Suppressed sales are taxable only to the extent of embedded profit, not as full gross turnover.

In cases of suppressed sales or unaccounted turnover, only the profit element embedded in the receipts can be taxed, because income tax applies to profits and gains rather than gross turnover. The ITAT found that the assessee had disclosed net profit on accounted turnover, that the unaccounted turnover was only part of overall business receipts, and that seized material also indicated unaccounted expenditure in earning such receipts. It therefore rejected taxation of the entire admitted turnover and confined the addition to a reasonable estimate of net profit on the unaccounted turnover.

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Issues: Whether the entire unaccounted turnover admitted during search could be brought to tax as income, or only the profit element embedded in such turnover was liable to be assessed.

Analysis: The assessee's case involved admitted undisclosed turnover recorded in the search material and in the statement under section 132(4). The Tribunal held that sales or gross receipts do not by themselves constitute income, because the charge is on profits and gains and not on the entire turnover. It noted that the assessee had been consistently disclosing net profit on accounted turnover, that the unaccounted turnover formed only part of the total turnover, and that the seized material also indicated unaccounted expenditure incurred in earning such receipts. Relying on the settled principle that only the profit element embedded in suppressed sales can be taxed, the Tribunal rejected the approach of taxing the entire admitted turnover.

Conclusion: The addition was restricted to a reasonable estimate of net profit on the unaccounted turnover, and the assessee succeeded.

Ratio Decidendi: In cases of suppressed or unaccounted sales, only the profit element embedded in the receipts can be assessed to tax, not the entire gross turnover.

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