1999 (4) TMI 8 - HC - Income Tax

High-Stakes Tax Dispute: Undisclosed Sales Not Automatically Taxable Income Without Clear Evidence of Profit Suppression

Commissioner of Income Tax Versus President Industries

Gujarat HC dismissed CIT's reference application under section 256(2), affirming Tribunal's order. The court held that undisclosed sales cannot ... Undisclosed Income - 'Whether the Appellate Tribunal is right in law and on facts in holding that only the net profit rate can be applied in respect of admitted sales of goods outside the books of account?' - unless there is a finding to the effect that investment by way of incurring the cost in acquiring the goods which have been sold has been made by the assessee and that has also not been disclosed. In the absence of such finding of fact the question whether the entire sum of undisclosed sale proceeds can be treated as income of the relevant assessment year answers by itself in the negative. The record goes to show that there is no finding nor any material has been referred about the suppression of investment in acquiring the goods which have been found subject of undisclosed sales. - We are, therefore, of the opinion that no question of law which requires to be referred to this court arises out of the Tribunal's appellate order. The order of the Tribunal under section 256(1) is not erroneous in reaching such conclusion. The Gujarat High Court, in an application under section 256(2) by the CIT seeking a reference of a question of law arising from the Tribunal's order, held that the Tribunal was justified in rejecting the application under section 256(1). The key issue was whether the entire amount of undisclosed sales outside the books of account could be treated as income. The Court reasoned that 'the amount of sales by itself cannot represent the income of the assessee' since sales represent the price received for goods, which includes cost already incurred; only the excess over cost constitutes profit. Absent any finding or material indicating suppression of investment or cost related to the goods sold, the entire sum of undisclosed sales cannot be treated as income for the assessment year. The Court concluded that 'no question of law which requires to be referred to this Court arise out of Tribunal's appellate order,' and accordingly rejected the application.