Unrecorded sales taxed only to the profit element, with addition confined to gross profit on cash sales.

Unrecorded cash sales were found from the assessee's records, but the material did not justify taxing the entire turnover as income. The applicable principle was that sales are gross receipts and only the profit element embedded in those receipts can be brought to tax unless the record shows that the whole amount represents income. Earlier-year results were used to estimate a reasonable gross profit rate, and the record did not establish that all related purchases and expenses had been fully accounted for. The addition was therefore confined to gross profit at 11.65% on the unrecorded sales, and the Revenue's challenge to taxing the full receipts failed.

---

---

Issues: (i) Whether the entire amount of unrecorded cash sales could be added as income, or only the profit embedded in such sales was exigible to tax.

Analysis: The assessee's records and surrounding material were found to indicate unrecorded cash sales, but the material did not justify treating the whole turnover as income. The settled principle applied was that sales represent gross receipts and only the profit element embedded in such receipts can be brought to tax. The comparative results of earlier years were used to determine a reasonable gross profit rate, and the record did not show that all related purchases and expenses had been duly accounted for so as to warrant taxing the entire receipts.

Conclusion: The addition was restricted to gross profit at 11.65% on the unrecorded sales, and the Revenue's challenge to addition of the entire amount failed.

Final Conclusion: The Revenue's appeal was rejected on the core issue of quantum of addition arising from unrecorded sales, and the assessed income was to be computed only on the profit element with consequential interest relief.

Ratio Decidendi: In cases of unrecorded sales, only the profit embedded in the receipts can be taxed unless the record justifies a finding that the entire receipts constitute income.

---