5% Profit Rate Upheld on Unaccounted Helmet Sales; Revenue Appeal Dismissed

ACIT Vs Vega Aviation Products Pvt. Ltd. (ITAT Panaji)

One Helmet Cannot Wear Two 15% Profit Margins—5% on Manufacturer’s Unaccounted Sales Upheld; Revenue’s Appeal Also Falls Below ₹60-Lakh Limit

Summary:

Unaccounted Helmet Sales Unearthed

The Assessee-company manufactured plastic products, including safety helmets & toilet blocks. The helmets were sold under the “Vega” brand owned by its sister concern, Vega Auto Accessories Pvt. Ltd. Both companies had common directors.

The Assessee filed its return declaring income of ₹38,68,830. A search u/s 132 was conducted on 28.11.2019, followed by proceedings u/s 153A.

During the search, unaccounted retail cash sales of helmets amounting to ₹15,90,449 were discovered through delivery challans. A survey u/s 133A at the Assessee’s factory also resulted in the impounding of a pen drive containing unaccounted sales of ₹4,87,68,333 made to Vega Auto Accessories.

These sales were not recorded in the books of either company. The AO added the entire amounts & assessed total income at ₹5,42,27,612.

CIT(A) Taxes Profit, Not Entire Turnover

Before the CIT(A), the Assessee argued that the entire sales value could not represent income because no goods could be manufactured or sold without incurring material, manufacturing & incidental costs.

Regarding retail sales of ₹15.90 lakh, the Assessee claimed that some delivery challans related to free samples, promotional distribution, employee welfare, repairs or replacement of defective helmets. Nevertheless, the CIT(A) estimated profit at 15% by referring to the settlement reached by the group’s sister concern before the Interim Board for Settlement.

For sales of ₹4.87 crore to Vega Auto Accessories, the Assessee explained that it functioned as an intermediary or contract manufacturer. The sister concern ultimately sold those helmets & had already offered profit at 15% before the Settlement Commission.

The Assessee’s audited net-profit margins for surrounding years ranged broadly between 2.39% & 5.30%. It therefore offered 5% of the unaccounted sales to avoid prolonged litigation.

The CIT(A) accepted this rate as reasonable. He restricted the addition on ₹4.87 crore to 5%, deleting the balance.

Revenue Demands a Uniform 15%

The Revenue challenged the application of 5%, arguing that the Settlement Commission had adopted a 15% profit rate in the sister concern’s case. The CIT(A) had also applied 15% to the Assessee’s unaccounted retail sales of ₹15.90 lakh.

According to the Revenue, the profit element on unaccounted sales could not be altered merely because the purchaser happened to be a related concern. It sought application of the same 15% rate to the larger unaccounted turnover of ₹4.87 crore.

The central question was whether both categories of sales were commercially comparable & required an identical profit estimate.

Different Transactions Justified Different Rates

The ITAT found that the two sets of transactions were unearthed through different proceedings & had materially different characteristics.

The unaccounted sales of ₹15.90 lakh discovered during search represented retail sales through delivery challans to unrelated parties. The CIT(A) therefore applied a 15% profit rate.

In contrast, the turnover of ₹4.87 crore discovered from the pen-drive data during survey represented supplies made by the Assessee to its own sister concern. The Assessee was the intermediary or contract manufacturer, while Vega Auto Accessories was the principal entity making onward sales to customers.

Thus, the first transaction reflected direct retail sales, whereas the second involved an intra-group manufacturing & onward-sale chain. The difference in commercial roles justified a different profit attribution.

Same Transaction Cannot Yield 30% Group Profit

The Settlement Commission had already recognized that Vega Auto Accessories made unaccounted purchases from the Assessee & thereafter effected unaccounted onward sales. The sister concern offered profit of 15% on those onward sales.

If the Assessee were also assessed at 15% on its supplies forming part of the same transaction chain, the two group companies would together be taxed at a combined profit rate of 30%.

The Tribunal held that such an outcome was commercially impractical. The same helmets could not reasonably produce 15% profit at the contract-manufacturing stage & another 15% at the ultimate sale stage merely because both entities were separately assessable.

