2016 (9) TMI 711 - AT - Income Tax

Estimation of inflation of purchases - addition on the basis of statement collected during survey - Held that - The assessee has categorically stated that it is maintaining collection centres and payments are made to the farmers from there. There is no third party evidence towards purchase cost of milk legally. Payments were made on the basis of own vouchers which are maintained by the assessee. Though the Assessing Officer estimated the inflation of purchase, he was not able to co-relate those inflation of purchases during the assessment year under consideration. Thus, the estimated inflation of purchases is based on the subsequent years figures. In our opinion, the information gathered subsequent to the assessment year under consideration cannot be basis for estimation of inflation of purchases for the earlier assessment year. De horse, without prejudice to the fact that even the statement recorded during the course of survey have no evidentiary value. Any admission during such statement cannot by itself be basis for addition. Being so, in our opinion, the addition on the basis of statement collected during survey cannot be basis for addition. There is a decline in gross profit rate as compared to assessment year 2010-11, 2011-12. The assessee is not able to explain decline on the gross profit at 14.03% as compared to earlier assessment years. In our opinion, to settle the dispute, it is appropriate to take average gross profit rate of assessment years 2010-11, 2011-12 and 2012-13 and to estimate the income of the assessee on the basis of average gross profit rate of last two assessment years since the past history is the best yardstick to estimate the income. Accordingly, we direct the Assessing Officer to recompute the income of the assessee by applying the average gross profit rate of immediate earlier two assessment years alongwith present assessment year and decide the issue afresh. The assessee shall provide details of gross profit rate of all the two immediate earlier assessment years to the Assessing Officer. The Assessing Officer shall consider the same and decide the issue in accordance with our findings as above. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
- Disallowance of inflated purchase cost of milk based on survey statement
- Reliability of survey statement as evidence for addition
- Comparison of gross profit rate for assessment years

Issue 1: Disallowance of inflated purchase cost of milk based on survey statement
The case involved an appeal against the Commissioner of Income Tax (Appeals) order upholding additions made on creditors for the current year based on a survey conducted at the business premises. The Assessing Officer observed an outstanding balance towards milk purchases and inflated purchase cost. The partner of the assessee-firm admitted to boosting up creditors and offering additional income. The Assessing Officer estimated inflated purchases, leading to additions. The CIT(A) confirmed the additions based on subsequent surveys revealing the modus operandi of generating unaccounted cash. The appellant argued that the survey conducted after the financial year end should not be relied upon for the assessment. The appellant also cited a High Court judgment stating that survey statements have no evidentiary value for additions.

Issue 2: Reliability of survey statement as evidence for addition
The appellant contended that the Assessing Officer accepted the books of account as correct and should not estimate income without rejecting them. The appellant highlighted the difficulty in obtaining confirmation letters from numerous illiterate milk suppliers. The appellant argued that survey statements lack evidentiary value as per judicial precedents. The Department argued that the Assessing Officer's detailed inquiry established the habit of inflating purchase costs. The Department relied on the sworn statement made during the survey and lack of confirmation letters from suppliers to support the additions.

Issue 3: Comparison of gross profit rate for assessment years
The Tribunal considered the survey conducted after the relevant assessment year and the lack of direct evidence for inflated purchases. The Tribunal emphasized that subsequent information cannot be the basis for estimating purchases in earlier years. The Tribunal noted a decline in the gross profit rate and directed the Assessing Officer to recompute the income based on the average gross profit rate of immediate earlier assessment years. The Tribunal highlighted the importance of past history in estimating income and instructed the appellant to provide details for the same.

In conclusion, the Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer to recompute the income based on the average gross profit rate of the immediate earlier assessment years. The judgment emphasized the importance of reliable evidence and past history in assessing income discrepancies.