THE DCIT, CENTRAL CIRCLE-1(1), AHMEDABAD vs. NBM IRON AND STEEL TRADING PVT. LTD., BHAVNAGAR

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ITSSA 41/AHD/2023Status: DisposedITAT Ahmedabad22 January 2025AY 2020-216 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that it is a well-settled law that the entire unrecorded sales cannot be added as income, and only a reasonable profit margin embedded therein can be taxed. The Ld. CIT(A) correctly observed that only the profit margin should be taxed. The Tribunal noted that the assessee's net profit ratio for AY 2020-21 was 1.65% and for AY 2019-20 was 4.48%. Considering that profit margins are usually higher for unrecorded sales, the Ld. CIT(A) adopted a 10% profit margin. However, during the appeal proceedings, the assessee agreed to offer a higher net profit margin of 12% of the unrecorded sales, which the Departmental Representative also agreed was a fair concession. Therefore, the Tribunal directed that the net profit margin should be computed at 12%. For Ground Number 2, the facts and issues were found to be similar to Ground Number 1, and the same principle applied. The appeal of the Department was partly allowed.

What were the facts?

The assessee, M/s. NBM Iron and Steel Trading Pvt. Ltd., is engaged in ship breaking and recycling. For Assessment Year 2020-21, the assessee filed returns declaring income of Rs. 2,79,58,000/-, later revised to Rs. 3,13,44,190/-. A search action under Section 132 of the Income Tax Act, 1961, was conducted on November 19, 2019, covering the assessee's premises. Incriminating documents indicating unrecorded sales were found. The Assessing Officer (AO) added Rs. 1,65,47,120/- for unrecorded sales and Rs. 2,71,47,734/- based on seized documents reflecting unaccounted receipts. The Commissioner of Income Tax (Appeals) [CIT(A)] restricted the addition for unrecorded sales to Rs. 16,54,712/- (10% of unrecorded sales) and deleted the remaining Rs. 1,48,92,408/-. For the seized documents, the CIT(A) restricted the addition to Rs. 27,14,774/- (10% of unaccounted sales) and deleted the remaining Rs. 2,44,32,960/-. The Department has appealed against the CIT(A)'s order.

What were the issues?

1. Whether, in law and on facts, the Ld. CIT(A) erred in restricting the addition to Rs. 16,54,712/- (10% of unaccounted sales) and deleting the remaining Rs. 1,48,92,408/-, when the addition was made on the basis of report extracted during survey proceedings, and the assessee neither provided details of concurrent expenses nor accounted for them. (Relates to Section 132). 2. Whether, in law and on facts, the Ld. CIT(A) erred in restricting the addition to Rs. 27,14,774/- (10% of unaccounted sales) and deleting the remaining Rs. 2,44,32,960/-, despite the seized documents being confirmed as legitimate by the assessee's Director and an employee. (Relates to Section 132). Assessee's Contentions: - Taxes should be levied only on the profit margin and not the entire unrecorded sales amount, citing judicial decisions like CIT v. President Industries and Leo formulations. - The assessee is willing to offer a higher net profit margin of 12% of unrecorded sales to settle litigation. Revenue's Contentions: - The Ld. CIT(A) erred in restricting the addition without appreciating that the assessee neither gave details of concurrent expenses nor accounted for them. - The addition was made on the basis of a report extracted during survey proceedings. - The Ld. CIT(A) erred in deleting additions despite the assessee failing to explain the source of cash advances.

Which sections of the Income-tax Act were involved?

Section 132

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD

Before: DR. BRR KUMAR & SHRI SIDDHARTHA NAUTIYAL

For Appellant: Shri B.P. Srivastava, Sr. DR
For Respondent: Shri Sarju Mehta, A.R
Pronounced: 22.01.2025

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD BEFORE DR. BRR KUMAR, VICE PRESIDENT & SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER I.T(SS).A. No.41/Ahd/2023 (Assessment Year: 2020-21) Deputy Commissioner of Income Vs. M/s. NBM Iron and Steel Tax, Trading Pvt. Ltd., Central Circle-1(1), 205-208, Madhav Hill, Ahmedabad Waghwadi Road, Bhavnagar, Gujarat-364002 [PAN No.AAACH7420C] (Appellant) .. (Respondent) Appellant by : Shri B.P. Srivastava, Sr. DR Respondent by: Shri Sarju Mehta, A.R. 19.12.2024 Date of Hearing Date of Pronouncement 22.01.2025 O R D E R PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER: This appeal has been filed by the Department against the order passed by the Ld. Commissioner of Income Tax (Appeals)-11, (in short “Ld. CIT(A)”), Ahmedabad vide order dated 07.02.2023 passed for A.Y. 2020-21.

