2008 (2) TMI 883 - AT - Income Tax

Determination of net profit - income from undisclosed sources - merely on presumption and suspicion - Addition u/s 68 - bogus share application and premium - Disallowance under s. 40A(3) - unrecorded purchases from the records seized by excise authorities. Determination of net profit - hypothetical calculation of turnover and estimation of GP merely on guesswork and presumption - Regular books are maintained and audited under s. 44AB - HELD THAT - AO has estimated the turnover for 9 months (April to December, 2003) at ₹ 9.50 crores based on the turnover of ₹ 2.21 crores for two months but adopted ₹ 8 crores on which applied the GP @ 16 per cent on the turnover and worked out the income of ₹ 1.48 crores. In this regard, it is pertinent to mention here that the correct figure comes to ₹ 1.28 crores. This action of the AO in our view is not correct since there is no material on record to support the same. It is worthwhile to mention that at one place, the AO proposed the estimation at ₹ 90 lakhs i.e. ₹ 10 lakhs per month for a period of nine months and at the other place, proposed ₹ 1.48 crores which shows that the AO was not certain in regard to the addition to be made on account of unaccounted sales for the period of nine months. In our opinion, the addition of ₹ 58 lakhs (corrected figure is ₹ 38 lakhs) made by the AO is arbitrary and unwarranted on the facts and in the circumstances of the case. We, therefore, hold that the no details were available to the AO to arrive at such figure. Had there been any concealed sales for nine months, it could have been detected by the Central Excise authority during their search operation. We are therefore of the considered opinion that the addition made by the AO is purely based on guesswork, presumption and surmises and not on the basis of any material found during the course of search operation by the Central Excise authority. The learned CIT(A) completely failed to appreciate the facts of the case. In our view, such additions based on hypothetical calculation of turnover and estimation of GP on presumption and surmises are not sustainable. We direct the AO to delete the same. The first ground of appeal of the assessee is allowed. Addition made u/s 68 of bogus application money and premium - HELD THAT - In our considered opinion, the assessee has complied with all the requirements to prove (i) the genuineness of the amount received towards share application money and premium, (ii) identity of the creditor, (iii) genuineness of the transaction and (iv) creditworthiness of the creditor by filing the relevant documents. The AO failed to make necessary enquiries and only relied on the report of the Inspector thereby rejecting the explanation of the assesseee for making addition under s. 68 without having any evidence on record to show that the explanation of the assessee is false. In our view, the AO is not justified in making the addition since the assessee has proved all the three criteria simultaneously. Hence, the addition cannot be sustained. The cases relied upon by the learned counsel support the case of the assessee. The addition made by the AO and confirmed by the learned CIT(A) is hereby deleted and the appeal of the assessee on this ground is allowed. Disallowance under s. 40A(3) - unrecorded purchases from the records seized by excise authorities - HELD THAT - In the present case, the disallowance under s. 40A(3) has been made by the AO out of unrecorded purchases from the records seized by excise authorities. Such records are not at all a part of the regular books of accounts therefore a lump sum as income was surrendered on account of unrecorded transactions discovered during raid by the Excise Department. As observed by the AO that the books of account have not been rejected. This observation of the AO is also immaterial as there are no instances of payments exceeding ₹ 20,000 in violation of s. 40A(3) in the regular books of accounts kept and maintained by the appellant. The violation of s. 40A(3) comes out of loose papers seized by the Excise Department forming part of unrecorded transaction therefore the ratio of judgments in case of Banwarilal Banshidhar 1997 (5) TMI 37 - ALLAHABAD HIGH COURT ; Santosh Jain 2006 (8) TMI 167 - PUNJAB AND HARYANA HIGH COURT and Purushottamlal Tamrakar 2003 (3) TMI 10 - MADHYA PRADESH HIGH COURT are directly applicable to the present case. It is very much relevant to refer to the decision of Hon'ble Gujrat High Court in case of Hasanand Pinjomal vs. CIT 1977 (7) TMI 32 - GUJARAT HIGH COURT . It was held that 40A(3) has been enacted with objective of checking tax evasion and to know whether the transactions are genuine and has been made out of the income from disclosed sources . In the present case, the disallowance under s. 40A(3) has been made by the learned AO out of unrecorded purchases therefore it is not accordingly to law and judicial decisions as stated. In our considered view, the learned CIT(A) has very correctly and judiciously deleted the addition. No interference is called for in the order of the learned CIT(A) in deleting the disallowance made by the AO under s. 40A(3) of the Act. The order of the learned CIT(A) is confirmed and the ground of appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed. In the result, the appeal of the assessee is partly allowed whereas the appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Determination of net profit as income from undisclosed sales.
2. Treatment of share capital and premium as sham entries under Section 68.
3. Disallowance of expenditure under Section 40A(3).

Issue-wise Detailed Analysis:

1. Determination of Net Profit as Income from Undisclosed Sales:
The assessee challenged the determination of net profit at Rs. 1.48 crores as income from undisclosed sales, arguing it was based on presumption without material evidence. The AO added Rs. 58 lakhs after excluding Rs. 90 lakhs under Section 68 for alleged bogus share capital and premium. The assessee, engaged in steel re-rolling and trading, declared Rs. 22,46,038 in its return. During a search by the Central Excise Department, documents indicating avoidance of excise duty and unaccounted sales were found. The AO extrapolated the income based on detected unaccounted sales for two months to the entire year, resulting in an estimated turnover of Rs. 8 crores and a profit of Rs. 1.48 crores, later corrected to Rs. 1.28 crores. The CIT(A) upheld this, but the Tribunal found the AO's action to be based on guesswork without concrete evidence and directed the deletion of the addition, emphasizing that income assessment should be based on available evidence and not on presumptions.

2. Treatment of Share Capital and Premium as Sham Entries under Section 68:
The AO treated the share capital and premium amounting to Rs. 90 lakhs received from four Kolkata-based companies as sham entries under Section 68, doubting their genuineness and creditworthiness. Despite the assessee providing details such as PAN, IT returns, and bank statements of these companies, the AO concluded that these were conduit companies. The CIT(A) upheld the AO's decision. However, the Tribunal noted that the assessee had provided sufficient evidence to prove the identity, genuineness, and creditworthiness of the investors. The Tribunal emphasized that the AO failed to conduct necessary inquiries and relied on mere suspicion. Consequently, the Tribunal deleted the addition of Rs. 90 lakhs, stating that the AO's decision was not justified as it was based on doubts and surmises without concrete evidence.

3. Disallowance of Expenditure under Section 40A(3):
The AO disallowed Rs. 17,70,240 under Section 40A(3) for cash payments exceeding Rs. 20,000, based on documents seized by the Central Excise Department. The assessee argued that these expenditures were not claimed in the P&L account and that the income was estimated at a flat rate of 16% on unaccounted sales. The CIT(A) agreed with the assessee, noting that the AO had already estimated the income based on GP ratio and that there was no basis for further disallowance under Section 40A(3). The Tribunal upheld the CIT(A)'s decision, stating that when income is estimated, there is no scope for disallowance under Section 40A(3), as it applies only to genuine payments. The Tribunal confirmed that the AO's disallowance was not justified and dismissed the Revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeal partly by deleting the additions made under the first two issues and dismissed the Revenue's appeal regarding the disallowance under Section 40A(3). The judgment emphasized that income assessment should be based on concrete evidence and not on presumptions, and that necessary inquiries must be conducted before making additions under Section 68.