2015 (5) TMI 849 - AT - Income Tax

Addition on undisclosed GP rate - suppressed sales assumed on the basis of a diary seized from third party - CIT(A) restricted part addition - whether the documents seized during the course of search and the statements recorded during search and post-search was sufficient to draw an inference about undisclosed sales? - Held that - The entire sales as made by the assessee during the year aggregate to ₹ 699.73 crores and sale of manufactured goods is of ₹ 257.51 crores and the quantity-wise details furnished by the assessee have been accepted as such. Not a single party has been examined before drawing adverse inference regarding undisclosed sales made by the assessee. It is also worth noting that the sale is always made between the two parties and once there is no evidence either seized or gathered from the two parties then it would not only be highly improper but also unjust and arbitrary to assume undisclosed sales between the said parties. We are thus of the view that the seized diary during the course of search and the statements of Shri Salek Chand Garg recorded during the course of search and post-search was not sufficient to draw an inference about the alleged undisclosed sales dehors corroborative evidence supporting the third party statements and the entries recorded in the diary found from the possession of the third party during the course of search. - Decided in favour of the assessee. Whether a profit can be estimated without rejecting books of account with this finding that on the basis of the said books of account, proper income cannot be adduced? - Held that - It is a settled position of law that estimation of profit by applying a reasonable g.p. rate can be adopted and applied only when it is not possible for the Assessing Officer to deduce the profit of the assessee on the basis of books of accounts produced by the assessee. In such a situation, the Assessing Officer will have to afford opportunity of being heard to the assessee to meet out the defects pointed out by the Assessing Officer in the books of account and if the Assessing Officer is not satisfied with the explanation of the assessee to those defects pointed out by the Assessing Officer, then the Assessing Officer will reject the books of account by invoking the provisions of sec. 145(3) of the Act and will estimate the profit.In the present case, in view of the above finding on sub-issue No.(i), the Assessing Officer was having no reason to reject the books of account of the assessee, hence, he was not justified to jump on the second step for estimation of the profit by applying different g.p. rate than that shown by the assessee. - Decided in favour of the assessee. Whether application of g.p. rate at 10% by Assessing Officer and 5% by Learned CIT(Appeals) was reasonable to estimate the profit? - Held that - No plausible reason has been assigned by the Assessing Officer for application of g.p. rate at 10% nor has the Learned CIT(Appeals) assigned any convincing reason for applying the g.p. rate at 5% of the turnover. The g.p. rate declared by the assessee in respect of manufacturing was 1.24%. Also keeping in mind the above findings on other sub-issues, the issue is decided in favour of the assessee. Unexplained investment in stock - CIT(A) sustained the addition to the extent of ₹ 6,62,35,000 - Held that - The Learned CIT(Appeals) thereafter has held that variation in quantity of raw material of six items was imaginary to obtain credit facility from bank on account of accounts financial crises. He also held that there was no difference in stock on the date of search and that the stock has not been pledged with the bank but only hypothecated to bank as such stock statement given to bank cannot be a basis to assume unexplained investment in stock. In this regard, he placed reliance on several decisions. We also find that on the issue, there are several decisions in favour of the assessee as well as the Revenue. In such a situation, it is now a well settled position of the law that in absence of decision of Hon ble jurisdictional High Court on the issue, the decision favoring the assessee will have to be followed. The finding of the Learned CIT(Appeals) on the issue following the decision in favour of the assessee thus cannot be held erroneous. The same is upheld. - Decided against revenue. As regards CIT(A) sustained the addition to the extent of ₹ 6,62,35,000 the closing stock as on 31.3.2009 in any case cannot be added as unexplained investment for the assessment year under consideration as in that case it will be amounting to unexplained investment for the assessment year 2009-10, especially when the closing stock of that assessment year was accepted. In this regard, we find support from the cited decision of Hon ble Delhi High Court in the case of CIT vs. Om Prakash Mahajan (supra) and in the case of J.M. Wire Industries vs. CIT (supra). The addition of ₹ 6,62,35,000 sustained by the Learned CIT(Appeals) is thus not tenable. The same is directed to be deleted - Decided in favour of assesse. Undisclosed investment - assessee company had paid balance amount to the seller in cash outside the books of account by utilizing unaccounted income - held that - provisions laid down under sec. 50C of the Act are not applicable in the case of buyer and the valuation report in absence of corroborative evidence in support cannot be the sole basis to arrive at a conclusion beyond doubt that the value shown therein was invested by the assessee to purchase the property in question. It is also an established position of law that a document is reliable or unreliable in its entirety. The Learned CIT(Appeals) was thus not justified in relying upon the valuation report only for the purpose of the value of construction raised on the property shown in the said valuation report. On the other hand, we find that the evidence filed in the shape of agreement, sale deed, remittance of the accounts from the ledger as well as bank account were sufficient evidence to accept sale consideration shown in those documents. The Assessing Officer was thus not justified in making addition solely on the basis of valuation report and the Learned CIT(Appeals) was also not justified in sustaining the part addition partly on the basis of the valuation and applying the provisions of sec. 50C of the Act in the case of buyer. The addition made and sustained by the authorities below on the account of undisclosed investment in the property is thus directed to be deleted - Decided in favour of assesse.

