2019 (7) TMI 1049 - HC - Income Tax

Net profit method upheld for taxing suppressed sales as income under Income Tax Act, 1961

Principal Commissioner of Income Tax Versus M/s Shivhare Associates, Shri Ghanshyam Rathore

The High Court upheld the decision that only the net profit portion of suppressed sales could be taxed as income in an appeal under section 260-A of the ... Rejection of books of accounts u/s 145 - Estimating the turnover on the basis of information received from the Excise Department - taxing entire suppressed sale as income - Assessee is engaged in liquor business - ITAT affirmed with modification by applying net profit of 2.7% on the estimated sales - HELD THAT:- The findings arrived at by the Tribunal are finding of facts. And as to proposed substantial question as to whether in view of the facts as regard to defects of the sales unsupported by day to day shop wise register of stock and sales, the assessing officer was not justified in estimating the turnover on the basis of information received from the Excise Department by rejecting books of accounts under section 145 (3) of the Act, 1961 and taxing entire suppressed sale as income, but only the net profit part could have been taxed as income. We perceive that a Division of the High Court in CIT Vs. Balchand Ajit Kumar [2003 (4) TMI 76 - MADHYA PRADESH HIGH COURT] has held that the total sales cannot be regarded as the profit of the assessee. - Decided against revenue Issues:1. Estimation of turnover based on defects in sales records.2. Taxation of suppressed sales as income.3. Application of net profit for taxation.Issue 1: Estimation of turnover based on defects in sales recordsThe case involved an appeal under section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal. The appellant, engaged in the liquor business, declared gross receipts for the accounting year 2010-2011. The assessing officer rejected the books of accounts due to the absence of day-to-day shop-wise sales records, leading to the estimation of suppressed sales. The Commissioner of Income Tax (Appeals) held that only the net profit could be taxed as income, not the entire suppressed sale. The Tribunal affirmed this decision, applying a net profit rate on the estimated sales, emphasizing the lack of specific deficiencies in the purchase and expense invoices. The High Court concurred with the Tribunal's findings, highlighting that the total sales cannot be equated to the profit of the assessee. The Court referenced precedent cases to support the adoption of a net profit method for taxation, ultimately dismissing the appeal.Issue 2: Taxation of suppressed sales as incomeThe assessing officer estimated suppressed sales due to the lack of detailed sales records, leading to the disallowance of certain expenses and penalties. The Commissioner of Income Tax (Appeals) and the Tribunal both held that only the net profit portion of the suppressed sales could be taxed as income. They emphasized the necessity of adopting a net profit rate for taxation purposes, considering the nature of the liquor business and historical profit rates of the assessee. The High Court agreed with this approach, citing previous judgments to support the notion that undisclosed sales proceeds do not automatically translate to taxable income. The Court upheld the decision to tax only the net profit portion of the suppressed sales, dismissing the appeal against the taxation of the entire suppressed sale as income.Issue 3: Application of net profit for taxationThe case involved the application of a net profit rate on the estimated sales to determine the taxable income. The Commissioner of Income Tax (Appeals) and the Tribunal both considered historical profit rates and the nature of the business to arrive at a reasonable net profit rate for taxation purposes. The High Court concurred with this approach, emphasizing that the total sales cannot be equated to the profit of the assessee. The Court referenced precedent cases to support the adoption of a net profit method for taxation, ultimately dismissing the appeal against the application of a net profit rate on the estimated sales.In conclusion, the High Court upheld the decisions of the Commissioner of Income Tax (Appeals) and the Tribunal, ruling that only the net profit portion of the suppressed sales could be taxed as income. The Court emphasized the importance of adopting a net profit method for taxation purposes and rejected the notion that the total sales automatically constitute taxable income.