ACIT Vs Gurudatt Shrikant Bhobe (ITAT Panaji)
Entire Suppressed Sales Cannot Be Taxed as Income: ITAT Applies 23% Profit Rate to Salon Receipts
The Income Tax Appellate Tribunal, Panaji Bench, in ACIT v. Gurudatt Shrikant Bhobe and the connected proceedings involving Archana Bhobe, held that only the profit embedded in suppressed business receipts, rather than the entire receipts, should be taxed. It reduced the estimated net profit rate from 25% to 23% on unaccounted sales turnover.
The consolidated order, pronounced on 23 October 2026, concerned Assessment Year 2016–17. The Bench comprised Dr. Manish Borad, Accountant Member, and Shri Vinay Bhamore, Judicial Member. Both Revenue appeals were dismissed, while the assessees’ cross-objections were partly allowed.
Background of the Salon and Spa Business
The assessee operated a business owning and managing salons and spas, with branches across India.
He filed his original return on 14 October 2016, declaring income of Rs. 94,82,500.
Following a search under Section 132 on 28 December 2016, the Department issued a notice under Section 153A. In response, the assessee filed a return on 18 April 2018, declaring income of Rs. 1,58,79,610.
The assessee was governed by the Portuguese system of community of property. Accordingly, income other than salary was apportioned equally between husband and wife under Section 5A, and the spouse’s assessment involved identical issues.
Search Revealed Suppressed Gross Receipts
During the search, the Department examined the business’s “Divine Beauty” point-of-sale software, in which actual sales were recorded.
The software initially indicated sales of approximately Rs. 13.58 crore, against declared sales of Rs. 9,34,52,546.
During post-search proceedings, the assessee accepted actual turnover of approximately Rs. 15.52 crore. The Assessing Officer consequently identified suppressed sales of Rs. 6,17,64,014.
The assessee claimed that unrecorded expenses had also been incurred against those receipts. However, the officer rejected those claims for lack of supporting evidence.
After giving credit for additional income offered, the officer added the remaining amount, allocating it equally between the spouses.
CIT(A) Taxes Profit Instead of Entire Receipts
Before the CIT(A)-2, Panaji, the assessee relied on decisions recognising that suppressed sales do not automatically represent an equivalent amount of taxable profit.
The appellate authority accepted that principle but did not fully accept the expenses claimed.
It noted that some expenditure, including additional salaries, incentives and consumables, could relate directly to unaccounted sales. Nevertheless, the assertion that all unrecorded expenses were proportionate to those sales required justification.
The CIT(A) therefore estimated net profit at 25% of unaccounted turnover, granting substantial relief against the assessment.
Both sides challenged aspects of that conclusion before the Tribunal.
Revenue Seeks Restoration; Assessee Seeks Lower Rate
The Revenue objected to taxing only a percentage of the suppressed receipts and sought restoration of the assessment.
The assessee, through cross-objections, sought acceptance of the 21.85% profit rate stated to result after additional income was offered.
The Tribunal also considered a Revenue ground concerning telescoping of Rs. 1,74,40,297 in cash found at another person’s residence.
It dismissed that ground as infructuous, observing that it did not arise from the impugned order and appeared to have been incorrectly raised.
A separate additional ground challenging approval under Section 153D was dismissed as not pressed.
Judicial Precedents Support Profit Estimation
The Tribunal referred to CIT v. President Industries, CIT v. Balchand Ajit Kumar, and CIT v. S. M. Omer.
It recognised the principle that total sales cannot simply be treated as profit and that an appropriate profit rate depends on the facts.
The Bench also referred to Sumer Builders v. DCIT, which treated unaccounted receipts as distinct from income itself, with only the embedded profit chargeable.
These authorities supported the CIT(A)’s decision to estimate profit rather than tax the entire suppressed receipts remaining after the disclosed additional income.
Absence of Vouchers Did Not Eliminate All Expenses
The Tribunal noted that claimed unrecorded expenses included approximately Rs. 1.40 crore in purchases and Rs. 3 crore in salaries and wages.
Although the Assessing Officer had denied those expenses for want of vouchers, the Tribunal observed that expenses necessarily arise in effecting sales.
It therefore upheld the use of a net profit estimate.
At the same time, the lack of supporting evidence prevented automatic acceptance of every claimed expense. The appropriate response was estimation, rather than either complete allowance of the claims or treatment of all receipts as profit.
Tribunal Reduces Profit Rate to 23%
The Bench considered the recorded 19% book profit rate, the stated increase to 21.85% after additional disclosure, and the assessee’s submissions regarding common estimation benchmarks.