The Department has taken the following grounds of appeal:- 2.

“1. In the facts and on the circumstances of the case, the Ld. CIT(A) has erred in restricting the addition to Rs.16,54,712/- being 10% of unaccounted sales and deleting the remaining addition of Rs. 1,48,92,408/- without appreciating the fact that the assessee has neither given any details of concurrent expenses nor accounted the same in the books of accounts. 2. In the facts and on the circumstances of the case, the Ld. CIT(A) has erred in restricting the addition to Rs.27,14,774/- being 10% of unaccounted sales and deleting the remaining addition of Rs.2,44,32,960/- without appreciating the fact that the assessee has neither given any details of concurrent expenses nor accounted the same in the books of accounts.

IT(SS)A No. 41/Ahd/2023 DCIT vs. M/s. NBM Iron and Steel Trading Pvt. Ltd. Asst.Year –2020-21 - 2– 3. In the facts and on the circumstances of the case, the Ld. CIT(A) has erred in observing that there cannot be any addition of whole unrecorded sales in the absence of any corroborative material or finding, despite the fact that the addition was made on the basis of report extracted during the course of survey proceedings having details of goods from 31.10.2019 to 18.11.2019. 4. Iin the facts and on the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 11,85,000/- given in cash as advance to various persons/entities even though the assessee failed to explain the source of such cash advance either during assessment proceedings or during appellate proceedings. 5. In the facts and on the circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the A.O. 6. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent.” Ground Number 1: Ld. CIT(A) erred in restricting the addition of Rs. 1,65,47,120/- to Rs. 1,48,92,408/- for unrecorded sales

3.

The brief facts of the case are that the assessee is a Private Limited Company involved in ship breaking and recycling, and selling recycled goods. The assessee filed its initial income tax return for the Financial Year 2020-21, declaring an income of Rs. 2,79,58,000/-, and later filed revised return of income, revising the income to Rs. 3,13,44,190/-. A search action under Section 132 of the Act was carried out on the Priya Blue Group on November 19, 2019, in which the assessee’s premises were also covered. During the search, incriminating documents were found, which pointed out that the assessee had made unrecorded sales. Consequently, the assessing officer added a sum of Rs. 1,65,47,120/- to the assessee's income for the unaccounted sales. In appeal before Ld. CIT(A), the assessee submitted that the AO had not considered certain key facts, such as the internal weighbridge records and the higher yield percentage of 96.29% as compared to previous years. The assessee also submitted that the AO should have added only the

IT(SS)A No. 41/Ahd/2023 DCIT vs. M/s. NBM Iron and Steel Trading Pvt. Ltd. Asst.Year –2020-21 - 3– profit margin on the unrecorded sales, and not the entire sale proceeds. The assessee cited judicial decisions supporting this claim to support the argument that taxes should be levied only on the profit margin and not the full undisclosed sales amount. The Ld. CIT(A), after reviewing the search materials was of the view that the assessee had been engaged in unrecorded sales. However, Ld. CIT(A) also accepted the assessee's claim that only the profit margin should be taxed and not the entire amount. Ld. CIT(A) held that the unrecorded sales contained 10% a profit margin and Ld. CIT(A) confirmed addition of Rs. 16,54,712/- instead of Rs. 1,65,47,120/-. The remaining amount of Rs. 1,48,92,408/- was deleted by Ld. CIT(A). Therefore, the appeal was partly allowed by Ld. CIT(A) with respect to this Ground of Appeal.

4.

The Department is in appeal before us against the aforesaid relief granted by Ld. CIT(A). Before us, Ld. Departmental Representative placed reliance on the observations made by the assessing officer in the assessment order. In response, the counsel for the assessee placed reliance on the observations made by Ld. CIT(A) in the appellate order and submitted that in the instant facts, only the real income can be brought to tax in the hands of the assessee.

5.

We have heard the rival contentions and perused the material on record. On going to the case records, it is an undisputed fact that the assessee had made unrecorded sales outside the books of accounts. This position has also not been disputed before us by the counsel for the assessee. At the same time, we are of the view that it is a well settled law that the entire unrecorded sales cannot be added as income in the hands of the assessee and only a

