2012 (5) TMI 654 - AT - Income Tax

Investment towards unaccounted purchases - addition u/s 69 - addition being the estimation of profit at 5% on the unaccounted sales - addition on excess cash - unrecorded sales - addition on account of provisions of section 40A(3) of the Act though the assessee s income is determined u/s. 44AF

Issues Involved:
1. Addition towards unexplained investment in purchases.
2. Addition of profit on unexplained investment in purchases.
3. Disallowance under Section 40A(3).
4. Addition towards excess cash balance.
5. Addition towards unexplained investment in assets.
6. Addition of profit on undisclosed sales.

Issue-wise Detailed Analysis:

1. Addition towards unexplained investment in purchases:
The Assessing Officer (AO) added Rs. 1,19,43,361 as unexplained investment in purchases based on discrepancies between stock statements submitted to the bank and those shown in the books of account. The assessee argued that the stock statements given to the bank were inflated to secure higher credit facilities. The AO did not accept this explanation, relying on a letter from the Branch Manager confirming that the stocks were verified and found to be equivalent to the statements submitted. The Tribunal held that the practice of inflating stock statements for bank credit is common and that additions should not be based solely on such statements without corroborative evidence. The Tribunal allowed this ground in favor of the assessee.

2. Addition of profit on unexplained investment in purchases:
The AO estimated a profit of Rs. 5,89,677 at 5% on the unexplained investment in purchases. Since the Tribunal found the addition towards unexplained investment in purchases to be unsustainable, this addition was also deleted.

3. Disallowance under Section 40A(3):
The AO disallowed Rs. 1,38,670, being 20% of Rs. 6,93,347, for payments made in cash, which contravened Section 40A(3). The Tribunal noted that the assessee's income was determined under Section 44AF, and as per the precedent set by the jurisdictional High Court in Indwell Constructions vs. CIT, once income is estimated, further disallowances under Section 40A(3) cannot be made. The Tribunal deleted this addition.

4. Addition towards excess cash balance:
The AO added Rs. 10 lakhs as excess cash balance, noting discrepancies in the cash flow statement. The assessee argued that the excess cash was due to unaccounted purchases. The Tribunal upheld the AO's addition, stating that the assessee had agreed to unaccounted purchases of Rs. 10 lakhs, justifying the excess cash balance.

5. Addition towards unexplained investment in assets:
The AO added Rs. 1,17,600 as unexplained investment in assets due to the absence of invoices. The Tribunal held that non-production of vouchers does not justify an addition under Section 69 if the assessee has enough sources to purchase the assets. The Tribunal deleted this addition.

6. Addition of profit on undisclosed sales:
The AO added Rs. 92,000, estimating profit at 5% on a difference of Rs. 18,40,000 in stock between two days in March 2007. The Tribunal found that the addition was based on discrepancies in stock statements furnished to the bank, which were already addressed in the first issue. Hence, this addition was also deleted.

Conclusion:
The Tribunal allowed the appeal partly, deleting most of the additions made by the AO, except for the addition towards excess cash balance, which was upheld. The order was pronounced in the open court on 10th May 2012.

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