2016 (6) TMI 494 - AT - Income Tax

Addition on difference in cash and bank balances as per statement of accounts prepared on estimate and ad hoc basis - Held that - financial statement cannot be relied upon to assess the actual transaction of the assessee. In our view the AO has to assess the actual income of the assessee. No doubt the turnover of the assessee is less than the turnover prescribed for tax audit u/s 44AB. Assessee had opportunity to opt for assessment u/s 44AD. However assessee chose to declare more than 8% assessee may have better reason for declaring more than the limit prescribed u/s 44AD. Assessing Officer is of the opinion that the assessee had earned a specified income from the business of sale of scrap. In such an event Assessing Officer may not be justified in blowing hot and cold and making a specified addition again based on the balance sheet prepared by the assessee which was not accepted in totality by the Assessing Officer while estimating the income. At any rate in the instant case Assessing Officer having not specified any section/provision the addition made by the Assessing Officer in our considered opinion is not sustainable. If a separate addition has to be made the onus is upon the Assessing Officer to bring on record some evidences to justify that the assessee had actually earned undisclosed income over and above what was estimated from the business of sale of scrap and also to bring that there were additional sales which have generated income or there was other source of income. No such effort was made by the Assessing Officer in this case. Also the total income computed by the Assessing Officer including the impugned addition of 3, 59, 843 works out to 6, 79, 360/- and the percentage of profit vis-a-vis turnover estimated by the Assessing Officer works out to approximately 43% which in our humble opinion is absurd in the line of this business not only because of the fact that the Assessing Officer himself estimated arbitrary profit rate of 20.22% but also having regard to the past record of the assessee where the assessee has declared the profit range between 15 to 18% which was accepted by the Assessing Officer. Thus Assessing Officer is not made out a case for making a separate addition - Decided in favour of assessee

Summary

Issues involved:
Assessment of taxable income based on additions made by the Assessing Officer under different heads, including non-submission of evidence for deduction u/s 80C, treating bank deposits as business turnover, and considering a difference in bank balances as undisclosed income.

Analysis:
1. The assessee, an individual engaged in trading iron and steel scrap, filed the return of income for AY 2009-10, which was scrutinized by the Assessing Officer resulting in additions to the taxable income.
2. The additions made by the AO included non-submission of evidence for claiming deduction u/s 80C, treating bank deposits as business turnover, and considering a difference in bank balances as undisclosed income.
3. The CIT(A) partially allowed the appeal by deleting a portion of the profit margin addition but confirmed the rest, leading the assessee to appeal further.
4. The grounds of appeal raised by the assessee challenged the additions made by the CIT(A) as erroneous, contrary to facts, and unjustified in law.
5. The AR argued that the financial statements were prepared ad hoc and not based on actuals, emphasizing that the turnover and profit declared were higher than the prescribed rate under Section 44AD.
6. The DR contended that the additions were proper as per the books of account submitted by the assessee.
7. The ITAT observed that the AO estimated the turnover based on bank deposits, yet made a separate addition for the difference in bank balances without specifying the legal basis for such addition.
8. The ITAT held that the AO's addition of the difference in bank balances was not sustainable as it lacked a legal basis and was inconsistent with the estimation of income based on turnover and profit percentage.
9. Ultimately, the ITAT allowed the assessee's appeal, deleting the addition of the difference in bank balances and directing the Assessing Officer accordingly.

This detailed analysis encompasses the issues raised in the judgment, the arguments presented by both parties, and the reasoning behind the ITAT's decision to allow the appeal.