IT(SS)A No. 41/Ahd/2023 DCIT vs. M/s. NBM Iron and Steel Trading Pvt. Ltd. Asst.Year –2020-21 - 4– reasonable profit margin embedded therein can be taxed. Therefore, in our considered view Ld. CIT(A) has correctly held that entire unrecorded sales of ₹1,65,47,120/- could not be treated as income of the assessee, but only the profit margin embedded therein can be subject to tax in its hands. During the course of appellate proceedings, Ld. CIT(A) observed that assessee had declared net profit ratio @1.65% for this year and net profit ratio @ 4.48% for assessment year 2019-20 i.e. the preceding assessment year. Accordingly, Ld. CIT(A) after observing that profit margin usually remains higher for unrecorded sales as compared to recorded sales, adopted the profit margin of the assessee @ 10% in respect of unrecorded sales and restricted the addition to ₹1,48,92,408/-. In the case of CIT v. President Industries 124 Taxman 654 (Gujarat High Court), the High Court has held that in case of undisclosed sales only the net profit embedded in sales and not the entire amount of sale proceeds itself, could be treated as undisclosed income of the assessee. In the case of Leo formulations 48 Taxman.com 328 (Gujarat High Court), again the same principle was reiterated that only the net profit with respect to unaccounted sales can be subject to tax in the hands of the assessee. Before us, the counsel for the assessee submitted that the assessee would be willing to settle the pending litigation and offer a higher net profit margin @12% of the unrecorded sales. In response, Ld. Departmental Representative also agreed that the above profit margin would amount to a fair concession on part of the assessee, looking into the assessee’s particular set of facts.

6.

In the result, it is held that net profit margin should be computed @ 12% and accordingly, the appeal of the Department is partly allowed.

IT(SS)A No. 41/Ahd/2023 DCIT vs. M/s. NBM Iron and Steel Trading Pvt. Ltd. Asst.Year –2020-21 - 5– Ground Number 2: Ld. CIT(A) erred in restricting the addition to ₹27,14,774/- being 10% of unaccounted sales

7.

The brief facts of the case are that the assessee that the AO made addition of ₹2,71,47,734/- based on seized documents, which consisted of torn pieces of paper found during a search at the assessee's office. These documents appeared to reflect unaccounted receipts from sales not recorded in the assessee's books. In appeal before Ld. CIT(A), the assessee contended that the documents were "dumb" as they lacked corroborative evidence and should not be used for assessment. The assessee further submitted that in the event the receipts are held as arising from sales, then the addition should have been made on the net profit, and not the entire sales amount. Ld. CIT(A), however, rejected this argument, by observing that the seized documents were confirmed as legitimate by both the assessee's Director and also by an employee of the assessee. Therefore, the documents were not considered "dumb" documents and the addition was sustained. Regarding the assessee's alternate argument, Ld. CIT(A) accepted that taxes should be levied on the real income. Ld. CIT(A) observed that the assessee had made unrecorded sales but only the profit margin from these sales should be taxed, and not the entire amount. Considering the assessee’s profit margins, Ld. CIT(A) held that the profit embedded in the unrecorded sales should be taxed at a 10% margin, and thereby restricted the addition to Rs. 27,14,774/-, and the remaining Rs. 2,44,32,960 was directed deleted. As a result, the appeal was partly allowed by Ld. CIT(A).

8.

The Department is in appeal before us against the aforesaid partial relief granted by Ld. CIT(A) restricting the addition to Rs. 27,14,774/- by

IT(SS)A No. 41/Ahd/2023 DCIT vs. M/s. NBM Iron and Steel Trading Pvt. Ltd. Asst.Year –2020-21 - 6–

adopting a 10% net profit margin on unaccounted sales. We observe that the facts and issues for consideration are similar to Ground Number 1 above and accordingly, in light of our observations in the preceding paragraphs and the submission of the counsel for the assessee who has agreed that net profit margin may be revised to 12%, the appeal of the Department is partly allowed.

9.

In the result, Ground Number 2 of the Department’s appeal is partly allowed.

10.

In the result, the Department’s appeal is partly allowed. This Order is pronounced in the Open Court on 22/01/2025

Sd/- Sd/- (DR. BRR KUMAR) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 22/01/2025 TANMAY, Sr. PS TRUE COPY आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��थ� / The Respondent. 3. संबंिधत आयकर आयु� / Concerned CIT 4. आयकर आयु�(अपील) / The CIT(A)- िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपीलीय अिधकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 20.01.2025(Dictated over dragon software by Hon’ble Member) 2. Date on which the typed draft is placed before the Dictating Member 20.01.2025 3. Other Member………………… 4. Date on which the approved draft comes to the Sr.P.S./P.S 20.01.2025 5. Date on which the fair order is placed before the Dictating Member for pronouncement 22.01.2025 6. Date on which the fair order comes back to the Sr.P.S./P.S 22.01.2025 7. Date on which the file goes to the Bench Clerk 22.01.2025 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Dispatch of the Order……………………………………

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