Entire Undisclosed Sales Cannot Be Taxed; Only Embedded Profit Liable: ITAT

The assessee, an individual engaged in the trading of bricks, cement, rods and other construction materials, filed his return of income for AY 2018-19 declaring income of Rs. 3,50,488. The return and tax audit report reflected a turnover of Rs 52,14,340. Based on information and bank statement analysis, the Assessing Officer noticed total bank deposits of Rs 1,06,74,737. Proceedings were initiated, and the assessment was completed under Sections 147 read with 144B by treating the difference of Rs 54,60,397 as undisclosed sales and adding the entire amount to income.

The assessee contended that the short reporting of sales occurred due to an error by the auditor and that profit @7.03% had already been offered on the entire turnover, including the omitted sales, in response to notice. However, the CIT(A) dismissed the appeal and confirmed the full addition.

Question of Law:
Whether the entire amount of undisclosed sales can be added to income, or only the profit element embedded in such sales is taxable.

ITAT’s Decision: The ITAT held that even though the sales were understated due to the auditor’s mistake, the entire undisclosed turnover could not be brought to tax. It was observed that only the profit element embedded in the undisclosed sales is chargeable to tax.

Since the assessee had already declared and offered profit @7.03% on the total turnover, including the undisclosed sales, the addition of the entire amount of Rs. 54,60,397 was unjustified. Thus, the Tribunal deleted the addition made by the Assessing Officer and allowed the appeal of the assessee.

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