2008 (9) TMI 617 - AT - Income Tax

Computation of Income - Business expenditure - Cash credits - Valuation of stock - unexplained investment in the stock hypothecated to the bank - Disallowance on commission payment - Addition u/s 68 - Disallowance on car expenses and telephone expenses. Computation of Income - Business expenditure - Cash credits - Valuation of stock - unexplained investment in the stock hypothecated to the bank - assessee was engaged in the business of plastic dana and was working as an agent of Reliance Industries for sale of plastic dana - CIT(A) deleted an addition which was added by the AO in the value of closing stock on the ground that assessee has made unexplained investment in the stock hypothecated to the bank and not disclosed in the books of account - HELD THAT - From the bare reading of Section 145 it would reveal that it provides the mechanism how to compute the income of the assessee. According to sub-clause ( i ) the income chargeable under the head Profits and gains of the business or professions or income from other sources shall be computed in accordance with the method of accountancy employed by an assessee regularly subject to the sub-section (2) of section 145 of the Act. Thus it indicates that income has to be computed in accordance with the method of accountancy followed by an assessee i.e. cash or mercantile - We could appreciate the stand taken by the AO but instead of verifying the explanation of the assessee he straightway rejected it. There can be truth in the explanation of the assessee. The action on the part of assessee in manipulating the stock statement while disclosing it to the bank may be branded as a immoral or may be infringing any other law. But can substandard moral activity denude the assessee to say that he has no closing stock in his accounts for the purpose of making a disclosure under the Income-tax Act 1961. It is the AO who has to demonstrate that assessee has an income chargeable to tax. The learned AO miserably failed in that area. He without taking note of fact straightway took cognizance of the information supplied by the bank and then made the addition. On the other hand learned 1st Appellate Authority appreciated the controversy in right perspective and evaluated whether any income in the shape of unexplained investment in stock in real sense has arisen to assessee or not. The ld CIT(A) recorded a finding that in fact there was no closing stock with the assessee whose value can be added - Even for the sake of argument we accept the stand of the AO then this closing stock would become opening stock of the next assessment year and he has to give the credit of that in the next assessment year. In case the assessee will not be able to realize that stock because it was an artificial one then what would be the situation in that next assessment year. It has to be allowed to the assessee. In view of the above discussion we do not find any merit in the first round of appeal it is rejected. Disallowance on commission payment - CIT(A) deleted the addition added by the AO by making a disallowance out of commission payment - HELD THAT - In the light of the authoritative pronouncement of Hon ble jurisdictional High Court in CIT v. Dalmia Cement (Bharat) Ltd . 2001 (9) TMI 48 - DELHI HIGH COURT if we examine the facts of the present case. We are of the view that it is for the assessee to carry out his business. If he has an understanding with certain person then it may not be very much necessary to enter into an agreement. The assessee as well as the payees are withstanding to their stand. There is no variance in their conduct. As far as the allegation of failure to produce demonstrative evidence against the assessee is concern one has to see the nature of business. The assessee is in the business of sale of plastic dana. The agents are required to send customer for purchase of dana. They can be introduced on phone also. There may not be any demonstrative evidence in certain circumstance but that does not mean that expense are not incurred. The assessee has shown commission income on sale of plastic dana it suggest that he has carried on business - Thus all these circumstances are to be seen before making the disallowance. Hence the disallowance cannot be made. ld CIT rightly deleted the disallowances. We do not find any merit in this ground of appeal also. It is rejected. Addition u/s 68 - assessee has introduced a sum in his capital account and alleged that this sum was taken as a loan from Anand Plastics - proprietor of Anand Plastics had died and his business is closed - it was contended that Anand Plastics was a regular customer and assessee has a ledger account with it - amount was taken through banking channel and therefore it should not be added - HELD THAT - It is true that assessee has proved the identity of the payer and genuineness of the transaction but creditworthiness of the creditor is not proved. No evidence has been filed in that connection. On our query whether this amount has been repaid or adjusted against any purchases made by the creditor during the year or in the subsequent period the learned counsel for the assessee expressed his inability. If it is repaid subsequently then it can show that this amount must have been taken from M/s. Anand Plastics. It will rule out the possibility of introduction of assessee s own money through M/s. Anand Plastics. Therefore we set aside this issue to the file of the AO for verification and readjudication. In the result this ground of appeal is allowed for statistical purposes. Disallowance on car expenses and telephone expenses - HELD THAT - Similarly 1/6th of the phone expenses has also been disallowed on the ground that personal user of the telephone cannot be ruled out. In the absence of any log book exhibiting the user of car exclusively for the purpose of business possibility of its personal user cannot be ruled out and therefore AO has rightly made the disallowance. Taking into consideration this aspect we set aside the order of ld CIT(A) on this issue and restore the addition. Adopting similar yard stick with respect to telephone expenses we set aside the order of ld CIT(A) and restore the addition made by the AO. In the result the appeal filed by the revenue is partly allowed.

