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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Per Shri A.T.Varkey, JM
The appeal preferred by the revenue is against the order of the Ld. CIT(A)-1, Kolkata dated 11.02.2016 for AY 2011-12.
The sole ground of appeal of revenue is against the action of Ld. CIT(A) in directing the AO to compute the profit @ 5% on the total undisclosed sale of Rs.3,04,68,612/-.
Briefly stated facts are that the assessee company is engaged in the manufacturing of M. S. Billets. It filed the return of income for the AY 2011-12 on 29.09.2011 declaring loss of Rs.11,86,478/-. Then the assessee's case was re-opened and notice u/s.148 was issued. In response to the said notice, the assessee filed its return of income. In the instant case, a search was conducted on 30.12.2010 in the factory of the assessee - company by the Central Excise Department. During the course of search, they allegedly found some shortage of stock and one private note book which contained particulars relating to removal of M. T. of M.S. billets, during the period from 01.04.2010 to 28.09.2010, whereas corresponding entries of which were not allegedly found in the books of accounts of the assessee company.
2 Chhabra Ispat Pvt. Ltd., AY 2011-12 Then, the Customs & Excise Department computed the Central Excise Duty to be paid at Rs.31,38,267/- on such transactions recorded in the note book and not disclosed in the books of account of assessee. Then the Settlement Commission vide its order dated 28.01.2013 sustained the action of the Customs & Excise Department. With the aforesaid factual information, the AO perused the original return and return in response to 148, and he noted that the assessee did not change the sale proceed, so the AO taking note of the order of Settlement Commission of Customs & Central Excise came to conclusion that assessee indulged in undisclosed sales, so the AO calculated the total value of undisclosed sale as below: Rs.31,38,267 x 100 = Rs.3,04,68,612/- ( Excise duty 10.3%) 10.3 Therefore, Rs. 3,04,68,612/- was treated as undisclosed sales and added back to the income of the assessee.
Aggrieved, assessee preferred an appeal before the Ld. CIT(A) who gave partial relief to the assessee as under: “5.2. I have carefully considered the material before me. It is found that there is substance in the submission of the A/R, of the Appellant that the above addition can be made on the basis of N.P. margin that the assessee has earned during the year under consideration, which has not been considered by the A.O. For this proposition, the A/R, of the Appellant relied upon various decision 1. CIT vs. Presidents Industries 258 ITR 654(Guj) 2. CIT vs. Balchand Ajit Kumar 263 ITR 610 (M.P). The A/R, of the Appellant has also relied on the decision of the Hon'ble ITAT Calcutta Bench in the case of M/s Foreign Liquor Shop vs. ITO (ITA No. 178/K/06) wherein it has been submitted that:- "we are of the view that the total sales cannot be regarded as profit of the assessee only the profit on such sales is liable to be taxed. This view also finds support from the recent decision of Hon'ble M.P. High Court in CIT vs Balchand Ajit Kumar 263 ITR 610 (M.P). wherein their lordships while in agreement with the decision of Hon'ble Gujarat High Court in CIT vs. Presidents Industries 258 ITR 654(Guj) has held as under: "Held, that the total sale could not be regarded as the profit of the assessee. The net profit rate had to be adopted and once it was adopted it could not be said that there was perversity of approach. Whether the rate was tow or high would depends upon the facts of each case.” In this view of the matter and in the absence of any contrary material brought on record by the revenue, we are of the view that keeping in view the consistency it will be fair and reasonable if profit rate at 10.83% is applied on the undisclosed sales of Rs.5,03,865/- and accordingly, we set aside the order or the Ld. CIT(A) on this account and direct the AO to apply 10.83% profit on such undisclosed sales of Rs. 5,03,865/- and add the same profit in the income of the assessee. The ground taken by the assessee is, therefore, partly allowed.”