It adopted 23% net profit, replacing the CIT(A)’s 25% rate on unaccounted sales turnover.
This was a factual estimate for the business; the Tribunal did not apply Section 44AD presumptive taxation to the entire turnover.
Final Outcome
The same reasoning applied to Archana Bhobe’s connected proceedings.
Both Revenue appeals were dismissed, and both cross-objections were partly allowed, with unaccounted business income to be determined using the 23% profit rate.
Cases Discussed
- Collector, Land Acquisition, Anantnag & Anr. Vs. Mst. Katiji & Ors. — (1987) 2 SCC 107; 167 ITR 471 (SC). Relied upon for condonation of the 325-day delay in filing the cross-objection.
- Inder Singh Vs. State of Madhya Pradesh — 2025 INSC 382; Supreme Court; judgment dated 21.03.2025. Relied upon in considering reasonable cause for condonation of delay.
- Kanhaya Metal Works Vs. Commissioner of Income Tax (Appeal) — Punjab and Haryana High Court; 2023; citation referred to in the Revenue’s grounds. The Revenue relied on this decision while challenging the estimation of profit on unaccounted receipts.
- CIT Vs. President Industries — (2002) 258 ITR 654 (Gujarat High Court). Held that the entire undisclosed sale proceeds cannot automatically be treated as income.
- CIT Vs. Balchand Ajit Kumar — (2004) 135 Taxman 190 (Madhya Pradesh High Court). Referred to in support of taxing the profit component of suppressed sales.
- CIT Vs. S.M. Omer — (1992) 62 Taxman 46 (Calcutta High Court). Cited in connection with estimation of taxable profit from unaccounted sales.
- Sumer Builders Vs. DCIT — ITA No. 4915/Mum/2016; ITAT Mumbai; order dated 09.01.2021. Relied upon for the principle that on-money receipts are not income per se and only the embedded profit is taxable.
FULL TEXT OF THE ORDER OF ITAT PANAJI
The captioned appeals at the instance of Revenue and Cross Objection by the respective-assessees pertaining to A.Y. 2016-17-19 are directed against the separate orders dated 05.07.2024 of ld. CIT(A)-2, Panaji emanating out of respective Assessment Orders passed u/s.143(3) r.w.s.153A of the Income Tax Act, 1961 (in short ‘the Act’).
2. These appeals pertain to Husband and Wife and the issues raised are identical, we therefore proceed to adjudicate the appeals by this consolidated order for the sake of convenience.
3. Registry has pointed out that the cross objection No.05/PAN/2025 is belated by 325 days before this Tribunal. Assessee has filed an Affidavit stating the reason. On going through the said reason, we find that ‘reasonable cause’ prevented the assessee from filing the cross objection within the stipulated time. We therefore condone the delay in filing the cross objection placing reliance on the judgments of Hon’ble Apex Court in the case of Collector, Land Acquisition, Anantnag & Anr. Vs. Mst. Katiji & Ors. reported in (1987) 2 SCC 107 and in the case of Inder Singh Vs. State of Madhya Pradesh judgment dated 21.03.2025 (2025 INSC 382.
4. We will first take up ITA No.259/PAN/2024 along with C.O.No.05/PAN/2025 :
5. Revenue has raised following grounds of appeal :
“(1). The Ld. CIT(A) erred in directing the A.O. to treat only 25% of unaccounted receipts as income earned, thereby ignoring the ratio of decision held in the case of Hon’ble High Court of Punjab and Haryana in the case of Kanhaya Metal Works Vs Commissioner of Income Tax (Appeal) [2023] 153 taxman.com(Punjab & Haryana).
(2). The Ld CIT(A) erred in directing the AO to provide telescoping to the unaccounted cash of Rs. 1,74,40,297 found in the residence of Shri JP Agarwal.
(3). For the above grounds and any additional grounds that may be urged during the course of hearing it is prayed that the order of the Ld. CIT (A)-2, Panaji may be quashed and that of the AO restored.”
6. Assessee in its Cross objection has raised following grounds of appeal :
“1. The order of the learned CIT(A) is opposed to law and facts of the case.
2. The Id CIT(A) has erred in sustaining 25% of the unaccounted sales turnover as unaccounted income of the respondent, without considering the facts of the case.
3. The Id CIT(A) has erred in partly sustaining the addition made by the AO.
4. The learned assessing officer has erred in making the aforesaid additions under presumptions and surmise which has been wrongly sustained by the Id CIT(A).