The Assessee did earn some profit as a separate entity, particularly because it had not proved that supplies were made strictly on a cost-to-cost basis. Therefore, complete exclusion of profit was not warranted. However, the CIT(A)’s estimate of 5% appropriately recognized the Assessee’s limited manufacturing margin while avoiding unreasonable duplication of the 15% profit already taxed in the sister concern’s hands.

The Department itself admitted that the sister concern had disclosed 15% profit on the same purchase-sale stream before the Settlement Commission. The ITAT therefore found no error in the CIT(A)’s estimation.

Revenue’s Appeal Also Below Monetary Limit

The Tribunal further observed that the Revenue disputed only the difference between 15% & 5% on ₹4,87,68,333. The disputed 10% profit amounted to ₹48,76,833.

Even before computing the actual tax, this disputed income itself was below the CBDT monetary threshold of ₹60 lakh applicable to departmental appeals before the Tribunal. Therefore, the Revenue’s appeal was independently not maintainable on the ground of low tax effect. CBDT Circular No. 09/2024 prescribes the ₹60 lakh monetary limit for appeals before the ITAT.

The appeal was consequently dismissed both on merits & maintainability.

Unaccounted sales may justify estimated profit, but turnover cannot be mistaken for income & the same helmet cannot carry a 15% profit at the factory gate plus another 15% at the showroom. It needs safety certification—not double-profit padding.

Cases Discussed

• CIT vs S.C. Kothari (1974 CTR [82 ITR 794] (SC))
• Wall Street Construction Ltd. Vs. DCIT (75 TTJ 653-ITAT, Mumbai (TM))

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT PANAJI BENCH

This appeal filed by the Revenue is directed against the order dated 23.04.2025 passed by Ld. CIT(A)-2, Panaji [‘Ld. CIT(A)’] for the assessment year 2017-18.

2. The Revenue has raised the following grounds of appeal :-

“1. Whether, on the facts and in the circumstances of the case, the CIT(A) was right in Law in estimating the profit @ 5% of the unaccounted sales of Rs.4,87,68,333/- made to M/s. Vega Auto Accessories Private Limited whereas, profit on unaccounted sales of Rs. 15,90,449/- was estimated @ 15% in the same Order.

2. Whether, on the facts and in the circumstances of the case, the CIT(A) was right in Law in estimating the profit @ 5% of the unaccounted sales of Rs.4,87,68,333/- made to M/s. Vega Auto Accessories Private Limited without considering the fact that the hon’ble IBS, in its Order in the case of M/s. Vega Auto Accessories Pvt. Ltd., had estimated the income @ 15% of unaccounted sales based on which, CIT(A) estimated the profit @ 15% on unaccounted sales of Rs.15,90,449/-.

3. Whether, on the facts and in the circumstances of the case, the CIT(A) was right in Law in not considering that the profit element on unaccounted sales cannot be separately identified merely because sale is made to the sister concern M/s. Vega Auto Accessories Products Private Limited.”

3. Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing plastic products including safety helmets and toilet blocks. The helmets are sold under the brand name of ‘Vega’ which is owned by the sister concern company M/s. Vega Auto Accessories Private Limited. In both the companies directors are common. The assessee company filed return of income on 31.10.2017 by declaring income of Rs.38,68,830/-. A search u/s 132 of the IT Act was carried out on 28.11.2019 and notice u/s 153A of the IT Act was issued on 26.11.2020, in response to which assessee filed return of income on 24.12.2020 declaring income of Rs.38,68,830/-. Subsequently, notices u/s 143(2) and 142(1) respectively were issued to the assessee. During the course of search, unaccounted retail cash sales of helmets was discovered for various years and for the year under consideration the same was determined at Rs.15,90,449/- and whole of the unaccounted sale amount was added back to the income of the assessee. Survey u/s 133A of the IT Act was also conducted in the premises of the assessee situated at Belgaum Khanapur Road Desur wherein unaccounted retail cash sales of safety helmets were found in pen-drive which contains the unaccounted data of sales of Rs.4,87,68,333/- made by the assessee to sister concern M/s. Vega Auto Accessories Private Limited which were not accounted for in the books of accounts of both the parties. The whole of the above unaccounted sales of helmets of Rs.4,87,68,333/- was added back to the income of the assessee and vide order dated 29.09.2021 the assessment was completed u/s 153A of the IT Act by determining the income of the assessee at Rs.5,42,27,612/- as against the income of Rs.38,68,830/- returned by the assessee. The above assessed income includes addition of Rs.15,90,449/- being unaccounted sales of helmets on delivery challans to various parties and addition of Rs.4,87,68,333/- being unaccounted sales of helmets to sister concern M/s. Vega Auto Accessories Private Limited.