Summary

Issues Involved:
1. Restriction of addition on account of undisclosed GP rate.
2. Restriction of addition on account of undisclosed stock.
3. Reduction of addition on account of undisclosed income in the investment of property.
4. Telescoping of additions.
5. Levy of interest under sec. 234B of the Act.

Issue-wise Analysis:

1. Restriction of Addition on Account of Undisclosed GP Rate:
The Revenue challenged the restriction of addition from Rs. 8,37,60,000 to Rs. 4,18,80,000 made by the Assessing Officer (AO) based on undisclosed GP rate derived from a diary seized from a third party. The assessee contended that the diary was irrelevant and inadmissible, and no defects were found in the books of accounts. The Tribunal held that the seized diary and statements of Shri Salek Chand Garg were insufficient to infer undisclosed sales without corroborative evidence. The Tribunal emphasized that books of accounts were audited, excise and VAT authorities accepted the turnover, and no unexplained cash or investment was found during the search. The Tribunal concluded that the AO was not justified in rejecting the books of account and estimating profit without proper basis, thus directing the deletion of the sustained addition of Rs. 4,18,80,000.

2. Restriction of Addition on Account of Undisclosed Stock:
The AO made an addition of Rs. 17,69,98,750 on account of unexplained investment in stock based on differences between stock hypothecated to the bank and stock as per the stock register. The CIT(A) sustained the addition to Rs. 6,62,35,000. The Tribunal noted that the difference in stock was due to inflated figures to obtain higher credit from the bank, and there was no difference in stock found during the search. The Tribunal held that stock statements given to the bank cannot be the basis for assuming unexplained investment in stock, especially when no defects were found in the books of accounts. The Tribunal directed the deletion of the sustained addition of Rs. 6,62,35,000.

3. Reduction of Addition on Account of Undisclosed Income in the Investment of Property:
The AO observed that the property purchased by the assessee was undervalued compared to the circle rate and a valuation report found during the search. The CIT(A) reduced the addition to Rs. 61,26,760. The Tribunal held that provisions of sec. 50C of the Act apply to the seller, not the buyer, and the valuation report alone cannot be the sole basis for addition without corroborative evidence. The Tribunal accepted the sale consideration shown in the agreement, sale deed, and bank remittances, directing the deletion of the addition sustained by the CIT(A).

4. Telescoping of Additions:
The assessee argued that the addition made on account of alleged undisclosed profit should be telescoped with alleged unexplained investment. The Tribunal did not provide a separate ruling on this issue, as the primary additions were directed to be deleted.

5. Levy of Interest Under Sec. 234B of the Act:
The assessee contested the levy of interest under sec. 234B, which is consequential in nature. The Tribunal did not adjudicate this issue independently, as it is dependent on the outcome of the primary issues.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, directing the deletion of the additions sustained by the CIT(A) on account of undisclosed GP rate, undisclosed stock, and undisclosed income in the investment of property. The decision emphasized the importance of corroborative evidence and adherence to legal provisions in making additions based on seized documents and third-party statements.