2018 (8) TMI 1475 - HC - Income Tax

Appellate Tribunal decision clarifies tax assessment principles on undisclosed purchases, profit elements

The Appellate Tribunal's decision to disregard the value of unaccounted purchases and impose additional tax based on notional sales was partially upheld. ... Determination of additional income - notional sales - value of the unaccounted purchases made by the assessee - Held that:- CIT(A) found that there was no evidence that the FCI official who had issued the certificate had undertaken any physical verification of the stock at the rice mill of the assessee and the document appeared to have been filled up by the assessee and merely signed by the FCI official. Such part of the order of the Commissioner (Appeals) was unexceptionable and could not have been interfered with by the Appellate Tribunal. To the extent that the Appellate Tribunal accepted the quantum of additional stocks on the basis of the certificate issued by the concerned FCI official, such order is unacceptable and is set aside. The order of the Commissioner (Appeals) in such regard is restored. The additional quantum as discovered during the course of the survey operation will fasten to the assessee. In the circumstances and particularly since the factual findings rendered by the Commissioner (Appeals) as to the quantum of additional stocks have now been restored, the order impugned on the methodology for the ascertainment of the income which escaped assessment would pass muster. The Appellate Tribunal merely directed the gross profit that the additional purchase was capable of generating to be regarded as the additional income for tax to be assessed on such basis. Such view of the Appellate Tribunal does not call for any interference. - Order of ITAT modified. Decided in favor of revenue. Issues:1. Whether the Appellate Tribunal could disregard the value of unaccounted purchases and impose additional tax based on notional sales.Analysis:The legal issue in this case revolved around the question of whether the Appellate Tribunal had the authority to set aside the value of unaccounted purchases made by the assessee and impose additional tax by considering notional sales in the absence of actual corresponding sales during the relevant assessment year. The case stemmed from a survey operation conducted at the rice mill of the assessee, revealing significant undisclosed stocks of paddy, rice, and bran. The assessing officer based the tax demand on the additional stocks found, resulting in a substantial tax liability on the assessee.The Commissioner (Appeals) upheld the assessment order, emphasizing the physical verification of stocks conducted during the survey operation and rejecting reliance on a document from the Food Corporation of India (FCI) that lacked evidence of independent verification. The Commissioner agreed with the assessing officer's findings on the quantum of excess stocks and income that had escaped assessment. The Appellate Tribunal's order, dated June 30, 2015, was challenged on two grounds: interference with the Commissioner's factual findings and the direction to consider sales of rice and bran in determining additional income.The Appellate Tribunal's decision to accept the quantum of additional stocks based on the FCI certificate was deemed unacceptable and set aside. The Commissioner's findings were reinstated in this regard. However, the Tribunal's treatment of the additional stocks' value as the assessee's additional income for tax assessment was upheld. The Tribunal's approach aligned with the principle established in a Gujarat High Court judgment, emphasizing that only the profit element embedded in undisclosed purchases should be added to the total income. Given the restoration of the Commissioner's factual findings, the Tribunal's methodology for determining the escaped income was deemed appropriate and did not warrant interference.In conclusion, the appeals were disposed of by modifying the Appellate Tribunal's judgment, with no order as to costs. The judgment clarified the distinction between assessing additional income based on undisclosed purchases and the profit element within those transactions, ensuring a fair and legally sound tax assessment process.