[2013] 36 taxmann.com 61 (Article)
Unearthed Sale
Whether total unearthed sale or only profit thereon would tantamount to additions?
AKHILESH KUMAR SAH
Advocate
Introduction
1. In the judgment of ITAT, Lucknow in case of Dr. Anoop Manchanda v. CIT(A) [IT Appeal Nos. 223 & 224/LKW/12, dated 27-8-2012], the Hon'ble Members of the Division Bench have held that the entire amount of sales could not represent the income of the assessee who had not disclosed the sales, as the sales only represented the price received by the seller of the goods in excess over the cost incurred; in that event only the part of the profit could become the income.
Facts of the case in brief
2. There were two appeals filed by the appellant against the order of the CIT(A), Lucknow challenging the validity of action taken under section 148 of the Income-tax Act, 1961 as well as for the addition of entire amount of undisclosed sales of medicines & opticals found during survey done under section 133A in the business premises of the appellant, amounting to Rs. 137,071 in A.Y. 2002-03 & Rs. 58,250 in A.Y.2003-04. Besides that appellant also challenged the disallowance of salary paid to employees of Rs. 39,600 in A.Y.2002-03 & Rs. 43,600 in A.Y.2003-04.
Decision in the case in brief
3. The ITAT Lucknow relied on the judgment of the Gujarat High Court in the case of CIT v. President Industries [2002] 124 Taxman 654and held that it might be correct that the entire amount of sales could not represent the income of the assessee who had not disclosed the sales, as the sales only represented the price received by the seller of the goods in excess over the cost incurred for such medicines and in that event only the part of the profit could become its income. In respect of disallowance of salary it was held by the Division Bench that the reasonableness of the salary could not be a basis to treat the actual amount paid as excessive or that the amount had been paid for the work not done by its employees. Revenue's case was not that the assessee had inflated salary in the name of any of its employees nor that salary was shown to have been paid to non-existent persons. The Tribunal delivered its golden ruling that the reasonableness of the salary could not be the basis to treat the actual amount paid as excessive.
4. Rulings in similar other cases
4.1 In British South Africa Co. v. CIT - No gain or profit could be said to arise unless and until a balance had been struck between the cost of acquisition and the proceeds of sale British South Africa Co. v. CIT [1946] 14 ITR 17 (PC)(Supp.).
4.2 In CIT v. Motilal Padmpat Sugar Mills (P.) Ltd. - In CIT v. Motilal Padampat Sugar Mills (P.) Ltd.[1992] 196 ITR 25 (All.) the assessee received Rs. 2,05,000 as compensation and Rs.12,500 towards interest thereon. It was held that the reopening of the assessment under section 147(a) by treating whole of the receipts as income, on the facts & circumstances of the case, was not valid.
4.3 In Brij Bhushan Lal Praduman Kumar v. CIT - In Brij Bhushan Lal Praduman Kumar v. CIT [1978] 115 ITR 524 (SC) the cost of materials supplied by the Government (M.E.S. Department) for being used in the execution of works was held liable to be taken into consideration while estimating the profits of a contractor.
4.4 In Calcutta Co. Ltd. v. CIT - In Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), the Supreme Court observed at page 8 as under:
"When we speak of the profits and gains of a trader we mean that which he had made by his trading. Whether there be such a thing as profit or gain can only be ascertained by setting against the receipts the expenditure or obligations to which they have given rise".
4.5 In Motipur Sugar Factory Ltd. v. CIT - In Motipur Sugar Factory Ltd. v. CIT [1955] 28 ITR 128 (Pat.), at page 133, the Patna High Court observed as follows:
"Now to my mind it is very clear what is the intuitus, both from the enactment and from the rules under which the duties are to be ascertained. The thing to be taxed is the amount of profits and gains. The word 'profits' I think is to be understood in its natural and proper sense-in a sense which no commercial man would misunderstand. But when once an individual or a company has in that proper sense ascertained what are the profits of his business or his trade the destination of those profits or the charge which has been made on those profits by previous agreement or otherwise, is perfectly immaterial. The tax is payable upon the profits realized, and the meaning to my mind is rendered plain by the words 'payable out of profits'".
" The profit of a trade or business is the surplus by which the receipts from trade or business exceeded the expenditure necessary for the purpose of earning those receipts..............Unless and until you have ascertained that there is such a balance, nothing exists to which the name of profits can properly be applied."
4.6 In Badridas Daga v. CIT - Profits and gains which are liable to be taxed under section 10(1) of the I.T. Act 1922 (corresponding to section 28 of the IT Act, 1961) are what are understood to be such under ordinary commercial principles (Badridas Daga v. CIT [1958] 34 ITR 10 (SC)).
4.7 In CIT v. A. Krishnaswami Mudaliar - The Supreme Court in CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 observed as under:
"In computing the balance of profits and gains for the purposes of income-tax,....two general and fundamental common places have always to be kept in mind. In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts. In the second place, the account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting, so far as applicable, and in conformity with the rules of the Income-tax Act, or of that Act as modified by the provisions and schedules of the Acts regulating excess profits duty, as the case may be. For example, the ordinary principles of commercial accounting require that in the profit and loss account of a merchant's or manufacturer's business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower, although there is nothing about this in the taxing statutes."
4.8 In CIT v. Kalyanji Mavji & Co. - On accepted commercial practice and trading principles an item of business expenditure must be deducted in order to arrive at the true figure of profits and gains for tax purposes (CIT v. Kalyanji Mavji & Co. [1980] 122 ITR 49 (SC)).
4.9 In CIT v. Caixa Economica De Goa - While the assessee cannot re-agitate claims already assessed, it is open to the assessee in reassessment proceedings to put forward claims for deduction of any expenditure which is relatable to the income which is sought to be assessed as escaped income in the reassessment proceedings [CIT v. Caixa Economica De Goa [1994] 210 ITR 719 (Bom.)]
4.10 In CIT v. Jahanganj Cold Storage - The Allahabad High Court has observed in CIT v. Jahanganj Cold Storage [1989] 44 Taxman 139 that all receipts by an assessee may not necessarily be income of the assessee for the purpose of the Income-tax Act.
Conclusion
5. On the finding of unrecorded sales of an assessee some reasonable percentage may be taken as the net income and not the whole of the sales. Section 44AD speaks of minimum 8% net profit in estimation of a scheme. As per accepted accounting principles the cost of sales has to be deducted from sales while computing profits. However, for the source of purchase and expenses reasonable explanation has to be provided. Also, reasonability of the salary paid from allowance point of view in a concern depends upon the actual payments made and facts and circumstances of the case.
Regards
Prarthana Jalan
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