Facing tax troubles? A recent Income Tax Appellate Tribunal (ITAT) ruling provides crucial insights into how profit margins on 'off-the-books' sales are assessed, particularly for high-value items. This case involves Sunil Kumar Agarwal, a dealer in precious and semi-precious stones, and it highlights a significant reduction in the estimated Gross Profit (GP) rate applied to his undisclosed sales.
The Jaipur Bench of the ITAT stepped in to offer partial relief, reducing the initially imposed GP rate. This decision has implications for anyone dealing with similar situations.
The core of the matter revolves around unaccounted sales made by Agarwal between the assessment years 2016-17 and 2020-21. These sales came under scrutiny after a search operation. For the assessment year 2020-21, Agarwal admitted to unaccounted sales totaling ₹82,89,580, declaring a Gross Profit of 5%.
However, the Assessing Officer (AO) wasn't satisfied with this. The AO rejected the 5% rate, instead imposing a flat 10% GP rate on all the unaccounted sales. The AO justified this higher rate by arguing that these off-the-books transactions evaded taxes and compliance costs, thus warranting a larger profit margin compared to the average 7.26% profit rate on legitimate sales.
Aggrieved by the AO’s order, Agarwal appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], but the CIT(A) upheld the AO's decision. Consequently, Agarwal escalated the matter to the ITAT.
But here's where it gets controversial... The counsel for Agarwal argued that a 10% profit rate was arbitrary. They contended that profit margins on high-value items in the unorganized market are often lower due to the lack of tax benefits passed on to cash buyers, leading to reduced net profits.
The ITAT, comprising Dr. S. Seethalakshmi and Rathod Kamlesh Jayantbhai, acknowledged that these transactions involved high-value semi-precious gems, where margins outside the books are generally lower due to the cash market nature.
The Tribunal examined the profit margins of Agarwal's legitimately recorded concerns. Narnoli Emeralds recorded a 5.66% GP, and K. Sunil Narnoli recorded a 5.62% GP for the relevant period.
The ITAT observed that while unrecorded sales did provide some tax evasion benefits, arbitrarily increasing the profit margin from approximately 5.6% to 10% was excessive.
And this is the part most people miss... The ITAT decided that a 6% profit estimate on the unaccounted sales would be a fair balance, considering both the AO's insistence on a higher rate and the facts of Agarwal’s disclosed business. The tribunal directed the AO to apply the 6% rate instead of the imposed 10%, thereby allowing Agarwal’s appeal.
So, what do you think? Do you agree with the ITAT's decision to reduce the profit margin? Could this ruling set a precedent for similar cases? Share your thoughts in the comments below!
Citation: 2025 TAXSCAN (ITAT) 2095
Case Number: ITA Nos. 513 & 519 to 521/JP/2025
Date of Judgement: 14 October 2025
Coram: Dr. S. Seethalakshmi, Rathod Kamlesh Jayantbhai
Counsel of Appellant: Shri S. L. Poddar
Counsel Of Respondent: Mrs. Anita Rinesh