5. The respondent prays to be allowed to add, vary and amend the grounds of cross-objections at or before the date of hearing.”
7. Assessee has also taken following additional ground of appeal challenging the validity of assessment u/s.143(3) r.w.s.153A of the Act on the ground that no valid approval u/s.153D of the Act. However, at the time of hearing, ld. Counsel for the assessee requested for not pressing the same. Accordingly, the said additional ground is dismissed as ‘not pressed’.
8. Brief facts of the case are that the assessee is an individual and declared income of Rs.94,82,500/- in the return of income for A.Y. 2016-17 filed on 14.10.2016. A search and seizure action u/s.132 of the Act carried out on 28.12.2016 followed by issuance of notice u/s.153A of the Act on 22.03.2018. In response, the assessee furnished return on 18.04.2018 declaring income at Rs.1,58,79,610/- as against Rs.94,82,500/- declared in the original return of income. The assessee is engaged in the business of owning and managing salons and spas and has various branches across India. Assessee is governed by the sustem of community of property (known under the Portuguese Civil Code of 1860 as ‘COMMNIAO DOS BENS’) and the income earned other than salaries is apportioned equally between the husband and the wife as provided in section 5A of the Act. Therefore, the spouse of the assessee namely Archana Bhobe was also separately scrutinised. During the course of search, it was submitted that the assessee maintains a point of sales software called “Divine Beauty” in which the actual sales are recorded and as per the said software the sales for the year were Rs.13.58 crore as against the sales declared in the Income Tax Return at Rs.9,34,52,546/-. When confronted during the search, assessee accepted them to be suppressed gross receipts. During the course of post search proceedings, assessee accepted the actual turnover at Rs.15.52 crore and also claimed the expenses which are out of books of account at Rs.4.90 crore approx. but the assessee could not prove the genuineness of these expenses. Ld. Assessing Officer accordingly concluded the proceedings observing that the difference of suppressed sales is Rs.6,17,64,014/-. The assessee has offered additional income at Rs.1,27,94,233/-. Difference remains at Rs.4,89,69,781/-. Therefore, 50% is to be added in the hands of assessee at Rs.2,44,84,890/- and the remaining addition made in the hands of spouse. Thus, income assessed at Rs.4,03,64,500/-.
9. Aggrieved assessee preferred appeal before ld.CIT(A) and placed reliance on plethora of decisions consistently holding that in case of suppressed gross receipts only the profit element deserves to be taxed. Based on these decisions, ld.CIT(A) applied Net profit @25% as against 21.85% declared by the assessee and gave substantial relief to the assessee.
10. Aggrieved Revenue is now in appeal raising two grounds, firstly against the application of Net Profit @25% and secondly challenging the finding of ld.CIT(A) directing the Assessing Officer to provide Telescoping benefit to the unaccounted cash of Rs.1,74,40,297/- found at the residence of J.P. Agarwal. We note that Ground No.2 raised by the Revenue is not arising out of the impugned order and therefore seems to have been wrongly taken and therefore the same is dismissed as Infructuous.
11. On the other hand, assessee has raised cross objections claiming that Net Profit offered by the assessee at 21.85% ought to have been accepted as against 25% adopted by ld.CIT(A).
12. Ld. DR vehemently argued supporting the order of Assessing Officer.
13. Ld. Counsel for the assessee supported the finding of ld.CIT(A) estimating the Net Profit on the suppressed sales but also claiming that assessee has already disclosed higher Net Profit rate because the Net Profit to sales in the books is 19% but the assessee has offered additional income which has increased the Net Profit rate to 21.85% and the same should be accepted.
14. We have heard the rival submissions made by the parties and perused the record placed before us. The issue for our consideration is the estimation of Net Profit rate. Admittedly, the assessee has suppressed the gross receipts to the extent of Rs.6,17,64,014/-. Assessing Officer has made the addition for the total suppressed receipts after giving the benefit of additional income offered by the assessee at Rs.1,27,94,233/-. For the remaining suppressed sales, addition was made by the Assessing Officer. Assessee Challenged the same before ld.CIT(A). Ld.CIT(A) has considered plethora of judicial precedents including that of Hon’ble High Court of Gujarat in the case of CIT Vs. President Industries (2002) 124 Taxman 654 (Gujarat), CIT Vs. Balchand Ajit Kumar (2004) 135 Taxman 190 (Madhya Pradesh High Court), CIT Vs. S.M. Omer (1992) 62 Taxman 46 (Calcutta) and other judgments consistently holding that the total sales cannot be recorded as profit of the assessee and the Net Profit rate has to be adopted and adopting such Net Profit cannot be said that there is perversity of approach and whether the Net Profit is low or high would depend upon the facts of each case. We also take note of the decision of Coordinate Bench, Mumbai in the case of M/s. Sumer Builders VS. DCIT in ITA No.4915/Mum/2016 dated 09.01.2021 holding that on-money receipts are in the nature of undisclosed receipts and not income per se and therefore only the profit element embedded therein is liable to be taxed and not the entire receipts. Considering all these judicial precedents, ld.CIT(A) estimated the Net Profit @25% and the relevant observation of ld.CIT(A) reads as under :
“5.3 It can, thus, be seen that consistently, this Court and some other Courts have been following the principle that even upon detection of on-money receipt or unaccounted cash receipt, what can be brought to tax is the profit embedded in such receipts and not the entire receipts themselves. If that be the legal position, what should be estimated as a reasonable profit out of such receipts, must bear an element of estimation.
