2017 (4) TMI 1625 - AT - Income Tax

Assessment u/s 153A - Unexplained investment for purchase of plot and cost of super structure respectively - CIT(A) deleted the addition - HELD THAT - On perusal of the order of the CIT(A) it is apparent that the addition is deleted for the reason that there is no incriminating material found during the course of search and merely for the reason of the valuation report the addition has been made. The addition in block assessment cannot be made without any evidence unearthing during the search proceedings. DR could not point out any evidence found with respect to above property during the search and none could be gathered from the order of the AO. No infirmity in the order of ld CIT(A) in deleting the addition with respect to difference in valuation of property. In the result the solitary ground of appeal of revenue is dismissed. Addition of gross profit on sales outside the books of account - During the course of search and seizure it was found that stock is short based on trading account for the period 01.04.2001 to 26.02.2002 - HELD THAT - As undisputed fact that the value of the shortage of the stock has been determined and confirmed by the partner of the assessee. In this confirmation there was a positive affirmation that the rate of the stock as well as the value derived on physical verification of the stock is correct. Therefore there is a shortage of stock of Rs. 1 041 3641/ compared to the stock lying in the books of the assessee. There was no exploration by the assessee about the shortage in the stock therefore the only plausible assumption that can be drawn is that these stock has been sold outside the books of account. Now after the sale of the stock assumed to be out of the books then only plausible way of determining income thereon is applying the rate of gross profit earned by the assessee on that sale. Naturally AO has perused the past history of the assessee and thereafter adopted that rate of 33.8% for working out profit. We do not find any infirmity in the order of the Ld. CIT appeal in confirming the above addition on account of gross profit on sales not recorded in books of account. In the result ground No. 2 of the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Addition of gross profit on sales outside the books of account.
2. Addition on account of unexplained investment for the purchase of a plot and the cost of superstructure.

Issue-wise Detailed Analysis:

1. Addition of Gross Profit on Sales Outside the Books of Account:
The assessee challenged the confirmation of an addition of Rs. 35,19,810/- as gross profit on sales outside the books of account. During a search and seizure operation, a discrepancy was found between the recorded stock and the physical inventory, resulting in a shortfall of Rs. 1,04,13,641/-. The Assessing Officer (AO) applied a gross profit rate of 33.8% to this shortfall, which was based on the previous year's gross profit rate, to arrive at the unexplained income. The assessee argued that the gross profit rate was inappropriately high and cited reasons such as market recession and heavy discounts. However, the AO and the CIT(A) found these explanations unconvincing, noting that the physical stock valuation was confirmed by one of the partners and that no evidence was provided to justify a lower gross profit rate. The Tribunal upheld the addition, agreeing with the AO and CIT(A) that the gross profit rate was reasonably applied based on past performance and that the shortage of stock indicated sales outside the books.

2. Addition on Account of Unexplained Investment for Purchase of Plot and Cost of Superstructure:
The revenue contested the deletion of an addition of Rs. 9.04 crores for the purchase of a plot and Rs. 6.56 lakhs for the cost of the superstructure, which were based on a valuation report by the District Valuation Officer (DVO). The assessee had shown the investment in the property at Rs. 2.42 crores for the land and Rs. 2.16 crores for the superstructure. The AO referred the matter to the DVO, who valued the land at Rs. 11.49 crores and the superstructure at Rs. 2.25 crores, leading to the addition of the difference as unexplained investment. The CIT(A) deleted the additions, stating that there was no incriminating material found during the search to support the higher valuation and that the addition was based solely on the DVO's report. The Tribunal upheld the CIT(A)'s decision, emphasizing that additions in a block assessment must be based on evidence found during the search, and no such evidence was presented by the revenue.

Conclusion:
The Tribunal dismissed the revenue's appeal regarding the unexplained investment in the property, confirming that no incriminating material was found during the search to justify the addition. The assessee's appeal concerning the gross profit addition was also dismissed, with the Tribunal agreeing that the gross profit rate applied by the AO was reasonable and supported by the partner's confirmation of the stock valuation. The judgments collectively reinforce the necessity for concrete evidence in block assessments and the validity of applying historical financial performance metrics in the absence of contrary evidence.