4. Being aggrieved with the above assessment order, the assessee preferred an appeal before Ld. CIT(A). After considering the reply and submissions of the assessee, Ld. CIT(A) partly allowed the appeal by restricting the addition of Rs.15,90,449/- to 15% of such unaccounted sales and also restricted the addition of Rs.4,87,68,333/- to 5% of above unaccounted sales by observing as under :-

“5.7 During the appellate proceedings, the appellant re-iterated its contention that the alleged amount pertains to delivery challans for non-commercial activities such as free sample distribution for promotional purposes, employee welfare, and repairs or replacements of defective helmets. These activities inherently involve production costs, and taxing the entire sales value disregards the economic reality of the business. The appellant also contested that only real income shall be subjected to tax and thus in order to buy peace of mind, the appellant has agreed to offer 5% of said sale are income out of alleged unaccounted sales.

5.8 The contention of the appellant is considered and found to be acceptable. There is no denial of the fact that the appellant had unaccounted sale, the question arises about its quantum which is subjected to tax. It is also pertinent to note that no sale can be affected without incurring cost to purchase/ manufacture the goods. Therefore, due regards to cost of manufacturing shall be given to. In case of the appellant group of companies, one company the group company viz Vega Auto Accessories Pvt. Ltd. had filed an application with Interim Board of Settlement Commission (“IBS”) wherein it had entered into settlement to offer 15% as additional income out of its unaccounted sales which was un-earthed during search operations. Further, following judicial pronouncements also support the contention that only profitability shall be taxed and not the entire unaccounted sales.

CIT vs S.C.Kothari 1974 CTR [82 ITR 794 (SC)]

the tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business

Wall Street Construction Ltd. Vs. DCIT 75 TTJ 653-ITAT, Mumbai (TM)

While, the application of the rates of 12 per cent on the unrecorded turnover has to be upheld, we are of the opinion that the results shown by the appellant in the books of account have to be accepted. There is no dispute that the cash receipts of ‘on money’ for this year is Rs. 35,00,000 approximately. We are, therefore, of the opinion that on this turnover, a rate of 12 per cent should be applied following the order of the Tribunal for assessment year 1991-92. As far as the balance of the turnover is concerned, the rate as shown 12 per cent by the appellant should be accepted.

5.9 In view of the above and having regards to resolution achieved under IBS proceedings, I am of the considerate opinion that only certain portion of said unaccounted sales shall be added instead of entire sum of money. As far as next question of quantification of such portion of profitability is concerned, based of IBS resolution, I find that 15% of such unaccounted sale shall be treated as income reasonable profitablility be charged to taxed.

5.10 Therefore, the addition made by Ld. AO is restricted to 15% of such unaccounted sales.

5.11 Accordingly, Ground 1 of the appeal is Partly Allowed.

6.0 Ground 2

6.1 During the course of survey u/s. 133A of the Income tax Act, 1961 conducted on 2811- 2019 in the premises of the appellant at the Udyambag office and Desur factory premises of the appellant, the pen drive found and impounded as 133NVAP/BLG/IO at Desur factory contained the data maintained in an excel sheet named New Microsoft Office Excel Worksheet.xlsx. The data in this excel sheet contained the sales made by the appellant to M/S Vega Auto Accessories Pvt. Ltd. which were not accounted for in the books of the appellant.

