2016 (8) TMI 1166 - AT - Income Tax

Addition made u/s 56(2)(vii)- transaction of machinery purchased by the HUF from the individual - assets given as gift between the relatives - Held that - On careful reading of the section 56(2)(vii) t is clear that the legislature intended to exclude the properties which are personal belongings like land and buildings, shares, securities and personal effects. It was never intended to exclude the business assets like stock-in-trade, machinery etc. On safe and infallible principle is to read the words through and see if the rule is clearly stated. If the language employed gives the rule in words of sufficient clarity and precision, nothing more requires to be done, in such a case, the task of interpretation can hardly be said to arise. Absoluta sententia expositore non indiget. The language used by the legislature best declares its intention and must be accepted as decisive of it. Hence, it is clear that the intention of the legislature not to include business assets in the exclusion list, it has to be accepted as such. Considering the above discussion, we are of the view that the definition of the capital assets for exclusion does not include the assets, machinery . Hence, the definition cannot be expanded beyond what is not intended to include. Accordingly, the addition made by the AO in this regard is sustained. Addition on account of inflated sales - Held that - We observe from the submissions and records produced before us that there is sales taken place at the commencement of the business which is fact. For sales to complete there has to be stock for such purpose. In the given case, assessee had made sales in the commencement of the year. There has to be some expenditure without which the stock would not have appeared for making sales. Moreover, the assessee had made sales to its own sister concerns. There has to be stock to make sales. In our considered view, no businessman will make bogus sales in the commencement of the venture. It is wrong to treat such sales as unexplained or inflated sales. The assessee has made sales with stock but failed to explain the source of such arrangement. This is also fact that the sister concerns of the assessee are also in the same line of business. It may be internal arrangement to make sure to have initial sales on the first day of commencement of the business. In our considered view, the AO must have brought the element of profit to tax instead of whole value of sales. We direct the AO to tax only the profit. We remit the matter back to the file of the AO to determine the profit considering the industry and calculation offered by the assessee. Interest u/s 234C shall be revised on the basis of liability computed as per this order.

Summary

Issues Involved:
1. Addition under Section 56(2)(vii) for inadequate consideration of machinery.
2. Addition on account of inflated sales.
3. Levy of interest under Section 234C.

Issue-wise Detailed Analysis:

1. Addition under Section 56(2)(vii) for inadequate consideration of machinery:

The Assessee, a proprietor of STS Handloom Silks, filed a return of income admitting ?4,27,640/-. During scrutiny, the AO assessed the income at ?48,62,230/- by adding ?37,92,961/- for receipts of immovable/movable properties without adequate consideration under Section 56(2)(vii). The AO observed that the HUF received properties from an individual without adequate consideration, including ?22,13,152/- for a building and ?15,79,809/- for machinery.

The CIT(A) held that the provisions of Section 56(2)(vii) did not apply to the building as it was received from a relative, thus deleting the addition of ?22,13,152/-. However, the CIT(A) confirmed the addition of ?15,79,809/- for machinery, stating that machinery is not included in the definition of property under Section 56(2)(vii).

The Assessee appealed, arguing that the CIT(A) misinterpreted Section 56(2)(vii) and that the definition of "property" should include machinery. The Tribunal analyzed the section, noting that it excludes business assets like stock-in-trade and machinery from the definition of property. Consequently, the Tribunal sustained the addition of ?15,79,809/- as machinery is not covered under the exclusion list.

2. Addition on account of inflated sales:

The AO added ?6,41,625/- for inflated sales, stating that the Assessee started business on 01.04.2010 and made sales without having any sarees on hand. The Assessee explained that raw materials were given to weavers 10-15 days prior to the start of the business. However, the AO was not satisfied, citing inconsistencies in the Assessee's explanations and lack of evidence for purchases or transfers of sarees.

The CIT(A) confirmed the addition, noting that the Assessee could not provide reliable evidence for the corresponding purchases of the sales made during the first 10 days of business.

The Tribunal observed that the Assessee made sales at the commencement of business, implying the existence of stock. It noted that the Assessee's sister concerns were in the same business and that the sales might be an internal arrangement to ensure initial sales. The Tribunal held that the AO should have taxed only the profit from these sales, not the entire value. The matter was remitted back to the AO to determine the profit, considering the industry norms and the Assessee's calculations.

3. Levy of interest under Section 234C:

The Assessee contested the levy of interest under Section 234C. The Tribunal noted that charging of interest under Section 234C is consequential and directed that the interest be revised based on the liability computed as per the Tribunal's order.

Conclusion:

The appeal was partly allowed for statistical purposes, with the Tribunal sustaining the addition for machinery under Section 56(2)(vii), directing the AO to tax only the profit from the alleged inflated sales, and revising the interest under Section 234C based on the revised liability.