2025 (4) TMI 897 - AT - Income Tax

Rejecting the books of accounts holding it to be unreliable - estimated the profits from this business at 2.21% as opposed to 0.47% returned by the assessee - HELD THAT - Identical facts and circumstances were also involved in the case of assessee s sister concern M/s Beach Minerals Company 2023 (11) TMI 732 - ITAT CHENNAI which was also in the same line of business and was also searched along with the assessee. Like the assessee two parallel books of accounts were unearthed from the electronic data viz. tally software titled ori and IT . Upon comparison the AO noted that the accounts titled IT were the accounts maintained for income-tax purposes wherein the expenses debited were higher than the expenses found debited in the books maintained in ori and therefore made disallowance on account of inflated expenses. On appeal the coordinate bench of this Tribunal upheld the Ld. CIT(A) s action of rejecting the books of accounts holding it to be unreliable but estimated the profits from this business at 2.21% as opposed to 0.47% returned by the assessee. CIT(A) had rightly followed the ratio decidendi laid down in the above decision (supra) for rejecting the books of accounts and estimating the profits of the assessee at 2.21% as the facts involved were similar. Accordingly we do not see any reason to take a different view in the present case before us. Likewise the argument of the Ld. CIT DR urging that the net profit rate ought to be adopted at 53% instead of 2.21% as estimated by this Tribunal in assessee s sister concern (supra) cannot be countenanced. Also we note that the entity viz. Industrial Mineral Company urged by the Revenue to be comparable to the assessee was demonstrated before us to be in different line of business and hence this entity identified by the Revenue is held to be not comparable. Whether income estimated upon rejection of books of accounts ought to be added over and above the addition/disallowance already made in the original assessments which were completed u/s 143(3) of the Act in AYs 2014-15 2015-16? - From the facts placed before us it is noted that the AO s predecessor had made ad-hoc disallowance of Rs.90 lacs Rs.40 lacs out of expenses for want of verification in AYs 2014-15 and 2015-16 respectively. In the preceding paragraphs we have already upheld the CIT(A) s action of rejecting the books of accounts for being unreliable and upheld the estimation of the total income with reference to the turnover of the assessee. Having done so we find that the Ld. CIT(A) had rightly held that the total income so estimated ought to subsume the disallowances made in the original assessment and if the disallowance made in original assessment is added to the total income so estimated then it would effectively amount to double addition. In our considered view also the net addition to be made to the income originally assessed is to be quantified in such a manner to ensure that the total income so computed upon making such addition shall result in the same figure as estimated upon rejection of the books viz. 2.21% of the turnover in the facts of the present case. For these reasons this plea of the Revenue is also rejected. No infirmity in the order of the Ld. CIT(A) in rejecting the books of accounts and estimating the total income of the assessee. We accordingly uphold the same. Addition on account of unaccounted sales and unexplained expenditure - No reason to interfere with the Ld. CIT(A) s finding directing the AO to assess the profit element of 2.21% embedded in these unaccounted sales. Addition made on account of unexplained expenditure we find ourselves in agreement with the Ld. AR that the unaccounted sale proceeds could be telescoped towards the source of such unaccounted expenditure and therefore no separate addition on this account was permissible. In the facts of the present case we have already upheld the estimation of profits from the unaccounted business above i.e. net of sales and purchases/expenses and thus the unexplained expenditure in question stands subsumed in the estimation exercise. In our considered view therefore no separate addition on this count was warranted. For these reasons we uphold the Ld. CIT(A) s action of deleting the impugned addition.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

The validity of the assumption of jurisdiction under Section 153A of the Income-tax Act, 1961, in the absence of incriminating material found during the search.
The appropriateness of the rejection of the books of accounts maintained by the assessee and the estimation of profits.
The determination of whether the entire unaccounted sales should be added to the income or only the profit element therein.
The treatment of unexplained expenditure and whether it should be separately added to the income.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Jurisdiction under Section 153A:

Legal Framework and Precedents: Section 153A of the Income-tax Act allows for the reopening of assessments if incriminating material is found during a search.
Court's Interpretation and Reasoning: The Tribunal noted that the existence of two sets of books of accounts and discrepancies therein, along with the accounts manager's statement, constituted incriminating material.
Conclusion: The Tribunal rejected the assessee's plea that the assumption of jurisdiction under Section 153A was invalid.

Rejection of Books of Accounts and Estimation of Profits:

Legal Framework and Precedents: Section 145 of the Income-tax Act permits the rejection of books if they are not reliable, and Section 144 allows for estimation of income.
Court's Interpretation and Reasoning: The Tribunal upheld the CIT(A)'s rejection of the books due to discrepancies and estimated profits at 2.21% of turnover, following precedent from a sister concern's case.
Key Evidence and Findings: The existence of two parallel sets of accounts and discrepancies in expense entries.
Application of Law to Facts: The Tribunal found the estimation of profits at 2.21% reasonable and consistent with similar cases.
Conclusion: The Tribunal upheld the rejection of books and the estimated profit rate.

Unaccounted Sales:

Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that only the profit element of unaccounted sales should be taxed, not the entire sales value.
Key Evidence and Findings: The sales were not recorded in the books of the assessee or the alleged group entity.
Application of Law to Facts: The Tribunal relied on precedents that only the profit element of unaccounted sales should be taxed.
Conclusion: The Tribunal upheld the CIT(A)'s decision to tax only the profit element of unaccounted sales.

Unexplained Expenditure:

Court's Interpretation and Reasoning: The Tribunal agreed that unaccounted sales could be the source of unexplained expenditure, thus no separate addition was warranted.
Key Evidence and Findings: The expenditure was not found in the books, suggesting it was made outside the books.
Application of Law to Facts: The Tribunal found that the unaccounted sales could be telescoped to cover the unexplained expenditure.
Conclusion: The Tribunal upheld the deletion of the addition for unexplained expenditure.

3. SIGNIFICANT HOLDINGS

Core Principles Established: The judgment reinforces that only the profit element of unaccounted sales should be taxed, and that unexplained expenditure can be covered by unaccounted sales, preventing double addition.
Final Determinations on Each Issue: The Tribunal upheld the rejection of books and the estimation of profits at 2.21%, confirmed the taxation of only the profit element of unaccounted sales, and agreed with the deletion of the addition for unexplained expenditure.
Verbatim Quotes of Crucial Legal Reasoning: "It cannot be a matter of an argument that the amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales... It is the realisation of excess over the cost incurred that only forms part of the profit included in the consideration of sales."

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