5.4 The appellant had offered Rs.56,03,591/- as additional income on account of unaccounted net profits earned from the unaccounted sales turnover. This ratio comes out to 21.85% whereas the accounted net profit to sales turnover was 19%. I have also gone through the unaccounted expenses claimed by the appellant against the receipts. While some of the expenses were almost directly related to the sales (say, additional salary, incentives, consumables, miscellaneous expenses etc), the appellant’s claim that all the unaccounted expenses were proportionate to the unaccounted sales generated is not acceptable. Certain expenses may not have been spent by the appellant even partly for generation of unaccounted income and cannot be accepted as such unless these claims are sufficiently justified by the appellant. The AO also pointed out in the remand report that the appellant had simply worked out the out-of-books expenses on the percentage of gross profit without justifying the actual occurrence. Therefore, the claim of the appellant as reported in the return of income cannot be accepted fully. Further, considering that the appellant had not maintained the correct or complete books of account, and since the unaccounted sales turnover for A.Y 2015-16 was an estimated figure, the AO ought to have rejected the books of account and estimated the unaccounted income as a percentage of unaccounted sales. In the absence of the same and in the light of the previous paragraphs, I direct the AO to treat 25% of unaccounted sales turnover as the unaccounted income earned by the appellant from the business activity. The remaining additions are deleted. Accordingly, the grounds of appeal of the appellant is considered as partly allowed.”
15. On going through the above finding of ld.CIT(A), we fail to find any inconsistency so as the applicability of Net Profit rate is concerned because ld. Assessing Officer has only referred the suppressed gross receipts. Further, it is also noticed that during the course of assessment proceedings assessee has referred to out of books expenses at Rs.4,89,69,781/- incurred under various head which mainly included the amount of purchases at Rs.1,40,50,152/- salaries and wages at Rs.,3,00,44,144/- etc. Ld. Assessing Officer has not given the benefit of these out of books expenses for lack of supporting vouchers. However, for effecting the sales, expenses are to be incurred and therefore the application of Net Profit rate is justified.
16. Now remains the issue of Net Profit rate to be applied, which we find that assessee has declared 19% Net Profit rate and after offering additional income at Rs.56,03,591/- Net Profit rate increased to 21.85% and ld.CIT(A) has applied 25% Net Profit rate. We find during the course of appellate proceedings assessee has contended that as per section 44AD of the Act the Net Profit rate of 8% is applied on the turnover, if it does not exceeds the limit of gross receipts as prescribed u/s.44AD of the Act and that such 8% Net Profit rate is a benchmark normally applied by the Revenue authorities while making the Best Judgment assessment. It is also been stated that assessee has already offered 19% Net Profit rate which is much higher than the accepted standards and on adding the additional income the Net Profit worked out at 21.85%. Considering these observations, we deem it appropriate to apply Net Profit rate at 23% as against 25% applied by ld.CIT(A) on the unaccounted sales turnover as the unaccounted income earned by the assessee is from the business activity. Accordingly, the grounds of appeal raised by the Revenue are dismissed and the cross objections raised by the assessee are partly allowed.
17. The facts and the issues in the case of spouse of assessee namely Archana Bhobe are also identical and therefore our decision given in the case of husband Gurudatta Shrikant Bhone shall apply mutatis mutandis to this appeal as well. Grounds of appeal raised by the Revenue are accordingly dismissed whereas the Cross Objection filed by the assessee is partly allowed.
18. To sum up, both the appeals of the Revenue are dismissed and the cross objections filed by the assessee are partly allowed a per the terms indicated hereinabove.
Order pronounced on 23rd October 2026 under Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963.
