2012 (3) TMI 56 - AT - Income Tax

Business Income Set off against Brought forward loss - Change in shareholding pattern loss not allowed - Held That - Share transfer by uncle to nephew is not covered by proviso to Section 79, AO justified in not allowing the set of of less of Rs.2,52,269. Addition on account of Under Valuation of Stock - AO valued Methanol entire stock at 10887.5 MT - Held That - Valuation by assessee are in conformity with the method of accounting followed by it consistently and stands duly supported by the documentary evidence as submitted any lying on the record which has been verified. Consignment Sales - Bank deposits - Show cause treating it Accommodation entries - Held That - SAles made to consignment agent who further sold goods to ultimate consumer. In assessee s books credit was given to agents, to save, time and expenses, the consignment agent asked the parties to whom goods have been sold to deposit the amount in the bank account of assessee. The assessee has paid commission to the consignment agent and tax was also deducted at source. On the above factual matrices amount received in bank account cannot be held as Unexplained Deposits .

Issues Involved:
1. Set off of business losses.
2. Under valuation of closing stock.
3. Unexplained deposits under Section 68.

Detailed Analysis:

1. Set off of Business Losses:
The revenue challenged the CIT(A)'s decision to allow the set-off of business income of Rs. 2,52,269/- against brought forward business losses from the assessment year 1997-98. The AO disallowed the set-off citing a change in shareholding pattern, invoking Section 79 of the I.T. Act, 1961. The CIT(A) countered this by referencing the first proviso to Section 79(a), which excludes transfers by way of gift to relatives. The shares in question were transferred from an uncle to a nephew, which CIT(A) considered as falling under this proviso. However, the Tribunal concluded that the relationship of uncle and nephew is not covered under the definition of "relative" in Section 2(41) of the I.T. Act. Consequently, the shareholding did not meet the required threshold, and the AO was justified in denying the set-off.

2. Under Valuation of Closing Stock:
The AO added Rs. 59,526/- to the income of the assessee due to the under-valuation of closing stock of methanol. The AO observed inconsistent valuation rates without supporting evidence. The CIT(A) deleted the addition, stating that the valuation was consistent with the accounting method regularly followed by the assessee and supported by documentary evidence. The Tribunal upheld the CIT(A)'s decision, noting that the CIT(A) had verified the documents and found the valuation method consistent and adequately supported.

3. Unexplained Deposits under Section 68:
The AO added Rs. 1,36,10,000/- as unexplained deposits, asserting that the assessee failed to substantiate the source of these deposits, which were credited to the assessee's bank account by M/s Shree Balaji Sales and M/s Shivam Sales Corporation. The CIT(A) deleted the addition, observing that the assessee provided extensive documentary evidence, including stock registers, consignment agreements, and confirmations from consignment agents and buyers. The AO did not effectively counter these documents or conduct a thorough investigation. The Tribunal agreed with the CIT(A), emphasizing that the credits in the assessee's books were in the name of consignment agents, and the sales were accepted by sales tax and excise authorities. The Tribunal concluded that the assessee is not required to prove the source of the source, and the AO's addition was unjustified.

Conclusion:
The Tribunal partially allowed the revenue's appeal, upholding the AO's decision on the set-off of business losses but siding with the CIT(A) on the issues of under-valuation of closing stock and unexplained deposits under Section 68.

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