2016 (11) TMI 603 - AT - Income Tax

Unexplained purchases - Held that - DR had merely stated in his written submission that mere settlement of dues to the said parties does not sanctify the purchase transactions as genuine. This goes to prove that there is no case for making any addition towards unrecorded purchases and it could only have to be concluded that the unrecorded purchases found during survey were subsequently recorded in the books of accounts. Consequentially there is no question of making any addition on account of gross profit on the same. But we find that the additions sustained by the ld CITA towards unrecorded purchases and undisclosed gross profit has not been contested by the assessee before us. Hence in these circumstances, we feel that no interference need to be made to the order of the ld CITA in this regard. - Decided in favour of assessee Addition u/s 40A(2)(b) - Held that - AO had not doubted the genuineness of the expenditure incurred and the services rendered by these two parties to the assessee. AO had not brought any comparable cases for fair market value to prove that the payment made by the assessee is excessive or unreasonable even in the remand proceedings. Without bringing the same, simply invoking the provisions of section 40A(2)(b) of the Act would be highly improper. We also find that the nature of services rendered by these two parties were also not denied or doubted by the ld AO in the remand report. Hence we hold that the ld CIT-A had rightly granted relief to the assessee.- Decided in favour of assessee Addition on unexplained investment in fixed assets - Hel that - We find that the fixed assets have been duly reflected in the audited balance sheet filed by the assessee which represents assets and liabilities. The liabilities reflected therein clearly reflect the bank loans availed by the assessee such as auto loan from HDFC Bank, loan from Citi Bank against hypothecation of showroom, cash credit limit from Centurion Bank against the hypothecation of stocks of business of the assessee. The liabilities reflected in the liability side in the form of bank loans were treated as explained by the ld AO. Hence, it could be safely concluded that the assets appearing in the balance sheet would be treated as explained once the corresponding entries on the liability side are explained. There is no case made out for framing an addition towards unexplained investment in fixed assets.- Decided in favour of assessee Addition made towards sundry creditors as bogus - Held that - We find that the entire details of sundry creditors for expenses and for goods were provided by the assessee before the ld AO in the remand proceedings. With regard to sundry creditors for expenses, they are only expenses provided on accrual basis at the end of the year which would get immediately discharged in the subsequent year and the ld CITA on factual verification of the same granted relief to the assessee. We do not deem fit to interfere with the said findings of the ld CITA. With regard to creditors for goods, the ld AO did not give any comments with regard to 31 creditors out of total 47 creditors. In the absence of any adverse remarks with regard to 31 creditors, it would be just and fair to conclude that the ld AO had accepted those creditors to be genuine. With regard to 16 sundry creditors verified by the ld AO, we find that those creditors were duly settled in the subsequent year by account payee cheques which were also reflected in the ledger account of the assessee for the Asst year 2004-05 and duly cross verified with the books of creditors. Hence the ld CITA rightly concluded that no adverse inference could be drawn on the same. With regard to 5 the parties did not respond to notice u/s 133(6) of the Act and ld CITA fairly concluded the same to be bogus.- Decided in favour of assessee in part Addition towards unexplained cash credit - Held that - We find that the assessee had stated that the fresh loan was availed from American Express Bank in the sum of ₹ 1,96,445/- during the year under appeal which is also reflected in the audited balance sheet filed along with the return as a separate item under unsecured loans . Hence the belief entertained by the ld CITA that the said bank loan cannot be treated as unexplained cash credit cannot be faulted with.- Decided in favour of assessee Disallowance of various expenses - Held that - We find that the expenditure has been disallowed on an arbitrary basis without any material on record. - Decided in favour of assessee

Issues Involved:
1. Deletion of additions on account of unexplained purchases and undisclosed profit.
2. Disallowance under Section 40A(2)(b) of the Income Tax Act.
3. Addition on account of unexplained investment in fixed assets.
4. Addition towards sundry creditors as bogus.
5. Addition towards unexplained cash credit.
6. Disallowance of various expenses.

Issue-wise Detailed Analysis:

1. Deletion of Additions on Account of Unexplained Purchases and Undisclosed Profit:
The primary issue was whether the CIT(A) was justified in deleting additions of ?23,59,261/- for unexplained purchases and ?5,12,471/- for undisclosed profit. The assessee, a firm dealing in various items, was found to have unaccounted purchases and sales during a survey. The AO made these additions based on the unaccounted transactions. The CIT(A), after obtaining a remand report, granted partial relief by verifying the sundry creditors and payments made by the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the unrecorded purchases were subsequently accounted for and verified through sundry creditors. The Tribunal dismissed the revenue's grounds, agreeing that the assessee's inability to produce books due to their destruction was credible.

2. Disallowance under Section 40A(2)(b):
The AO disallowed ?78,000/- paid as service charges to persons specified under Section 40A(2)(b) due to lack of evidence. The CIT(A) deleted the disallowance, noting that the payments were for services rendered and were not excessive. The Tribunal upheld the CIT(A)'s decision, finding no adverse comments from the AO on the genuineness of the expenses in the remand report and agreeing that the amounts were reasonable.

3. Addition on Account of Unexplained Investment in Fixed Assets:
The AO added ?54,09,993/- as unexplained investment in fixed assets due to lack of supporting details. The CIT(A) deleted the addition, accepting the assessee's explanation that the investments were reflected in the balance sheet and funded by loans from banks. The Tribunal upheld the CIT(A)'s decision, noting that the fixed assets were duly reflected in the audited balance sheet, and the corresponding liabilities were explained.

4. Addition Towards Sundry Creditors as Bogus:
The AO added ?1,15,92,543/- as bogus sundry creditors due to lack of confirmation. The CIT(A) deleted most of the addition after verifying the details and payments made to creditors in subsequent years. The Tribunal upheld the CIT(A)'s decision, agreeing that the AO did not provide adverse remarks for many creditors and that the liabilities were duly discharged in subsequent years.

5. Addition Towards Unexplained Cash Credit:
The AO added ?4,99,470/- as unexplained cash credit due to lack of confirmation. The CIT(A) confirmed part of the addition but allowed relief for ?1,96,445/- from American Express Bank, noting that bank loans could not be treated as unexplained. The Tribunal upheld the CIT(A)'s decision, agreeing that the bank loan was reflected in the audited balance sheet and could not be considered unexplained.

6. Disallowance of Various Expenses:
The AO disallowed ?1,52,387/- being 10% of various expenses due to lack of details. The CIT(A) deleted the disallowance, noting that the AO did not point out any specific instance of non-genuine expenditure. The Tribunal upheld the CIT(A)'s decision, finding the disallowance arbitrary and unsupported by material evidence.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions across all issues, and found that the additions and disallowances made by the AO were not justified based on the evidence and explanations provided by the assessee. The Tribunal emphasized the importance of proper verification and the credibility of audited financial statements.

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