Unrecored sales

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Bhadresh (Querist)
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14 April 2009 Unrecorded sales found during search. Now A.O. can add only G.P. margin on unrecorded sales to profit or add full unrecoded sales to income.
please give some caselaws which add only G.P. margin on unrecorded sales to profit.

CA RAMESH KUMAR AHUJA

CA RAMESH KUMAR AHUJA (Expert)
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15 April 2009 The following opinion may help you:

WHAT should be the treatment given to undisclosed sales detected by the Income-Tax Department during a search? Can the entire undisclosed sales be added to the disclosed turnover and assessment made on that basis? That will mean that every rupee of an undisclosed sales represented profit earned.

Reconstructing the trading account taking the undisclosed sales to the sales side can inflate the gross profit by the corresponding figure. This issue has often confused the assessing officers.

During a search, in a case in Madhya Pradesh, it was found that there were credit sales, which were not reflected in the books of accounts. The assessing officer added a sum of Rs 8,19,255 towards sale profit of the assessee.

The CIT (Appeals) came to the conclusion that the entire credit sales could not have been included in the total income of the assessee and accordingly followed the method of adding a net profit of 5 per cent on sales. The addition was limited to Rs 40,960.

The Revenue went in appeal and lost before the Tribunal. The question before the Madhya Pradesh High Court was whether the assessee, having not included the credit sales in the books of accounts and in the balance-sheet, the Tribunal was justified in assuming that the assessee followed a different method of accounting for unrecorded sales, without any factual basis and as such whether the order of the Tribunal did not suffer from perversity being against settled principles of accountancy.

The MP High Court ruled that the amount of sales by itself could not represent the income of the assessee who has not disclosed the sales. The sales represented the price received by the seller of the goods for the acquisition of which he 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.

Unless there is a finding to the effect that investment by way of incurring the cost in acquiring the goods which have been clandestinely sold has been made by the assessee and such investment has also not been disclosed, there can be no addition of the entire sum of undisclosed sales as income.

If there is no evidence of suppression of investment in acquiring the goods, which have been found the subject of undisclosed sales, only a net profit rate can be adopted (CIT vs Balchand Ajit Kumar — 263 ITR 610).