2016 (4) TMI 551 - AT - Income Tax

Purchases doubtful - Estimation of commission income @1% of total purchases - as per AO the assessee was not running regular business but only providing accommodation entries since assessee failed to substantiate sales - CIT(A) deleted the addition - Held that - The assessee has furnished VAT return and VAT audit report. The total turnover declared before the VAT authorities are tallied with the turnover declared in the Income-tax return. The assessee has taken cash credit loan from PNB, Punjabi Bagh, New Delhi against hypothecation of stock. As per submissions, he has fulfilled the requirement of bank against cash credit loan taken. Therefore, the purchase and stock declared before the bank cannot be questioned. After going through the AO s order and the paper book submitted, we observe that the Inspector has submitted wrong report. Regarding very low amount of depreciation, the assessee was carrying his business since last many years, therefore, their WDV has gone down. The AO has computed 1% income on total purchases on estimate basis whereas the accounts of the assessee have been audited by the Chartered Accountant and submitted the tax audit report in appropriate form and the Assessing Officer has not disturbed the financial results. The sales and purchase invoices were produced before the AO, but he did not reject any single paper and accepted the same. He issued notice u/s. 133(6) to the creditors, bankers and all have responded to the AO. The major part of the purchases was from Anshika jewellers, the sister concern and payments were made directly to the MMTC Ltd., which is a government organization. Therefore, no interference is called for in the well reasoned order passed by the ld. CIT(A). - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition of Rs. 23,95,000/- made by AO by treating source of accretion to capital amount as unexplained cash credit.
2. Deletion of addition of Rs. 1,06,99,740/- made by AO by estimating the commission income at 1% of total purchases, alleging the assessee was providing accommodation entries.

Detailed Analysis:

Issue 1: Deletion of Addition of Rs. 23,95,000/- as Unexplained Cash Credit
The Assessing Officer (AO) added Rs. 23,95,000/- to the income of the firm, treating it as unexplained income routed through the partner, Sh. A.S. Malik. The AO was not satisfied with the explanations provided regarding the sources of entries in the partner's bank account. However, the CIT(A) found that the assessee had submitted confirmations and bank statements for the relevant transactions during the assessment proceedings. The CIT(A) noted that the AO did not bring any cogent reasons or evidence to contradict the explanations provided by the assessee. The CIT(A) relied on established legal precedents, including CIT vs. Taj Borewells and CIT vs. Metachem Industries, which hold that if a firm satisfactorily explains that credit entries represent partners' investments, the burden of proof is discharged. Consequently, the addition of Rs. 23,95,000/- was deleted.

Issue 2: Deletion of Addition of Rs. 1,06,99,740/- as Commission Income
The AO added Rs. 1,06,99,740/- to the income of the firm by estimating a 1% commission on total purchases, alleging that the assessee was providing accommodation entries. The AO based this on the fact that most sales were made in cash and cash was deposited in the bank before making cheque payments for purchases. However, the CIT(A) found that the AO's addition was based on conjecture and surmises without any cogent evidence. The CIT(A) noted that the assessee had provided detailed explanations and documentary evidence, including VAT returns, bank statements, and confirmations from creditors, to substantiate the genuineness of the transactions. The CIT(A) also observed that the AO did not reject the assessee's books of accounts or find any discrepancies in the financial records. The CIT(A) concluded that the AO was not justified in making the addition and directed to accept the income declared by the assessee at Rs. 2,56,020/-.

Conclusion:
The Tribunal upheld the CIT(A)'s order, agreeing that the AO's additions were not justified and were based on assumptions without proper evidence. The Tribunal found that the CIT(A) had passed a well-reasoned order based on documentary evidence and legal precedents. The appeal by the Revenue was dismissed in its entirety.