2010 (7) TMI 839 - AT - Income Tax

Issues Involved:
1. Violation of Section 40A(3) of the Income-tax Act.
2. Addition of 20% of accounted purchases.
3. Excess stock variation for the assessment year 2007-08.
4. Retraction of statements made during the search.
5. Justification for percentage additions and inflation of purchases.

Detailed Analysis:

1. Violation of Section 40A(3) of the Income-tax Act:
The primary issue revolves around the assessee-firm making payments in contravention of Section 40A(3) while purchasing from unregistered dealers. The firm admitted to making cash payments exceeding Rs. 20,000, which amounted to Rs. 1,69,37,290 in total. The firm offered 20% of these payments as taxable income, amounting to Rs. 33,43,458. The Commissioner of Income-tax (Appeals) (CIT(A)) held that genuine cash payments made out of business exigency should not be grounds for additions, thus deleting the additions made by the Assessing Officer (AO) under Section 40A(3).

2. Addition of 20% of Accounted Purchases:
The AO made an addition of 20% of the accounted purchases for each of the previous years from 2000-01 to 2006-07, which amounted to Rs. 43,09,207 for the Mangalore showroom and Rs. 45,590 for the Puttur showroom. The CIT(A) modified the addition to 10% of the accounted purchases, citing the lack of incriminating documents to support the AO's claims. However, the Tribunal found that even a 10% addition was not justified and modified it to 3% of the purchases for each assessment year under appeal.

3. Excess Stock Variation for the Assessment Year 2007-08:
For the Mangalore showroom, there was an excess stock variation case where the assessee initially offered Rs. 50 lakhs but later declared only Rs. 22,81,149 in the return of income. The AO added the differential amount to make the excess stock value Rs. 50 lakhs. The CIT(A) modified this addition to Rs. 25 lakhs, and the Tribunal upheld this modification, directing the addition of the differential amount of Rs. 2,18,851.

4. Retraction of Statements Made During the Search:
The assessee retracted the statements made during the search, arguing that the admissions were not unconditional and were subject to re-verification. The Tribunal found that the retraction was not irrelevant and that the admissions had only a persuasive value. The Tribunal noted that the AO and CIT(A) erred in holding the retraction as grossly erroneous.

5. Justification for Percentage Additions and Inflation of Purchases:
The CIT(A) held that there was no justification for making percentage additions for the alleged violation of Section 40A(3) and instead found that the addition should be made on the ground of inflated purchases. However, the Tribunal found that there was no primary case of inflated purchases, and the change of the head of addition from Section 40A(3) to inflated purchases by the CIT(A) was not justified. The Tribunal concluded that additions on pinpointed grounds were not sustainable and confined the addition to 3% of the purchases for probable omission and suppression.

Conclusion:
The Tribunal modified the addition of 20% made by the AO and the 10% addition by the CIT(A) to 3% of the purchases for all the assessment years under appeal. The Tribunal upheld the CIT(A)'s modification of the excess stock addition to Rs. 25 lakhs for the assessment year 2007-08. The appeals filed by the assessee were partly allowed, and the appeals filed by the Revenue were dismissed.

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