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2014 (11) TMI 131 - AT - Income TaxUnexplained credits u/s 68 - Money claimed to have been received as towards share application Held that - Before the AO the assessee had filed confirmation of the applicant, copies of his return of income for the AYs 2004-05 and 2006-07, statement of bank account of M/s R K Engineers, proprietor Shri Rohit Kumar Gogia - CIT(A) deleted the addition placing reliance on COMMR. OF INCOME TAX Versus M/s LOVELY EXPORTS(PVT) LTD 2008 (1) TMI 575 - SUPREME COURT OF INDIA - with the finding that the assessee company had filed confirmation of Shri R.K. Gogia proprietor R K Engineers, copy of return of income filed by him for the AY 2004-05 and 2006-07, copy of the bank statement of Allahabad Bank from where share application money was given to the assessee company by way of cheque to prove the genuineness of the transaction and in case AO was having any doubt he could have summoned the applicant to verify the genuineness of the claimed share application money - simply because the assessee could not file the copy of the return of income for the AY 2005-06 of the investor, the transaction cannot be treated as unexplained in the hands of the assessee - since after filing of the primary evidence like confirmation of the share applicant, his PAN, bank statement of the firm under the proprietorship of the share applicant which remain the source of the investment in question, etc. the onus was shifted upon the AO to establish that after verification the confirmation and other documents were not found reliable - the AO was not justified in holding that the evidence filed in support by the assessee was not sufficient to establish the genuineness of the claim the order of the CIT(A) is upheld Decided against revenue. Transactions in fabric business are sham transactions or not Held that - CIT (A) has rightly appreciated the contention of the assessee that the AO was not justified in assessing the income represented by the cash deposits in the account of third party as undisclosed income in the hands of the assessee u/s 68 of the Act - What is taxable under the Income Tax Act, is income which has on its own been disclosed by the assessee - nothing prevents the assessee from venturing into new line of business if it results in earning of the profits - The purchaser and seller both are identified and both are income tax assessees in its their own capacity - the assessee had also filed confirmation from the purchaser and seller and besides, the AO had also obtained bank statement from Senturian Bank of Punjab of the said party whereby the payment received and paid by the assessee were duly found recorded - CIT(A) has rightly held that the assessee had discharged its initial onus of establishing bonafide of the transaction of sale and purchase of fabrics by furnishing the evidence and declaring substantial profits, the onus was shifted on AO to dislodge those evidence the order of the CIT(A) is upheld Decided against revenue. Rejection of books of accounts Adoption of Average of preceding two years G P rate of 3.48% - Held that - CIT (A) had rightly upheld the action of the AO in rejecting the books of account u/s 145(3) of the Act, on the basis that there was drastic decline in the gross profit of the assessee as compared to the preceding years, the payment of excise duty of ₹ 39 lac included in the sale price, will only have marginal impact on the operational results of the assessee and that the assessee has not explained the mismatch in the monthly production figure and corresponding production expenses - the assessee has not added the excise duty component while valuing its closing stock, though it is specifically provided in section 145A of the I. T. Act - the assessee has made certain sales to its sister concern, at a value lower than its purchase price of raw material - But merely because books of account were rejected the action of the authorities below in estimating the profit by adopting a particular GP rate without assigning any reason in support resulting into the trading addition cannot be justified - The addition made by the AO and sustained by the CIT (A) on account of trading addition applying an estimated gross profit rate without assigning the very basis, thus cannot be justified relying upon CIT vs. Gotan Lime Khanij Udhyog 2003 (9) TMI 21 - RAJASTHAN High Court wherein it has been held that Section 145 of the I.T. Act, 1961, only provides the basis on which computation of income is to be made for the purpose of determining the amount of tax - The provision by itself does not deal with addition or deletion to the income - mere rejection of, or some deficiency in, the books of account would not mean that it must necessarily lead to additions to the sustained income Decided against revenue
