Difference between sales as per books and in TDS certificate, only the profit element is taxable and not the entire amount.

Cuttack bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of R.R. Caryying Corpn. v. ACIT [2009] 126 TTJ 240 (Cuttack) held that only the embedded portion of the profits is to be considered as taxable and not the entire amount in the case of discrepancies between the sales or receipt amount as per books of accounts and the amount shown in TDS certificate, for taxability purpose. Accordingly, the Tribunal directed the Assessing Officer (AO) to adopt the gross profit rate declared by the taxpayer for the assessment year under consideration and compute addition accordingly.

Facts of the case

The taxpayer was engaged in the transport business. During the course of assessment proceedings, the AO found the discrepancies of INR 1.4 million between the receipts shown in the TDS certificate submitted and the books of accounts of the taxpayer. Accordingly, the AO made an addition of INR 1.4 million as undisclosed transportation receipts which was also confirmed by the Commissioner of Income-tax (Appeals).

Taxpayer’s contentions

The taxpayer contended that the books of accounts like cash books, ledger, journal and vouchers are maintained and audited under section 44AB of the Act and these books were produced before the AO. Further, since the taxpayer did not receive this amount the taxpayer should not be taxed for the same.

Alternatively, entire gross amount of INR 1.4 million should not be added as taxable income without allowing any expenditure or estimating profit on the difference, detected in respect of gross receipt. Accordingly, only estimated profit usually earned on the amount of INR 1.4 million should be added instead of adding the whole amount.

In that connection, the taxpayer relied on various judicial precedents in the cases of 1. CIT v. President Industries (2002) 258 ITR 654 (Guj) 2. CIT v. Balchand Ajit Kumar (2003) 263 ITR 610 (MP) 3. Balasore Synthetic (P) Ltd. v. DCIT in ITA No. 141/Ctk/2008 wherein it was held that in the case of discrepancies in receipts or sales entire amount of sales or receipts cannot be added and only the profits embedded in sale profits should be taxed.

Tribunal’s ruling :-The Tribunal after relying on the decisions cited by the taxpayer held that in the case of discrepancies between the sales or receipt amount as per books of accounts and the amount shown in TDS certificate, for taxability purpose, only the embedded portion of the profits is to be considered as taxable and not the entire amount. Accordingly, the Tribunal directed the AO to adopt the gross profit rate declared by the taxpayer for the assessment year under consideration and compute addition accordingly.

This is a welcome decision by the Cuttack Tribunal which resolves a practical difficulty faced by the taxpayers. It is pertinent to note that even in the case of Eagle Seeds & Biotech Ltd. v. ACIT [2006] 100 ITD 301 (INDORE) the Indore Tribunal held that undisclosed income on unaccounted purchases could be computed by applying the net profit rate and not the gross profit rate on such purchases.