2009 (6) TMI 650 - AT - Income Tax

Addition - undisclosed advance and unexplained stock - It was contended that addition has been made by the AO only on the basis of presumption and as against that the assessee has submitted the proof which was in the shape of books of account and has also produced the person to whom the payments were made and, thus, there was no justification in making the addition simply on the basis of presumption Regarding addition of Rs. 1 lac - AO has reconciled such stock which, according to him, tallied with the vouchers found except few items which are for a consolidated sum of Rs. 21,334 - Held that learned JM was right in holding that the assessing authority should compute the closing stock of the assessee on the basis of 25 per cent variable. Regarding penalty - the fate of additions has to be decided in accordance with my above order and it will be in the interest of justice if the parties are given opportunity to argue this issue after the finalization of the quantum - if it thinks proper can dispose of penalty appeal by giving hearing to the parties on the date when the effect is, given to this order with regard to quantum proceedings - Appeal is partly allowed

Summary

Issues Involved:
1. Addition of Rs. 2,95,000 based on loose papers found during a survey.
2. Addition of Rs. 14,500 for low household withdrawals.
3. Addition of Rs. 1,00,000 for unexplained stock found during the survey.
4. Penalty under Section 271(1)(c) related to the above additions.

Detailed Analysis:

1. Addition of Rs. 2,95,000 based on loose papers found during a survey:

The assessee contested the addition of Rs. 2,95,000 made on the basis of three loose papers found during a survey on 12th September 2000. The Assessing Officer (AO) inferred that the assessee had advanced this amount to a third party, and since the books of accounts were not produced during the assessment, the AO treated this amount as unexplained under Section 69A of the Income Tax Act. The CIT(A) upheld this addition, suspecting manipulation of the books of accounts to show the availability of cash.

Upon appeal, it was argued that the payments were made after the survey dates and were recorded in the books of accounts, which were later produced before the AO. The Tribunal noted that the books of accounts were indeed produced and verified, and the payments were reflected therein. The Tribunal found that the AO's suspicion was diluted by the evidence provided, including the statement of the third party confirming the receipt of the amounts. The Tribunal concluded that the addition of Rs. 2,95,000 was not justified and ordered its deletion.

2. Addition of Rs. 14,500 for low household withdrawals:

The AO estimated household expenses at Rs. 5,000 per month, which was reduced to Rs. 4,000 per month by the CIT(A), and added Rs. 14,500 for low household withdrawals. The assessee argued that the withdrawals were consistent with previous and subsequent years, which were accepted by the Department.

The Tribunal observed that there was no valid basis for the AO's estimate and noted the consistency in household withdrawals over the years. Consequently, the Tribunal ordered the deletion of the addition of Rs. 14,500.

3. Addition of Rs. 1,00,000 for unexplained stock found during the survey:

The stock was valued at MRP during the survey, and the AO allowed a 15% reduction instead of the claimed 25-30%, resulting in an addition of Rs. 1,00,000. The CIT(A) upheld this addition, doubting the books of accounts due to discrepancies.

The Tribunal noted that the AO accepted the principle of variation in MRP rates but allowed only a 15% reduction. The Tribunal directed the AO to accept a 25% reduction, as claimed by the assessee, and recompute the addition accordingly.

4. Penalty under Section 271(1)(c) related to the above additions:

Penalty under Section 271(1)(c) was levied based on the additions of Rs. 2,95,000 and Rs. 1,00,000. Since the Tribunal deleted the addition of Rs. 2,95,000 and directed a recomputation for the addition of Rs. 1,00,000, the basis for the penalty no longer existed.

The Tribunal, following the deletion and recomputation of the additions, ordered the cancellation of the penalty under Section 271(1)(c).

Separate Judgment by Sanjay Arora, A.M.:

Sanjay Arora, A.M., disagreed with the deletion of the addition of Rs. 2,95,000, emphasizing the possession of currency notes as evidence of payment before the survey and questioning the credibility of the assessee's explanation. He also upheld the addition of Rs. 1,00,000 for unexplained stock, citing discrepancies and lack of reliable evidence.

Third Member's Opinion:

The Third Member agreed with the learned Judicial Member (JM) on both issues, concluding that the addition of Rs. 2,95,000 was not justified and that a 25% reduction on MRP should be accepted for the stock valuation.

Final Decision:

In view of the majority opinion, ITA No. 48/Agra/2005 was partly allowed, and ITA No. 4/Agra/2007 was allowed, resulting in the deletion of the additions and cancellation of the penalty.