2015 (7) TMI 522 - AT - Income Tax

Estimation of profit - Undisclosed Purchase - non production of books of accounts - Held that - Assessee has not produced books of account before the AO or before CIT(A) during the course of assessment proceedings or appellate proceedings. The AO while framing assessment has gone through the audited accounts and the stock register maintained in Form No IV. AO has never denied that the sales are not out of these unaccounted purchases. The sales made are accepted as it is. Once the sales are accepted, the entire undisclosed purchases cannot be added for computing the income of the assessee except by applying a profit rate i.e. gross profit as declared by assessee in regular books of account or the gross profit declared by other concerns in the similar trade. In view of the above facts and circumstances and particularly when the books of accounts were not produced by the assessee before the AO, the book results cannot be accepted and the same are to be rejected. In any case, the computation method of the AO for determining undisclosed purchases is taken through mathematical exercise. We find that the assessee maintaining the stock and production registers as per the guidelines of FCI, which are Form No.I to IV. The registers are regularly checked by FCI for the reasons that 40% of the production would have been sold to FCI as per Government order. The AO should have verified the closing stock in view of stock register maintained for the purposes of FCI. Even otherwise, this stock inventory of the magnitude of 43,447.20 quintals is impossible to be weighed and determine the closing stock within the time-limit of 12 hours, which was the period during which the Survey Party stayed in the business premises of the assessee. From the finding of survey, it is clear that weighing is not done but only counting of bags or inventory of bags is taken by the Survey Party counting the number of bags in the stacks. We find that the FCI Inspector has signed the stock register as on 31.03.2010 by mentioning the 5700 quintals of paddy, whereas the AO determined the stock as 43,347.20 quintals. The assessee has maintained stock register in Form No I, II, III & IV under DCF&S/FCI guideline as maintained by the Rice Mill. Neither AO nor CIT(A) has cross-verified the registers maintained by assessee. In such circumstances, we direct the AO to recompute the income by applying gross profit rate on the unaccounted purchases, which are sold out. Gross profit declared by the assessee, we are of the view that these are undisclosed purchases as sold by the assessee and sale is admitted by the Revenue, a reasonable GP rate will be 10% for computing profit of the assessee. Accordingly, we direct the AO to recompute the income after deleting the addition made on account of undisclosed purchases but apply GP rate of 10% on the undisclosed purchases. The AO is directed accordingly. - Decided partly in favour of assessee.

Issues Involved:
1. Addition of Rs. 3,85,01,830/- as undisclosed purchases.
2. Validity of survey findings and discrepancies in stock.
3. Non-production of documents and stock registers.
4. Methodology used by AO for determining undisclosed purchases.
5. Applicability of gross profit rate on undisclosed purchases.

Detailed Analysis:

1. Addition of Rs. 3,85,01,830/- as Undisclosed Purchases:
The primary issue in the appeal was the addition of Rs. 3,85,01,830/- made by the Assessing Officer (AO) as undisclosed purchases. The assessee contended that the addition was arbitrary and bad in law, arguing that purchases are always related to subsequent sales and any concealment would involve only the net profit.

2. Validity of Survey Findings and Discrepancies in Stock:
A survey under section 133A of the Income-tax Act, 1961 was conducted on the assessee's business premises. Discrepancies were noted in the stock of paddy, rice, and rice bran. The AO determined undisclosed purchases of paddy at 37,647.20 quintals, excess stock of rice at 581.15 quintals, and undisclosed stock of bran at 45.52 quintals. The assessee disputed these findings, stating that the survey report's calculations were erroneous and the units of items were not clarified.

3. Non-production of Documents and Stock Registers:
The AO and CIT(A) noted that the assessee did not produce the books of account or the stock registers during the assessment and appellate proceedings. The CIT(A) emphasized the importance of document SRM-5, which indicated a higher stock than recorded in the books. The assessee argued that the documents SRM-5, 6, and 7 did not exist and were not supplied during the assessment proceedings, making the survey invalid.

4. Methodology Used by AO for Determining Undisclosed Purchases:
The AO's methodology involved comparing the closing stock as per audited accounts with the physical stock found during the survey. The assessee argued that the stock could not have been weighed within the limited time of 12 hours during the survey. The CIT(A) upheld the AO's findings, stating that the physical inventory matched closely with document SRM-5 and that the stock was not merely in the godown but also in open and temporary sheds.

5. Applicability of Gross Profit Rate on Undisclosed Purchases:
The Tribunal found that the AO did not deny that the sales were made from the unaccounted purchases. It was concluded that the entire undisclosed purchases could not be added to the income; instead, a gross profit rate should be applied. The Tribunal directed the AO to recompute the income by applying a gross profit rate of 10% on the undisclosed purchases, considering the gross profit declared by the assessee in regular books and the comparative statement of turnover and gross profit.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to delete the addition made on account of undisclosed purchases and instead apply a gross profit rate of 10% on the undisclosed purchases. This approach was deemed fair and reasonable, given the circumstances and the evidence on record. The order was pronounced in the open court on 30/06/2015.

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