2011 (6) TMI 802 - AT - Income Tax

Unaccounted investment in purchase from unaccounted income - Assessee has made purchases from M/s M.D.R Jewellers which were in turn purchased by M/s M.D.R Jewellers from M/s Amit Agency - The AO considered purchases from M/s Amit Agency as bogus - Therefore, made the addition. HELD THAT - We observe that all the purchases made by assessee are verifiable. Most of the purchases are made from Jewellers. Partner of M/s M.D.R Jewellers who appeared confirmed having made sales to the assessee. It is further seen that purchases made from M/s M.D.R Jewellers were made through made from known sources. Thus, we are of the considered view that the AO decision was not justified. The Hon'ble Supreme Court in the case of SREELEKHA BANERJEE VERSUS COMMISSIONER OF INCOME-TAX 1963 (3) TMI 47 - SUPREME COURT has held that the suspicion howsoever strong cannot take the place of evidence. We order accordingly. Rejection of Books of Accounts - Reduction in Trading Addition - CIT(A) confirmed the rejection of books of accounts on the account that sales made to two concerns have been established as bogus, therefore sales are not fully verifiable - Also, it reduced the trading addition made by AO - HELD THAT - Complete books of account were produced before learned CIT(A) which were audited. In our considered view, observations of ld. CIT (A) regarding bogus sales are not correct as assessee has made sales from its stock which has not been disturbed, sales made by assessee have been accepted. If other parties are bogus then it cannot be said that the genuine party who made sales to these parties are also bogus. Written submissions filed on behalf of the assessee are self-explanatory. In some of the branches the GP rate shown is higher and only in one branch the GP rate declared by assessee is lower, reason for the same has been explained. No defects in the books of account were found. All the purchases and sales are vouched. Therefore, we are of the considered view that there was no justification in making trading addition and sustaining partly at the end of the learned CIT(A). We hold that learned CIT(A) was not justified in restricting the trading addition - Accordingly, same is deleted Unexplained Cash Credits u/s 68 - AO treated an amount so transferred through journal entry as unexplained cash credit - whether journal entry passed or odd can be added as unexplained cash credit - HELD THAT - CIT(A) held that AO has not understood the accounting sequence of the adjustment entry in question and wrongly considered the same as unexplained credit which was factually incorrect. Findings of CIT(A) find support from the decision of Hon'ble jurisdictional High Court in the case of COMMISSIONER OF INCOME-TAX VERSUS HAZARIMAL MILAPCHAND SURANA. 2002 (9) TMI 29 - RAJASTHAN HIGH COURT wherein the Hon'ble Court has held that mere book entry does not create income. In view of the reasoning given by learned CIT (A) we confirm his order on this issue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 3,61,65,070 for unaccounted investment in purchase.
2. Reduction of trading addition from Rs. 3,46,21,220 to Rs. 2,55,465.
3. Deletion of addition of Rs. 2,68,00,000 for unexplained credit.
4. Rejection of books of account.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 3,61,65,070 for Unaccounted Investment in Purchase:
The Department objected to the deletion of an addition of Rs. 3,61,65,070 made by the AO on account of unaccounted investment in purchases. The assessee had shown purchases from M/s M.D.R. Jewellers, which in turn had purchased from M/s Amit Agency, a bogus concern. The AO considered these purchases as unverifiable and held that the appellant made unaccounted investments. The CIT(A) found that the assessee had discharged its onus by producing the partner of M/s M.D.R. Jewellers and confirming purchases. The CIT(A) concluded that any addition should be made in the hands of M/s M.D.R. Jewellers, not the appellant, as the purchases were proved genuine. The Tribunal upheld the CIT(A)'s decision, stating that the AO had not provided evidence of unaccounted income generation by the appellant.

2. Reduction of Trading Addition from Rs. 3,46,21,220 to Rs. 2,55,465:
The Department also objected to the reduction of the trading addition made by the AO. The AO had invoked provisions of Section 145(3) and rejected the books of accounts due to unverifiable purchases and sales. The CIT(A) confirmed the rejection of books but reduced the trading addition, applying a lower GP rate based on past history and the nature of transactions. The Tribunal found that the CIT(A) was justified in reducing the addition as the assessee's purchases and sales were supported by proper vouchers, and no defects were found in the books of accounts. The Tribunal noted that the AO had acted arbitrarily in applying higher GP rates without any basis.

3. Deletion of Addition of Rs. 2,68,00,000 for Unexplained Credit:
The AO had made an addition of Rs. 2,68,00,000 as unexplained cash credit, based on a journal entry debiting M/s Rajesh Sales Corporation and crediting the assessee's current account. The CIT(A) found that this was a mere accounting entry, later rectified, and not a real credit. The Tribunal upheld the CIT(A)'s decision, stating that the AO had misunderstood the accounting sequence and wrongly considered the entry as unexplained credit. The Tribunal emphasized that the provisions of Section 68 apply to actual sums credited, not mere book entries.

4. Rejection of Books of Account:
The CIT(A) had confirmed the rejection of books of account due to unverifiable sales to bogus concerns and cash sales. The Tribunal, however, found that the assessee had maintained proper books, and all purchases and sales were supported by vouchers. The Tribunal noted that the AO had not found any defects in the books of accounts and that the sales made through proper banking channels were accepted. The Tribunal concluded that there was no justification for rejecting the books of accounts and making trading additions.

Conclusion:
The Tribunal dismissed the Department's appeal and allowed the assessee's cross-objection. The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 3,61,65,070 for unaccounted investment, reduce the trading addition to Rs. 2,55,465, and delete the addition of Rs. 2,68,00,000 for unexplained credit. The Tribunal also found that the rejection of books of accounts was not justified.