ITAT upholds 8% net profit rate over Revenue's 12.5% proposal for undisclosed sales from WhatsApp evidence

The ITAT Rajkot upheld the CIT(A)'s decision to apply an 8% net profit rate instead of Revenue's proposed 12.5% rate for undisclosed sales discovered through incriminating WhatsApp messages found during a search at the director's premises. The tribunal rejected Revenue's appeal, ruling that no reasonable basis was provided to justify the higher 12.5% rate, emphasizing that net profit rates must be justifiable based on business nature and specific facts rather than arbitrary application.

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Issues:
- Delay condonation for filing the Cross Objection (CO) by the assessee.
- Addition made by the Assessing Officer (AO) on account of undisclosed sales.
- Restriction of addition by the Commissioner of Income Tax (Appeals).
- Net profit element embedded in unaccounted sales.
- Application of net profit rate in determining taxable income.
- Benefit of income surrendered by the assessee in the return of income.

Analysis:

1. The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) regarding the addition made to the income of the assessee by the AO on account of undisclosed sales. The assessee also filed a Cross Objection (CO) against the same order, which was noted to be time-barred by 15 days. The delay in filing the CO was condoned by the Appellate Tribunal, and both the appeal and CO were disposed of together.

2. The main issue in the appeal was the deletion by the Commissioner of Income Tax (Appeals) of the addition made by the AO on account of undisclosed sales, with the restriction being on the net profit element in the sales. The Revenue challenged this restriction, seeking the deletion of the entire addition made by the AO. The facts revealed during a search showed that the assessee had made out-of-books sales amounting to Rs.2,35,42,980, which the AO added to the income of the assessee.

3. The Commissioner of Income Tax (Appeals) restricted the addition to the profit element embedded in the undisclosed sales, estimated at 8% of the sales. The Revenue contended that the net profit rate should have been 12.5% instead of 8%, citing a decision of the Gujarat High Court. However, the Tribunal found no merit in the Revenue's contention as there was no reasonable basis provided for applying a higher net profit rate.

4. The Cross Objection filed by the assessee highlighted that the Commissioner of Income Tax (Appeals) failed to consider the income surrendered voluntarily by the assessee in its return of income. The AO had noted this fact in the assessment order, and during the hearing, both parties agreed that the benefit of the income surrendered should be granted to the assessee against the addition confirmed by the Commissioner of Income Tax (Appeals).

5. Ultimately, the Appellate Tribunal dismissed the appeal of the Revenue and allowed the Cross Objection of the assessee. The Tribunal directed the AO to grant the assessee the benefit of the income surrendered voluntarily. The decision was pronounced on 12th January 2024 in Ahmedabad.

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