Issues Involved:
1. Deletion of addition of Rs. 2,06,83,349 to closing stock.
2. Deletion of disallowance of Rs. 29,51,556 out of commission payment.
3. Deletion of addition of Rs. 1,00,000 introduced as capital.
4. Deletion of disallowance of Rs. 50,587 and Rs. 9,375 out of car and telephone expenses.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 2,06,83,349 to Closing Stock:
The revenue's first grievance concerns the deletion of an addition of Rs. 2,06,83,349 by the CIT (Appeals), which the Assessing Officer (AO) added to the closing stock value on the grounds of unexplained investment in stock hypothecated to the bank but not disclosed in the books of account. The assessee, engaged in the business of plastic dana, had an overdraft account with Syndicate Bank. The AO found discrepancies between the stock value reported to the bank and that disclosed in the books, leading to the addition. The assessee explained that the inflated stock value was to secure a higher loan and was not actual stock. The CIT (Appeals) accepted the assessee's explanation, noting that the books of account were not rejected and the inflated stock was only for loan purposes. The Tribunal upheld the CIT (Appeals)'s decision, emphasizing that the AO did not find any defects in the books of account and failed to verify the creditors and purchases claimed by the assessee.

2. Deletion of Disallowance of Rs. 29,51,556 Out of Commission Payment:
The second issue pertains to the deletion of a disallowance of Rs. 29,51,556 made by the AO out of commission payments. The assessee had claimed a deduction for commission paid to 12 parties, all of whom responded to the AO's inquiries. The AO disallowed the claim, citing a lack of evidence of services rendered and agreements for commission payments. The CIT (Appeals) deleted the disallowance, noting that the payments were made through banking channels, the recipients confirmed the transactions, and similar commissions were allowed in previous and subsequent years. The Tribunal upheld the CIT (Appeals)'s decision, stating that the assessee had established the payment's genuineness and necessity for business purposes.

3. Deletion of Addition of Rs. 1,00,000 Introduced as Capital:
The third grievance involves the deletion of an addition of Rs. 1,00,000 introduced as capital, which the assessee claimed was a loan from Anand Plastics. The AO added the amount due to a lack of confirmation from the creditor, as the proprietor had died and the business closed. The CIT (Appeals) deleted the addition, accepting the assessee's explanation of the transaction through banking channels. The Tribunal, however, noted that while the identity and genuineness of the transaction were proven, the creditor's creditworthiness was not. The Tribunal set aside this issue for verification and readjudication by the AO.

4. Deletion of Disallowance of Rs. 50,587 and Rs. 9,375 Out of Car and Telephone Expenses:
The final issue concerns the deletion of disallowances of Rs. 50,587 and Rs. 9,375 out of car and telephone expenses, respectively. The AO disallowed 1/6th of these expenses, assuming personal use. The CIT (Appeals) deleted the disallowances, arguing they were made on an ad hoc basis without specific reasons. The Tribunal restored the AO's disallowances, reasoning that in the absence of logbooks or evidence of exclusive business use, personal use could not be ruled out.

Conclusion:
The Tribunal upheld the CIT (Appeals)'s deletion of the addition to the closing stock and commission disallowance, but restored the AO's disallowances for car and telephone expenses. The issue of the Rs. 1,00,000 capital introduction was remanded for further verification. The appeal was partly allowed.

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