Issues Involved:
1. Deletion of addition of Rs. 3,50,000/- made under Section 68 regarding share application money. 2. Deletion of addition of Rs. 1,01,90,000/- made under Section 68 for transactions in the fabric business. 3. Deletion of addition of Rs. 53,77,921/- by adopting the average of the preceding two years' Gross Profit (G.P.) rate after rejecting the books of accounts. 4. Upholding trading addition of Rs. 35,02,280/- out of the total addition of Rs. 53,77,921/- and confirming the rejection of books of accounts under Section 145(3). Issue-wise Detailed Analysis: Issue 1: Deletion of Addition of Rs. 3,50,000/- under Section 68 (Share Application Money) The Revenue questioned the deletion of Rs. 3,50,000/- made under Section 68 for money claimed as share application. The Assessing Officer (AO) doubted the transaction and the creditworthiness of the applicant, Mr. Rohit Kumar Gogia, and held that the assessee failed to establish the claimed investment with proper evidence. The AO noted discrepancies such as the absence of the applicant's return for the assessment year 2005-06 and doubts over the bank statement and the applicant's income. The CIT(A) deleted the addition, relying on the confirmation of the applicant, his PAN, returns of income for other years, and his bank statement. The CIT(A) held that the assessee had discharged its primary onus, and it was not the duty of the assessee to ensure the applicant had filed returns for a specific year. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not verify the documents by summoning the applicant and that the primary evidence provided by the assessee was sufficient. Issue 2: Deletion of Addition of Rs. 1,01,90,000/- under Section 68 (Fabric Business Transactions) The Revenue challenged the deletion of Rs. 1,01,90,000/- made under Section 68 for transactions in the fabric business, which the AO deemed sham. The AO noted that the assessee, primarily in the iron and steel business, engaged in fabric trading for only 10 days, showing significant sales and profits. The AO doubted the genuineness of these transactions and made the addition. The CIT(A) deleted the addition, noting that the assessee provided supporting evidence, including sale and purchase bills and confirmations from the parties involved. The Tribunal concurred with the CIT(A), stating that the assessee had discharged its initial onus by providing necessary evidence, and the AO failed to disprove this evidence. The Tribunal held that the AO was not justified in treating the transactions as unexplained income without further verification. Issue 3: Deletion of Addition of Rs. 53,77,921/- by Adopting Average G.P. Rate (Rejection of Books of Accounts) The Revenue questioned the deletion of Rs. 53,77,921/- made by adopting the average G.P. rate after rejecting the books of accounts due to a low G.P. rate. The AO noted several discrepancies, including sales to sister concerns at lower prices, mismatched production figures, and improper stock valuation. The AO estimated the profit by adopting a G.P. rate of 3.48%, resulting in the addition. The CIT(A) upheld the rejection of the books but estimated the profit at a lower G.P. rate of 1.5%, leading to a partial relief. The Tribunal found that while the rejection of the books was justified, the estimation of profit without a clear basis was not. The Tribunal directed the AO to delete the addition, emphasizing that mere rejection of books does not necessarily warrant an addition. Issue 4: Upholding Trading Addition of Rs. 35,02,280/- and Confirming Rejection of Books under Section 145(3) The assessee contested the upholding of Rs. 35,02,280/- out of the total addition of Rs. 53,77,921/- and the rejection of books under Section 145(3). The AO noted several issues, including sales to sister concerns at lower prices, mismatched production figures, and improper stock valuation, leading to the rejection of the books and estimation of profit. The CIT(A) upheld the rejection of the books but reduced the addition by applying a lower G.P. rate. The Tribunal agreed with the rejection of the books but found the profit estimation without a clear basis unjustified. The Tribunal directed the AO to delete the addition, aligning with the view that rejection of books does not automatically lead to an addition. Conclusion: The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, directing the AO to delete the additions made on the basis of estimated G.P. rates and unsupported claims of unexplained income. The Tribunal emphasized the need for proper verification and evidence-based conclusions in such matters.
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