2011 (9) TMI 1242 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer (AO) on account of undisclosed income under Section 68 of the Income-tax Act, 1961.
2. Deletion of addition made by the AO on account of low gross profit.

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Undisclosed Income under Section 68
The Revenue contended that the CIT(A) erred in deleting the addition of Rs.5,68,000/- made by the AO on account of undisclosed income under Section 68 of the Income-tax Act. The AO made this addition after the assessee failed to provide satisfactory documentary evidence for the share application money received in cash from various individuals. Despite being given 13 opportunities, the assessee only provided partial confirmations, leading the AO to treat the share application money as income from undisclosed sources.

The CIT(A) deleted the addition based on the assessee's reliance on several judicial precedents, including CIT v. Lovely Exports (P) Ltd. and CIT v. Steller Investment Ltd. The CIT(A) noted that confirmations and identity proofs were provided, and the AO did not dispute these in the remand report. The CIT(A) concluded that the identity of the shareholders and the genuineness of the transactions were established, thus deleting the addition.

In the appellate proceedings, the Revenue argued that the confirmations were inadequate as they did not include evidence of income tax returns filed by the shareholders. The Revenue also highlighted that the share capital contributions were made in cash, and some confirmations listed the assessee's address as that of the shareholders.

The Tribunal noted that the primary onus lies on the assessee to prove that the share application money does not represent its income. The Tribunal emphasized that the assessee failed to provide adequate evidence despite multiple opportunities. The Tribunal also referenced the decision of the jurisdictional High Court in M/s Power Drugs Ltd., which supported the Revenue's stance that the assessee did not discharge its burden under Section 68.

The Tribunal concluded that the CIT(A) relied on incorrect evidence, as the assessee never demonstrated that the shareholders were assessed to income tax. The Tribunal found the CIT(A)'s findings to be based on surmises and conjectures. Consequently, the Tribunal upheld the addition made by the AO, deciding the issue in favor of the Revenue.

Issue 2: Deletion of Addition on Account of Low Gross Profit
The Revenue contended that the CIT(A) erred in deleting the addition of Rs.5,08,822/- made by the AO on account of low gross profit. The AO made this addition by comparing the gross profit rate of the current year with the previous year without rejecting the books of account as required under Section 145(3) of the Act.

The CIT(A) deleted the addition, noting that the assessee's sales had substantially increased, and all transactions were duly vouched. The CIT(A) accepted the assessee's explanation that the decrease in gross profit was due to lower sales rates and higher purchase costs. The CIT(A) also noted that the gross profit rate for the subsequent year was accepted by the department.

The Tribunal agreed with the CIT(A), stating that the AO substituted his version without rejecting the books of account and failed to bring credible material to justify the addition. The Tribunal upheld the CIT(A)'s findings as well-reasoned and based on a proper appreciation of the facts and legal position. Thus, the Tribunal dismissed this ground of appeal by the Revenue.

Conclusion
The Tribunal partly allowed the Revenue's appeal, upholding the addition on account of undisclosed income under Section 68 but dismissing the addition on account of low gross profit. The order was pronounced in the Open Court on 19th Sept., 2011.