Profit Element Embedded In Unexplained Sales Can Only Be Treated As Undisclosed: Rajkot ITAT

While rejecting the estimation of profit at 12.5% deduced by AO on account of undisclosed sales, the Rajkot ITAT held that there has to be a reasonable basis for applying a particular net profit rate in each case.

The Bench of Annapurna Gupta (Accountant Member) & Madhumita Roy (Judicial Member) observed that “It is basic common sense that net profit to be applied is to be at justifiable rate depending upon nature of the business and other facts. It cannot be simply an adhoc rate”. (Para 12)

As per the brief facts of the case, during search at the residential premises of the director of the assessee-company, various incriminating material by way of WhatsApp message/images were discovered along with material from the mobile phone of the director of the assessee-company, Dhirendra Kavar and on analysis of the same, it was discovered that the assessee had made out of books sales which during the impugned year amounted to Rs.2,35,42,980/-. The AO added entire undisclosed sales to the income of assessee. On appeal, the CIT(A) restricted the same to the profit element embedded therein and estimated at the rate of 8% of the sales.

The Bench noted that the solitary issue for adjudication is vis-à-vis addition confirmed by the CIT(A) on account of unaccounted sales revealed to the AO during search action conducted.

The Bench found that even though the Revenue contended that the CIT(A) ought to have applied 12.5% net profit rate instead of 8%, however, the Revenue has not given any basis to justify applying higher rate of net profit at 12.5%.

Finding that the DR has not supported his contention of applying 12.5% GP rate with any reasonable basis, the ITAT dismissed the appeal of Revenue.

Counsel for Appellant/ Department: Shramdeep Sinha

Counsel for Respondent/ Taxpayer: Mehul Ranpura

Case Title: ACIT verses Conor Granito P. Ltd

Case Number: ITA No.143/RJT/2021

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