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Entire quantum of suppressed sales need not be disallowed where not supported by day-to-day records; taxing just the net profit element is sufficient: HC

2019-TIOL-1643-HC-MP-IT

IN THE HIGH COURT OF MADHYA PRADESH

AT GWALIOR

ITA No.18/2019

PRINCIPAL COMMISSIONER OF INCOME TAX
CITY CENTRE, GWALIOR

Vs

M/s SHIVHARE ASSOCIATES
JINSINALA NO.1, GWALIOR (MP)

ITA No.36/2019

PRINCIPAL COMMISSIONER OF INCOME TAX
CITY CENTRE, GWALIOR

Vs

SHRI GHANSHYAM RATHORE
SANGEETA HOTEL GUNA

ITA No.37/2019

PRINCIPAL COMMISSIONER OF INCOME TAX
CENTRAL BHOPAL

Vs

M/s PREMNARAYAN SHIVHARE
GWALIOR (MP)

Sanjay Yadav & Vivek Agarwal, JJ

Dated: July 12, 2019

Appellant Rep by: Mr DPS Bhadoriya, learned Counsel
Respondent Rep by: 
None

Income Tax – Section 145(3)

Keywords – Net profit – Suppressed sale

THE assessee is engaged in liquor business. In the return for the relevant AY, the assessee declared gross receipts yielding gross profit and net profit. In the course of assessment, the AO noted that the assessee suppressed its sale by not maintaining a day to day record of shop wise details. Rejecting the books of accounts, the AO made the additions. The CIT(A) held that the assessee, being a liquor contractor, was bound to pay the prescribed license fee and excise duty to the State on the liquor which was to be sold before the end of license period. To avoid unsold stock and face losses, the assessee sold the material as per the market trend by offering discounted rates. Hence, the addition was restricted to only net profit. The ITAT affirmed the CIT(A) findings with modification by applying net profit of 2.7% on the estimated sales.

On hearing the appeal, the High Court held that,

Whether where the sales are unsupported by records on a day to day basis, the AO is not justified to add the entire suppressed sale as income after estimating the turnover rather than just bringing the net profit element to tax – YES: HC

++ the findings arrived at by the Tribunal are finding of facts. As to proposed substantial question which is 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 AO was not justified in estimating the turnover on the basis of information received from the Excise Department by rejecting books of accounts u/s 145(3) and taxing entire suppressed sale as income, but only the net profit part could have been taxed as income. The Division of the High Court in CIT Vs. Balchand Ajit Kumar, has held that the total sales cannot be regarded as the profit of the assessee. The net profit rate has to be adopted and once a net profit rate is adopted, it cannot be said that there is perversity of approach. Whether the rate is low or high, it would depend upon the facts of each case. Thus, the proposed substantial question of law stands answered against the Revenue.

Revenue’s appeal dismissed

Case followed:

CIT Vs. Balchand Ajit Kumar – 2003-TIOL-1176-HC-MP-IT

JUDGEMENT

ITA No.18/2019:

Heard on admission.

1. This appeal under section 260-A of the Income Tax Act, 1961 is directed against the order dated 16.5.2018 passed by Income Tax Appellate Tribunal, Agra Bench, Agra in Case ITA No.71/AGR/2015.

2. The substantial question of law proposed is “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 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, or only the net profit part can be taxed as income.”

3. The accounting year is 2010-2011.

4. The assessee is engaged in liquor business, as a licensee of the State. It is a State monopoly and licenses are issued from year to year either through auction or by extension as per Excise Policy mooted every year. During assessing year 2010-2011 the assessee declared gross receipts of Rs.15.47 Crores yielding gross profit @ 0.93% and net profit @ 0.60%, vide query letter dated 19.10.2012 and 10.1.2013, the assessee was asked to furnish various details. The information along with the books of accounts were furnished by the assessee. Further query was made by letter dated 1.3.2013, which as evident was on the basis of the information received from Excise Department. Certain information were furnished by the assessee. The assessing officer while observing that by not recording day to day shop-wise details of sale in the books of accounts, the assessee was having tremendous scope of suppressing its sale. Consequently, rejected the books of accounts and taking into consideration certain incidental complimentary sale and possible solitary instances of sale below MRP, the addition representing difference of average sale of MSP and MRP and by reducing disclosed sales, arrived at Rs.2,98,60,025/- as difference of suppressed sale. Assessing officer further disallowed Rs.18075/- which was imposed as penalty by the Excise Department being not admissible under section 37 of the I.T.Act. The Assessing Officer under section 40 (a) (ia) of the Act disallowed Rs.7355/- which was an interest paid by the assessee.

