2014 (5) TMI 1102 - AT - Income Tax

Disallowance out of purchases - difference found between the credit entry in the bank account and sale proceeds - Held that - It is true that without purchase no sale can be executed. The appellant had not produced the books of accounts before the AO however made available copy of bank account to the AO on which addition had been made. The appellant had shown net profit on sale of 32.01 lac @ 4.08%. The AO made addition without comparing any case in the similar line of business @ 25% and disallowed the expenses on estimated basis. He made addition on account of difference found between the credit entry in the bank account and sale proceeds shown by the assessee at 17, 31, 629/-. The AO has not brought any material on record that the assessee had made purchases outside the books of accounts. The sales included the cost of purchase plus expenses and net profit. Therefore the whole sale proceeds cannot be added as income of the assessee. As suggested by the ld.counsel for the assessee that 5% on net profit of total credit entries i.e. 49, 32, 992/- be taken as income of the assessee which comes to 2, 46, 649/-. The appellant had already disclosed income at 1, 30, 757/- and returned income at 95, 114/-. After reducing the amount of returned income the net addition is worked out at 1, 15, 892/-; whereas as per the peak theory of investment the maximum balance was at 2, 05, 643/-. The appellant had not established that all the cash deposited in the bank account came from the sale proceeds of the assessee. In the absence of complete books of accounts we estimate the assessee s income for the year under consideration at 2.05 lacs on the basis of peak plus income disclosed by the assessee in the return. When assessee s income has been estimated on the basis of facts no other addition remained to be justified as held by the various courts on this issue. - Decided partly in favour of assessee

Summary

Issues:
1. Ex-parte order without proper opportunity of hearing.
2. Disallowance of purchases.
3. Disallowance of expenses.
4. Addition on account of difference in bank account and sales.

Issue 1: Ex-parte order without proper opportunity of hearing
The Assessee appealed against the order of the Ld. Commissioner of Income Tax(Appeals) for Assessment Year 2007-08, citing that the ex-parte order was passed without providing a proper opportunity of hearing. However, the ground was not pressed by the Assessee's counsel and was dismissed.

Issue 2: Disallowance of purchases
The Assessing Officer disallowed 25% of the total purchases amounting to &8377; 7,51,807 as the Assessee failed to produce books of accounts, bills, vouchers, etc., during the assessment proceedings. The disallowance was based on the non-verification of purchases and reliance on a previous order. The Commissioner of Income Tax(Appeals) upheld this disallowance due to the Assessee's failure to provide necessary documentation despite multiple opportunities.

Issue 3: Disallowance of expenses
The Assessing Officer disallowed &8377; 43,152 out of total expenses claimed by the Assessee due to non-verifiability in the absence of proper documentation. The Commissioner of Income Tax(Appeals) confirmed this disallowance, emphasizing the lack of submissions and supporting evidence during the appeal proceedings.

Issue 4: Addition on account of difference in bank account and sales
The Assessing Officer made an addition of &8377; 17,31,629 on account of the difference between the total bank deposits and sales shown by the Assessee. The Assessee failed to reconcile the deposits in the bank account adequately, leading to the conclusion that the unexplained cash deposits were the Assessee's accounted income. The Commissioner of Income Tax(Appeals) upheld this addition, as the Assessee could not provide substantial evidence or explanations to justify the difference.

The Appellate Tribunal considered the arguments presented by the Assessee, highlighting the nature of the business, sales, and bank transactions. The Tribunal estimated the Assessee's income at &8377; 2.05 lacs based on the peak balance theory and disclosed income, reducing the addition to &8377; 1,15,892. The Tribunal emphasized the importance of factual estimation in determining the Assessee's income and partially allowed the appeal. General grounds 5 & 6 were not independently adjudicated. The appeal of the Assessee was partly allowed by the Tribunal.