As per the data maintained in this excel sheet named New Microsoft Office Excel Worksheet.xlsx the total of such unaccounted sales to the company, M/S Vega Auto Accessories Pvt. Ltd. was Rs.3,90,05,000/- in FY 2015-16 and Rs.4,87,68,333/- in the FY 2016-17. On seeking explanation if the said sales were accounted for in the regular books of account, Shri. Shrikant Nagare admitted in the statement recorded u/s 131 of the Income Tax Act, 1961 on 25.02.2020, that these transactions are not reflected in the books for FY 2015-16 and FY 2016-17. In said statement while answering to question 15, Mr. Shrikant Nagare had also accepted that appellant had received cash worth Rs.4,87,68,333/- from Vega Auto.

6.2 The appellant contested that due to limitation at factory of Vega Auto, these products were manufactured at factory of the appellant and Vega Auto in its application to IBS has already factored this unaccounted sales.

6.3 The contention of the appellant were not accepted by the Ld. AO for the reason that cash was received by appellant from Vega Auto and thus the underlined sales are separate sales. Thus, the Ld. AO added the entire sum of Rs. 4,87,68,333/- during year under consideration.

6.4 During the appellate proceedings, the appellant that that M/s. Vega Auto Accessories Pvt. Ltd has already acknowledged and disclosed the said sales as its income for AY 2017-18. Furthermore, the profit element on these sales has been offered to tax by M/s. Vega Auto Accessories Pvt. Ltd. during proceedings before the Income Tax Settlement Commission. This establishes that the income arising from the alleged unaccounted sales has already been taxed in the hands of the rightful entity. Any further addition in the appellant’s hands would result in double taxation of the same income, which is against the principles of equity and fairness under the Income Tax Act, 1961.

6.5 The appellant also submitted that being a manufacturing entity, the company incurs significant costs to produce these helmets, and earnings cannot be equated with the gross sales value alone. Thus, once again the appellant pleaded to restrict addition to net profit only instead of entire amount. Additionally, the appellant filed following chart depicting the net profit ratio of prior years from the audited data:

6.6 Hence, considering the margins in the business and the audited data and to maintain peace and avoid prolonged litigation, the appellant company is submitted to offer 5% of the alleged sales as its income.

6.7 The contention of the appellant are considered and found to be acceptable. ON perusal of the assessment order, it is observed that While recording statement, Mr. Shrikant Nagare has also acknowledged about cash payments which is not commented by Ld. AO. It is obvious that sales cannot be made without incurring cost of production and other incidental cost.

6.8 The appellant has also filed copy of IBS resolution dated 22 September 2023, on perusal of said resolution, it is observed that IBS has very well recognized unaccounted purchase made by Vega Auto from Vega Aviation (i.e. appellant) and Vega Auto has onward sold these products. Such sales of Vega Auto remained unaccounted and as per IBS resolution Vega Auto has paid taxes on 15% of profit from said unaccounted sales.

6.9 However, regards are also paid towards finding of survey team wherein it was found that un accounted sales were made to Vega Auto. Each entity being separate entity and profit centre, presence of element of profit can not be ignored while selling goods to related party. Moreover, the appellant has also not filed any explanation/ justification with supporting documentation to demonstrate that goods were supplied on cost to cost to basis. In the absence of any evidences to the contrary, and in the light of the discussion in the previous paragraphs, a profit estimate is to be determined.

6.10 In the impugned case, it is pertinent to mention since the appellant is an intermediary/ contract manufacturer and ultimate sale of goods if made by Vega Auto and the end profitability of sale of same goods is already taxed in hands of Vega Auto, therefore taxing the same goods once again at similar net profit rate percentage would lead to unreasonable profitability being taxed in hands of appellant group.

6.11 In view of the above, I am of the considered opinion that in the absence of any specific details and claim at appellant’s side, the profit margin of 5% is estimated to be reasonable for charge of tax.