Considering the above observation and the ratio of the above cited case laws, it is held that the total sales of Rs.3,04,68,612/- cannot be regarded as the appellant's profit and brought to tax as profit from undisclosed sales. The A.O's finding in this regard is found to be unwarranted and not justified. However, considering the facts of the cases in cited case laws pertained to trading, wherein NP rate was applied to work out profit on unrecorded sales, the appellant's case is one of manufacture and sales, application of GP rate would be more reliable basis to work out profits from unrecorded removal and sale of goods. It is considered fair and reasonable to adopt the G.P declared by the appellant company as per its audited accounts for the relevant assessment year to compute profits from undisclosed sales. It is observed that the GP rate of the recorded transactions of the relevant year was a fair indicator of the gross profit, which would have been earned by the appellant from unrecorded transactions. The appellant is found to have disclosed G.P rate of 4.99% as per its audited a/cs for the relevant previous year ending 31.3.2011. In view of the totality of the facts of the case, it is reasonable to apply G.P rate of 5% to compute profits from undisclosed sales. Therefore, the A.O. is directed to compute the profit @ 5% on the total of undisclosed sales of Rs.3,04,68,612/- which amounts to Rs.15,23,431/-. From the above discussion, it is found that admittedly the appellant had made unrecorded sales amounting to Rs. 3,04,68,612, as per seized documents. The transactions of such magnitude would require investment by the appellant. The onus is on the appellant to show that the unaccounted investment was made out of accounted stock. Although unaccounted sales may result and can contribute towards the investment, but there has to be initial investment by the appellant. Although the appellant has relied upon the ratio of judgement in the case of CIT vs. Presidents Industries(Supra) and CIT vs. Balchand Ajit Kumar (supra), the ratio thereof pertains to application of NP rate to compute profits and does not deal with the issue of investment in undisclosed sales. The onus was on the assessee to explain that purchases recorded in the books were sufficient after adjustment sales, and explain the sources/funds for making the impugned undisclosed sales. The appellant has not submitted any details of investment in undisclosed sales. It is observed that unaccounted sales may result and contribute towards investment, but there has to be initial investment therein, which is considered as follows.
For considering investment in unrecorded sales, peak credit is one of the reliable methods of computing the amount which should be brought to tax. However, since the unrecorded sales of billets made by the appellant coy resulted from manufacturing process, the investment in a cycle of three days is considered reasonable to work out quantum of investment for rotation of funds in unrecorded production and sales. Here, it is pertinent to mention that the Appellant has made the undisclosed sales of Rs. 3,04,68,612/- for the period starting from 01.04.2010 upto 28.09.2010. As per details worked out by the AO on the basis of Order of Settlement of Custom & Excise Deptt, the quantum of required initial investment for the purchase of the goods for unrecorded sales is considered as under:
It is found from the details mentioned in "private note book" found during search by Excise Deptt. that the initial sales are as under:
Date Party name Amount 01.04.2010 Ramash Rs.341090/- 02.04.2010 Gopal Rs.363630/- 02.04.2010 Amit Rs.351900/- 03.04.2010 Pankaj Rs.352590/- Rs.307740/- 03.04.2010 Pankaj
The total sales value of initial 3 days which comes Rs.17, 16,950/- including the GP element @ 5%. The cost of investment in undisclosed sales through rotation of funds from sales proceeds, after excluding GP thereon, works out to Rs.16,50,000/-. The appellant made undisclosed investment for conducting these sales out of his undisclosed income. After that, the appellant is considered to have rotated this unaccounted investment and made the total unaccounted sales during the above 6 months period. Therefore, I direct the AO to bring to tax the said unexplained investment of Rs.16,50,000/- for unaccounted sales. Thus, the addition sustained works out to Rs.31,73,431/- (Rs.15,23,431 plus Rs.16,50,000/-), the appellant gets relief of Rs.2,72,95,179/-. Thus these grounds are partly allowed.”
We have heard both the parties and perused the material available on record. We note that the AO taking note of the decision of Settlement Commission of Custom & Central Excise levying Rs.31,38,267/- for undisclosed manufacture and surreptitious removal of M. S. Billets, has made the addition of entire sale proceed of Rs.3,04,68,612/-. It is common knowledge that total sales cannot be regarded as profit of the assessee. Only the profit on such sales is liable to be taxed and the Ld. CIT(A) taking note of the assessee’s audited accounts of disclosed sales found that assessee had disclosed GP rate of 4.99% and thereafter applied GP rate of 5% on undisclosed sales. We find no infirmity in this approach of Ld. CIT(A) while adjudication of this kind of appeal. Further we also note that the Ld. CIT(A) has made addition on the undisclosed investment element also at Rs.16,50,000/- which is the undisclosed investment needed to do the initial undisclosed manufacture which has been explained by the ld CIT(A). So, this approach adopted by the Ld. CIT(A) cannot be termed as erroneous and, therefore, we do not find any infirmity in the order of Ld. CIT(A) and the same is hereby upheld. Therefore, the appeal of revenue is dismissed.
In the result, the appeal of revenue is dismissed.
Order is pronounced in the open court on 13/07/2018