2015 (10) TMI 1492 - AT - Income Tax

Addition on deposits in savings bank account of the assessee - Held that - This deposit includes an amount of ₹ 2 lakhs transferred from M/s. Star Tex through cheque No. 800244 and also noted that Star Tex is a concern from which the assessee is regularly purchasing cloth as raw material to be consumed in his proprietorship concern M/s Hoor Creators, which is engaged in manufacturing of garments. In the light of these facts, it has to be accepted that the deposit in this bank account is business transaction and business receipts and therefore, in respect of such deposit in bank account, the addition should be made to the extent of gross profit on such undisclosed business turnover and not the entire deposit in bank account. Regarding the gross profit rate the addition to the extent of accepted gross profit rate of 10.82 per cent. of the turnover of ₹ 16,90,811 should be confirmed. We order accordingly. Addition on account of initial capital for doing this business outside the books - Held that - Assessee was having opening balance of ₹ 3,18,872 in this bank account and in our considered opinion, for doing an annual turnover of ₹ 16.90 lakhs for which the addition has been made by the Assessing Officer, this much fund is sufficient as initial capital. Hence, in our considered opinion, in the facts of the present case, no addition is called for on account of initial capital for doing this business outside the books. We confirm the addition to the extent of ₹ 1,82,945 being 10.82% of ₹ 16,90,811 and delete the balance addition. - Decided partly in favour of assessee. Addition made with regard to credit balance of three creditors - addition appears to have been made by the Assessing Officer under section 41(1) - Held that - It is noted by the Assessing Officer that these creditors were having opening balances and there is no purchase during the present year. Regarding the addition to be made under section41(1), it is essential that the liability should cease to exist as per the judgment of the hon ble apex court rendered in the case of Chief CIT v. Kesaria Tea Co. Ltd. In the present case, it is seen that the assessee is still showing these creditors as liability. Assessee has not written back the liability in his accounts. In the light of these provisions of section 41(1) and the judgment of the hon ble apex court in the case of Kesaria Tea Co. Ltd. 2002 (3) TMI 1 - SUPREME Court and CIT v. Sugauli Sugar Works P. Ltd. 1999 (2) TMI 5 - SUPREME Court we hold that the addition made by the Assessing Officer in this regard is not sustainable and therefore, on this issue, we do not find any reason to interfere in the order of the Commissioner of Income-tax (Appeals). - Decided in favour of assessee.

Summary

Issues:
Cross-appeals by assessee and Revenue against CIT(A) order for AY 2009-10; Addition of deposits in savings bank account and sundry creditors; Appeal by assessee for upheld additions; Appeal by Revenue for deleted additions.

Analysis:
The ITAT Lucknow heard cross-appeals by the assessee and Revenue against the CIT(A) order for the assessment year 2009-10. The primary issues revolved around the addition of deposits in the assessee's savings bank account and sundry creditors. The Assessing Officer made an addition of Rs. 16,90,811 for bank deposits, with the CIT(A) confirming Rs. 10 lakhs and allowing relief for the balance amount. Additionally, an addition of Rs. 21,60,421 was made for sundry creditors from three parties. The CIT(A) upheld two additions while deleting one. The ITAT considered both sides' contentions simultaneously.

The ITAT noted that the Assessing Officer's approach of adding the entire cash deposit in the bank account was incorrect. They emphasized that the addition should be based on the gross profit of the undisclosed business turnover, not the entire deposit. The gross profit rate claimed by the assessee was 5.5%, but the actual rate in the business was found to be 10.82%. Consequently, the ITAT confirmed the addition based on the accepted gross profit rate.

Regarding the addition for initial capital for the business outside the books, the ITAT agreed with the assessee that the existing funds were sufficient for the turnover, leading to the deletion of the balance addition. For the addition related to creditors under section 41(1), the ITAT referred to relevant case law and provisions. They concluded that as the liability still existed and was not written back in the accounts, the addition made by the Assessing Officer was not sustainable. Therefore, the ITAT dismissed the Revenue's appeal and partly allowed the assessee's appeal.

In conclusion, the ITAT dismissed the Revenue's appeal while partly allowing the assessee's appeal. The judgment provided detailed reasoning for each issue, focusing on the correct application of gross profit rates, initial capital considerations, and the legal requirements under section 41(1) for creditor liabilities.