Malwa Packaging Vs DCIT (ITAT Delhi)
Delhi ITAT : On Unaccounted Sales, Only Net Profit Can Be Taxed – Separate Additions for Expenses Would Amount to Double Addition
The Delhi ITAT in the case of Malwa Packaging held that where unaccounted sales are detected during search proceedings, the Revenue cannot tax the entire turnover or again make separate additions for related expenses once profit is estimated on such sales. The Tribunal ruled that only a reasonable net profit element embedded in the unaccounted turnover can be brought to tax.
During search proceedings u/s 132, the department alleged large-scale out-of-books sales and expenses based on seized Tally data and statements of partners, labour supervisors and workers. The AO estimated unaccounted sales at multiple times of recorded turnover and applied a hefty gross profit rate of 27.25%, resulting in huge additions. Separate additions were also made u/s 69C towards alleged unexplained cash wages and other cash expenditure.
The CIT(A) partly reduced the additions by lowering both the sales multiplier and profit rate. However, before the ITAT, the assessee argued that once even the department’s seized material itself showed existence of direct and indirect expenses such as purchases, salary and other operational expenditure, only net profit rate could be applied and not gross profit rate.
Accepting the contention, the Tribunal relied upon several landmark rulings including Indeo Airways Pvt. Ltd. (Delhi HC), President Industries (Gujarat HC) and India Seed House (ITAT Delhi) to reiterate that total unaccounted sales cannot automatically represent taxable income. Only the profit embedded in such turnover is liable to tax.
The ITAT specifically noted that the assessee had disclosed NP rate of around 1.43% in regular books and that the search material itself evidenced existence of unaccounted purchases, salary and other expenses. Therefore, applying GP rate of 27.25% or even 10% was held excessive. The Tribunal ultimately estimated income by applying a 2% net profit rate on the alleged unaccounted turnover.
On the separate additions u/s 69C for alleged unexplained wages and cash expenditure aggregating to several crores, the ITAT held that once profit on unaccounted sales is estimated, separate addition of related business expenditure would amount to double taxation of the same stream of income. The Bench observed that the source of such expenditure stood explained out of the unaccounted sales themselves.
The Tribunal also granted telescoping benefit against cash found during search by observing that once additional income had already been sustained in the hands of the assessee and no separate utilisation thereof was proved by the department, the cash found could reasonably be presumed to have come from such income. Accordingly, the addition u/s 69A was deleted.
FULL TEXT OF THE ORDER OF ITAT DELHI
