Profit element in unrecorded sales alone is taxable unless separate unexplained investment is proved; full turnover cannot be added as income.

In cases of unrecorded sales, only the profit element embedded in the suppressed turnover can be taxed, unless a separate unexplained investment needed to carry out those sales is identified. The full value of unaccounted sales cannot be assessed as income merely because the sales were not recorded. A consistent method adopted in earlier years, and accepted by the department, should not be departed from without a valid basis. On those facts, the addition based on the entire sales value was unwarranted and the deletion of the addition was sustained.

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Issues: Whether the entire amount of unaccounted sales could be assessed as income, or only the profit element embedded in such sales and the related investment required to make those sales.

Analysis: The addition was based on the premise that the full value of the undisclosed sales represented taxable income. The appellate authority applied the settled principle that in cases of suppressed or unrecorded sales, only the profit component embedded in those sales can be brought to tax, along with any separately identified unexplained investment necessary to effect the sales. The assessee had followed a consistent working for the relevant years, and the earlier year disclosures on the same basis had already been accepted by the department. No finding was recorded that the related purchases or expenses had escaped the books in a manner justifying taxation of the full turnover as income.

Conclusion: The entire unaccounted sales were not taxable as income; only the profit element embedded therein was liable to be considered, and the addition made on the basis of the full sales value was unwarranted.

Final Conclusion: The Revenue's challenge failed and the deletion of the addition was sustained.

Ratio Decidendi: In cases of unrecorded sales, taxation is confined to the profit embedded in such sales, unless separate unexplained investment is established, and a consistent method accepted in earlier years should not be departed from without a valid basis.

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