“profit element”
The decision most relied on for profit element is CIT v. President Industries (258 ITR 654), cited in 471 judgments on BharatTax.
Leading authorities on profit element
When books of account are rejected and unaccounted sales or receipts are discovered, the income addition is restricted to the net profit element embedded in these undisclosed transactions, not the entire sale proceeds or receipts, especially if corresponding purchases are not proven to be outside the books.
In cases of alleged bogus or unverifiable purchases, rather than disallowing the entire purchase value, a reasonable profit element or a proportionate percentage of the purchases should be added back to the assessee's income.
Reimbursements of actual expenses without any profit element are not taxable income. Additionally, mere amendments to the Income-tax Act do not override the provisions of Double Taxation Avoidance Agreements (DTAAs).
In cases of alleged bogus or hawala purchases where the existence of transactions is not entirely denied, only the profit element embedded in such purchases, and not the entire purchase price, can be added to the assessee's income. The focus is on determining a reasonable profit percentage for such additions.
When making an addition for unaccounted receipts, on-money, or non-genuine purchases/sales, the addition should be restricted to the estimated profit element embedded in such transactions, rather than the entire gross amount, particularly when evidence of corresponding expenditure is incomplete. This estimation often involves applying a net profit rate.
When unaccounted receipts or suppressed sales are detected and books of account are rejected under Section 145(3), additions to income must be restricted to the profit element embedded in such transactions, not the entire transaction value. This profit element is to be estimated by considering the assessee's regular profit ratio as per books of account.
When purchases are found bogus, only the profit element embedded therein, and not the entire purchase value, can be added to the assessee's income.
When purchases are unverifiable or alleged to be bogus, only the profit element embedded in such transactions is taxable, not the entire purchase amount; the onus lies on the assessee to prove the genuineness of the transactions.
