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Income Tax Appellate Tribunal, KOLKATA ‘SMC’ BENCH, KOLKATA
Before: Shri P.M. Jagtap
This appeal is preferred by the Revenue against the order of ld. Commissioner of Income Tax (Appeals)-XXXIII, Kolkata dated 23.05.2014 and the solitary issue involved therein relates to the action of the ld. CIT(Appeals) in restricting the addition of Rs.34,93,270/- made by the Assessing Officer to the total income of the assessee on account of undisclosed purchases to Rs.5,20,726/-.
The assessee in the present case is an individual, who is engaged in the business of manufacturing and trading. The return of income for the year under consideration was filed by him on 31.10.2006 declaring total income of Rs.3,80,580/-. In the assessment originally completed under section 144, the total income of the assessee was determined by the Assessing Officer at the same figure of Rs.3,80,580/- as returned by the ./2014 Assessment year: 2006-2007 Page 2 of 5 assessee. Subsequently, it was noticed by the Assessing Officer from the details of creditors furnished by the assessee that the purchases made by the assessee during the year under consideration were Rs.1,21,93,270/- as against the purchases of Rs.86,99,734/- shown by the assessee in the Profit & Loss Account. According to him, there was thus escapement of income of the assessee from assessment to the extent of Rs.34,93,270/- and, therefore, the assessment of the assessee was reopened by him. In reply to a notice issued by the Assessing Officer under section 148, the assessee requested to consider the return of income originally filed by him on 31.10.2006 as the return filed in response to the notice under section 148. During the course of assessment proceedings, the assessee could not offer any satisfactory explanation as regards the understatement of purchases by Rs.34,93,270/- as noticed by the Assessing Officer. The Assessing Officer, therefore, made an addition of Rs.34,93,270/- to the total income of the assessee on account of undisclosed purchases in the assessment completed under section 147/144 vide an order dated 21.12.2011.
Against the order passed by the Assessing Officer under section 147/144, an appeal was preferred by the assessee before the ld. CIT(Appeals) and after considering the submissions made by the assessee as well as the material available on record, the ld. CIT(Appeals) restricted the addition of Rs.34,93,270/- made by the Assessing Officer on account of undisclosed purchases to Rs.5,20,726/- for the following reasons given in paragraph no. 5 of his impugned order:- “5. I have considered the appellant’s submission. The appellant has admitted that undisclosed purchases of Rs.34,93,270/- were made by him during the relevant previous year. However, he has objected to the addition of the entire purchases as undisclosed income. It is the appellant’s contention that the undisclosed purchases have been processed and sold during the year and have been financed from the funds generated out of the unaccounted sales. For this purpose, the appellant has also pointed out to the absurd gross profit margin and net profit margin which will result if the entire purchases ./2014 Assessment year: 2006-2007 Page 3 of 5
are added to the net profit/total income. I agree with the appellant that the entire purchases cannot be treated as the appellant's net profit or total income. The very reason for making purchases is to sell the same and earn profit out of the difference in selling and purchase price. There is no evidence on record that the appellant had made any initial investment to make the unaccounted Purchases. As a matter of fact, the discrepancy was discovered from the list of sundry creditors furnished by the appellant in which the impugned purchases have been shown as purchases on credit and as at the end of the year also, the purchases had not been paid for. It is an established proposition of law that only net profit earned on undisclosed sales can be added unless there is any material on record to suggest that the assessee had made any investment outside books of account to make alleged unaccounted sales. This proposition has been followed in various judicial pronouncements like CIT vs. Balchand Ajit Kumar (2003) 263 ITR 610 (MP)/135 Taxman 180 (MP), CIT vs. President Industries (2002) 258 ITR 654 (GUJ)/124 Taxman 654 (GUJ) and Manmohan Sadani vs. CIT (2008) 304 ITR 52 (MP). Under the circumstances only profit shown by the appellant on the sales of the undisclosed materials/ items purchased by the appellant can be brought to tax. The appellant has worked out estimated gross profit of Rs.5,11,415/., on the projected sales on the basis of the corresponding figures of purchases, sales etc. in the declared P&L A/ c. The appellant has estimated the profit in a circuitous manner. A simpler way would be to estimate the gross profit directly on the basis of the ratio of the gross profit to the purchases in the declared P&L A/c. In his P&L A/c., the appellant has declared sales of Rs.1,06,64,432/- purchases of Rs.86,99,734/-, gross profit of Rs.12,96,831/-: opening stock of Rs.1,35,500/-, closing stock of Rs.4,25,500/-, wages and labour expenses of Rs.10,96,666/- carriage inward expenses of Rs.11,667/- and income of Rs.1,50,467/- on account of receipts of labour charges. The gross profit of Rs.12,96,831/- works out to 14.91% of the purchases of Rs.86,99,734/-. Applying the same ratio to the unaccounted purchases of Rs.34,93,270/-, the profit on the undisclosed purchases works out to Rs.5,20,726/-. This profit is held to be the undisclosed profit of the appellant earned on the trading of the undisclosed Purchases of Rs.34,93,270/-. The Assessing Officer is directed to add only this profit of Rs.5,20,726/- instead of the entire purchases of Rs.34,93,270/-. As a result, addition of Rs.5,20,726/- is ./2014 Assessment year: 2006-2007 Page 4 of 5 confirmed and the balance addition of Rs.29,72,544/- is deleted”.
Aggrieved by the order of the ld. CIT(Appeals), the Revenue has preferred this appeal before the Tribunal.
I have heard the arguments of both the sides and also perused the relevant material available on record. It is not in dispute that the undisclosed purchases of Rs.34,93,270/- were made by the assessee in relation to his regular business and there was nothing brought on record by the Assessing Officer to show that any investment outside the books was made by the assessee for such undisclosed purchases. Since the undisclosed purchases were made by the assessee in relation to his regular business, the logical conclusion that followed is that there were undisclosed sales made by the assessee out of such purchases. In short, the relevant purchases as well as the corresponding sales made out of the said purchases were undisclosed by the assessee and there being nothing brought on record to show specifically that any investment was made by the assessee for the purpose of this undisclosed business, what could be added to the total income of the assessee is only the net profit earned from such undisclosed business and not the entire amount of undisclosed purchases as rightly held by the ld. CIT(Appeals). At the time of hearing before me, even the ld. D.R. has not been able to rebut or controvert this position. I, therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) restricting the addition of Rs.34,93,270/- made by the Assessing Officer on account of undisclosed purchases to Rs.5,20,726/- and upholding the same, I dismiss this appeal filed by the Revenue.