5. Commissioner Income Tax (Appeals) by its order dated 10.12.2014 on the finding that the assessee being a liquor contractor is bound to pay the prescribed license fee and excise duty to the State on the liquor which is to be sold before the end of license period. And to avoid unsold stock and face huge losses to sell the material as per the market trend by selling liquor at discounted rates and by relying on the decision in Commissioner of Income Tax vs. Balchand Ajit Kumar, 263 ITR 610 = 2003-TIOL-1176-HC-MP-IT MP held that the entire suppressed/undisclosed sale of the assessee cannot be taxed as income, and only net profit can be taxed as income. Further by estimating 3% as the net profit affirmed by the addition of Rs.44,51,623/- and deleted the balance addition of Rs.2,68,50,342/-.

6. In further appeal before the Tribunal, the order passed by the Appellate Authority was affirmed with modification by applying net profit of 2.7% on the estimated sales on the findings:

“12 From the above, it is amply clear that the ld. CIT (A) hasn’t pointed out any specific deficiency in the purchase invoices or the expense invoices, nor discussed any comparable case on identical facts, to form the basis for application of a particular net profit rate on gross total receipts, in the case of the assessee. On perusal of the comparative ‘Net Profit Chart’ of the assesses’s past history on profit rate, as above, it is evident that the Net Profit Rate is reasonably declared at 0.95 and 0.93 in respect of assessment year 2010-11 and 2011-12 respectively as against 1.94% and 1.09% of the previous years after deducting interest and salary to partners. After considering the decision cited and the history of the case, it is factually clear that the profit rate applied by the Ld. CIT (A) at 3% is on the higher side and is unreasonable.”

7. 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 (Supra) has held that the total sales cannot be regarded as the profit of the assessee. It was observed by their Lordships:

“This court while admitting the appeal framed the following substantial question of law :

“Whether, on the facts and circumstances of the case, the assessee having not included the credit sales in the books of account and in the balancesheet, the Tribunal was justified assuming that the assessee followed different method of accounting for unrecorded sales, without any factual basis, and as such whether the order of the Tribunal does not suffer from perversity being against the settled principles of accountancy ?”

On appreciating the rival submissions raised at the Bar, we have carefully perused the order passed by the Commissioner of Income-tax (Appeals) and also that of the Tribunal. It is not disputed that the undisclosed income was Rs. 2,57,000. The sole question that arises for consideration is whether the entire income has to be treated as profit or there should be adoption of a method of net profit income. In the case of CIT v. President Industries [2002] 258 ITR 654 = 2003-TIOL-1327-HC-AHM-IT, the High Court of Gujarat in a similar matter came to hold as under (page 655) :

“Having perused the assessment order made by the Assessing Officer, the order made by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, we are satisfied that the Tribunal was justified in rejecting the application under Section 256(1). It cannot be a matter of an argument that the amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales. The sales only represented the price received by the seller of the goods for the acquisition of which it has already incurred the cost. It is the realisation of excess over the cost incurred that only forms part of the profit included in the consideration of sales. Therefore, unless there is a finding to the effect that investment by way of incurring the cost in acquiring the goods which have been sold has been made by the assessee and that has also not been disclosed. In the absence of such finding of fact the question whether the entire sum of undisclosed sale proceeds can be treated as income of the relevant assessment year answers by itself in the negative. The record goes to show that there is no finding nor any material has been referred about the suppression of investment in acquiring the goods which have been found subject of undisclosed sales.”

We are in respectful agreement with the aforesaid opinion inasmuch as the total sale cannot be regarded as the profit of the assessee. The net profit rate has to be adopted and once a net profit rate is adopted, it cannot be said that there is perversity of approach. Whether the rate is low or high, it would depend upon the facts of each case. In the present case net profit rate of five per cent. has been applied. We do not think it appropriate that the same requires to be enhanced. We are also inclined to think that it is high. In any case, it cannot be said that there has been perversity of approach.”

8. We are not inclined to take different view in given fact situation.

9. As the proposed substantial question of law stands answered against the revenue, we decline to revisit the issue.

10. Consequently, appeal fails and is dismissed. No costs.

I.T.A.No.36/2019:

Except factual variations the issue arises in the present appeal being similar to that in I.T.A. No.18/2019, the present appeal is dismissed in the same terms.

I.T.A.No.37/2019

Except factual variations the issue arises in the present appeal being similar to that in I.T.A. No.18/2019, the present appeal is dismissed in the same terms.

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