Al-Dua Agro Food Processing Pvt. Ltd. Vs DCIT (ITAT Delhi)
Conclusion: Where unaccounted sales were established through seized material, only the net profit embedded therein was liable to tax, and not the entire sales turnover. When the seized evidence itself reflected corresponding business expenditure, the Revenue could not disregard such expenses while relying on the same material. Accordingly, the addition was restricted by applying a net profit rate of 2%, and the Revenue’s appeal seeking taxation of the entire undisclosed sales was rejected.
Held: During search and seizure operation under Section 132, AO extrapolated the unaccounted sales based on the incriminating material found during the search for the entire financial year and treated the entire sale proceeds as income. Deduction towards purchases and other expenses was denied by invoking Section 40A(3). CIT(A) held that the entire unaccounted sales could not be assessed as income and restricted the addition by estimating the gross profit at 16% of the unaccounted sales. Aggrieved, both the assessee and the Revenue preferred appeals before the Tribunal. Assessee challenged the adoption of the 16% gross profit rate, whereas Revenue contended that the entire unaccounted sales ought to have been brought to tax. Before the Tribunal, assessee submitted that CIT(A) ought to have applied the net profit rate instead of the gross profit rate since the seized material itself reflected not only unaccounted purchases but also indirect expenses such as salary and other business expenses. It was further submitted that the gross profit rate adopted by CIT(A) exceeded the gross profit disclosed in the audited books of account and the income tax returns. However, Revenue contended that AO had rightly brought the entire unaccounted sales to tax and that the CIT(A) had erred in restricting the addition by applying a gross profit rate of 16%. It was held that AO had treated the entire unaccounted sales as income without allowing deduction of purchases and other expenses, whereas CIT(A) had rightly held that only the profit embedded in such sales could be brought to tax. It was further noted that assessee had declared a net profit rate of 1.45% for the relevant assessment year and that the seized material itself reflected both direct and indirect expenses. Relying on Commissioner of Income Tax v. President Industries [2002] and India Seed House v. Assistant Commissioner of Income Tax [2024], the Tribunal held that estimation of income on the basis of the net profit rate was appropriate in the facts of the case. Tribunal applied a net profit rate of 2% to the sales, partly allowed the assessee’s appeals, and dismissed the Revenue’s appeals.
Cases Discussed
- Sushil Bansal v. Pr. CIT, [2020] 115 taxmann.com 225 (Delhi)
- Pr. CIT v. M/s. Mohommad Haji Adam & Co., (2019) 103 taxmann.com 459 (Bombay)
- Indigo Airways (P.) Ltd v. Commissioner of Income Tax, [2012] 26 taxmann.com 244
- P.R. Metrani v. Commissioner of Income Tax, Bangalore, (2007) 1 SCC 789
- Commissioner of Income Tax v. Balchand Ajit Kumar, 2003 (4) TMI 76 – Madhya Pradesh High Court
- India Seed House v. Assistant Commissioner of Income Tax, 2000 (1) TMI 146 – ITAT Delhi
- Commissioner of Income Tax v. President Industries, 1999 (4) TMI 8 – Gujarat High Court
- Income Tax Officer, B-Ward, Ernakulam v. T. Abdul Majeed, [1988] 169 ITR 440
- Karnataka State Road Transport v. B.A. Jayaram & Ors., AIR 1984 SC 790
- State of Bombay v. Pandurang Vinayak, AIR 1953 SC 244
FULL TEXT OF THE ORDER OF ITAT DELHI