6.12 Therefore, I direct the AO to treat 5% of alleged sale as the unaccounted income earned by the appellant from to Vega Auto. The remaining addition on unaccounted sale are deleted.

6.13 Accordingly, Ground 2 of the appeal is Partly Allowed.”

5. It is the above order against which the Revenue is in appeal before this Tribunal.

6. We have heard Ld. Counsels from both the sides and perused the material available on record including the written submission furnished by the assessee. In this regard, we find that it is the grievance of the Revenue that Ld. CIT(A) erred in applying the estimated profit @ 5% on the unaccounted sales of Rs.4,87,68,333/- instead of applying 15% profit rate which was accepted by Settlement Commission in the case of sister concern M/s. Vega Auto Accessories Private Limited on the same transaction and moreover Ld. CIT(A) himself applied 15% profit rate on unaccounted sales of Rs.15,90,449/- in its own order.

7. In this regard, we find that two different transactions were unearthed in two different proceedings. In search action u/s 132 of the IT Act unaccounted helmets sales of Rs.15,90,449/- made through delivery challan was found which was sold to persons who do not have any connection with the assessee and therefore, Ld. CIT(A) applied 15% profit rate. In survey u/s 133A of the IT Act, unaccounted helmet sales of Rs.4,87,68,333/- was found which was sold to sister concern M/s. Vega Auto Accessories Private Limited and Ld. CIT(A) applied only 5% profit in the hands of the assessee, instead of 15% profit rate, since sister concern M/s. Vega Auto Accessories Private Limited already offered 15% profit before Settlement Commission on the same transaction.

We further find that the seller i.e. the assessee and the purchaser i.e. M/s. Vega Auto Accessories Private Limited are same group companies having common directors and the assessee being intermediary manufacture and the purchaser M/s. Vega Auto Accessories Private Limited being principle manufacturer, both cannot earn 15% profit in the same transaction which would result in 30% profit in the hands of same group companies and for this reason alone Ld. CIT(A) estimated only 5% profit in the hands of the assessee since the purchaser who happens to sister concern of the assessee has already accepted to pay tax on profits estimated @ 15% on the unaccounted purchase made from the assessee.

8. In this regard, para no.6.10 to 6.12 of Ld. CIT(A)’s order are relevant, which reads as under :-

“6.10 In the impugned case, it is pertinent to mention since the appellant is an intermediary/ contract manufacturer and ultimate sale of goods if made by Vega Auto and the end profitability of sale of same goods is already taxed in hands of Vega Auto, therefore taxing the same goods once again at similar net profit rate percentage would lead to unreasonable profitability being taxed in hands of appellant group.

6.11 In view of the above, I am of the considered opinion that in the absence of any specific details and claim at appellant’s side, the profit margin of 5% is estimated to be reasonable for charge of tax.

6.12 Therefore, I direct the AO to treat 5% of alleged sale as the unaccounted income earned by the appellant from to Vega Auto. The remaining addition on unaccounted sale are deleted.

9. Considering the totality of the facts of the case and in the light of admission of the Department that 15% profit has already been disclosed by the sister concern on the same unaccounted sale/purchase before Settlement Commission, we are of the considered opinion that the assessee cannot earn 15% profit as well, since 15% + 15% will become 30% net profit in the hands of same group companies which is not practical. Accordingly, we do not find any error in the order passed by Ld. CIT(A) and the same is confirmed. Thus, the grounds of appeal raised by the Revenue are dismissed.

10. Even otherwise the appeal of the Department is not maintainable since the tax effect appears to be less than Rs.60 lakhs. In this regard, we find that the Department is contesting to take 15% profit on unaccounted sales of Rs.4,87,68,333/- whereas Ld. CIT(A) has already determined 5% profit and now only 10% profit is under dispute which comes to Rs.48,76,833/-, therefore in any case the disputed tax amount cannot be more than Rs.48,76,833/- which is less than the monetary limit of Rs.60 lakhs prescribed by CBDT.

11. In the result, the appeal filed by the Revenue is dismissed.

Order pronounced on this 03rd day of September, 2026.