2016 (4) TMI 1433 - AT - Income Tax

Undisclosed investment in stock - excess stock found during the course of survey - HELD THAT - As observed from the assessment order that on 07/01/2004, the assessee surrendered Rs. 3 Lac as income from undisclosed source as the assessee could not reconcile the difference in stock - AO has simply made the addition of the balance amount being excess stock found during the course of survey without considering the reconciliation submitted by the assessee before him. The addition was made merely on the basis of difference in stock found between the books of accounts and the physical tally of the stock. AO was not justified in rejecting the explanation of the assessee submitted before him together with the reconciliation of the stock without verification and pointing out error therein. No material was brought on record by the Revenue to show that there was in fact any amount of undisclosed income in the form of excess stock more than Rs. 3 Lac disclosed by the assessee. In absence of the same, we find that the addition made by the Assessing Officer and sustained by CIT (Appeals) cannot be upheld. We, therefore, set aside the orders of the lower authorities and delete the addition and allow the ground of appeal of the assessee. Disallowance under the head interest expenditure - AO found that the assessee had paid interest to three persons @ 18%, 20.52% and 19% which was excessive and according to him, the prevailing market rate of interest was 12% - HELD THAT - We find that the disallowance has been made by AO on account of interest paid to relatives under sec. 40A(2) of the Act. We find that the Assessing Officer has brought no material on record to show that how the interest paid by the assessee was excessive by comparing it with the market rate of interest on loan on the date of taking of the loan by the assessee. In absence of the same, in our considered view, the disallowance made by the Assessing Officer and confirmed by the Commissioner of Income Tax (Appeals) cannot be sustained in law, hence, delete the disallowance of interest expenditure and allow the ground of appeal of the assessee.

Summary

Issues:
1. Addition of undisclosed investment in stock
2. Disallowance of interest expenditure

Issue 1: Addition of undisclosed investment in stock:
The appeal was filed against the Commissioner of Income Tax (Appeals) order confirming the addition of Rs. 3,08,971 on account of undisclosed investment in stock. The case involved a survey under sec. 133A where a difference in stock values was found during assessment proceedings. The Assessing Officer required explanations regarding the undisclosed investment. The assessee surrendered Rs. 3 Lac during the survey. The Commissioner of Income Tax (Appeals) upheld the addition, stating that the bills relied upon were not impounded. The ITAT found that the Assessing Officer did not accept the reconciliation submitted by the assessee, making the addition based solely on the difference in stock values. The ITAT concluded that the addition was unjustified as there was no evidence of undisclosed income beyond the amount surrendered by the assessee. Therefore, the ITAT set aside the lower authorities' orders and deleted the addition of Rs. 3,08,971.

Issue 2: Disallowance of interest expenditure:
The second ground of appeal concerned the disallowance of interest amounting to Rs. 41,467. The Assessing Officer disallowed the interest paid to three parties at rates higher than the prevailing market rate of 12%. The assessee explained that the excess interest was due to the easy availability of unsecured loans for business exigencies. The Commissioner of Income Tax (Appeals) upheld the disallowance, citing the abnormally high interest rates given to relatives. The ITAT noted that the Assessing Officer failed to provide evidence comparing the interest paid by the assessee with the prevailing market rates. Therefore, the ITAT concluded that the disallowance under sec. 40A(2) was not justified. As a result, the ITAT set aside the lower authorities' orders and deleted the disallowance of interest expenditure of Rs. 41,467.

In conclusion, the ITAT allowed the appeal of the assessee, ruling in favor of the assessee on both grounds of addition of undisclosed investment in stock and disallowance of interest expenditure.