,686/- as gross profit from undisclosed sales, which the CIT(A) confirmed. The CIT(A) also noted that the assessee admitted making undisclosed sales from undisclosed purchases. The CIT(A) computed the undisclosed investment in sales at Rs. 22,10,887/- and added the gross profit of Rs. 10,76,686/-, totaling Rs. 32,87,573/-. The CIT(A) cited several judicial precedents, including the Gujarat High Court’s decision in CIT vs President Industries Ltd and the Delhi High Court’s decision in CIT vs Ajay Kapoor, to support the view that only the profit element on unaccounted sales should be taxed if the purchases are unrecorded.

Conclusion:
The appellate authority upheld the reopening of the assessment under Section 147, despite procedural lapses by the AO. The addition of Rs. 2,65,30,653/- as unexplained expenditure was reduced to Rs. 22,10,887/- based on an estimated average purchase. The gross profit addition of Rs. 10,76,686/- was confirmed, leading to a total addition of Rs. 32,87,573/- as undisclosed income from undisclosed sales. The appeal by the revenue was dismissed, and the order of the CIT(A) was confirmed.