2016 (12) TMI 1403 - AT - Income Tax

N.P. estimation - Held that - Estimation of net profit of 5% on total stock put for sale net of all deductions is reasonable. Unexplained sources for opening capital brought forward from previous years - Held that - Assessee failed to prove genuineness of the transactions and creditworthiness of the parties. Although, the assessee filed confirmation letters from the creditors, all the confirmation letters are in prototype form without any details as to how the loan was accepted. Though assessee claims to have accepted the loan from agriculturists, fails to prove the sources of the creditors to substantiate the creditworthiness of the parties. Thus the assessee has failed to discharge its initial onus cast upon him by furnishing necessary identity, creditworthiness of the parties and genuineness of the transactions. In so far as additions towards opening capital is concerned, though assessee claims to have explained the sources for opening capital out of his past savings, the assessee failed to prove the sources with necessary evidences. The assessee claims to have savings out of his salary income, however, on perusal of the submissions of the assessee, the assessee himself admitted that he was working with a meager salary of ₹ 10,000/- per month. The assessee failed to demonstrate how with a meager salary of ₹ 10,000/- per month could show such a huge opening of capital of ₹ 8,14,500/-. Therefore, we are of the view that the assessee failed to prove the sources for opening capital brought forward from previous years and accordingly, the A.O. has rightly made additions. Unexplained amount being difference between initial expenditure incurred and sources in the form of unexplained credits and opening capital balance - Held that - We find that the assessee had been given sufficient opportunity to explain the case before the A.O. Though sufficient opportunity has been given, the assessee failed to file necessary evidences to prove his case. Even before CIT(A), the assessee failed to file necessary evidences to justify the additions made by the A.O. Therefore, we are of the view that there is no merit in the claim of the assessee for one more opportunity of hearing and accordingly the same is rejected. Additions towards income from other sources being interest received on fixed deposits - Held that - No merits in the arguments of the assessee for the reason that at any stretch of imagination interest from fixed deposit whether or not the said deposits are kept for obtaining bank guarantee cannot be considered as income from business. Therefore, we are of the view that the A.O. has rightly taxed interest income under the head income from other sources. Accordingly, the addition made by the A.O. is upheld.

Summary

Issues Involved:
1. Estimation of net profit from the business.
2. Addition towards unexplained amount.
3. Addition towards unexplained creditors.
4. Addition towards unexplained credits in capital account.
5. Addition towards unexplained unsecured loans.
6. Addition towards income from other sources.

Issue-wise Detailed Analysis:

1. Estimation of Net Profit from the Business:
The Assessing Officer (A.O.) rejected the books of accounts and estimated a net profit of 20% on the total stock put to sale. The A.O. cited the lack of substantiation for expenditures and absence of stock registers. The assessee contended that this estimation was excessive and referenced a similar case where the ITAT Visakhapatnam estimated net profit at 5%. The Tribunal, respecting the coordinate bench's decision, directed the A.O. to estimate the net profit at 5% on total purchases net of all deductions, noting that the A.O.'s reliance on a different case was not justified due to differing facts.

2. Addition Towards Unexplained Amount:
The A.O. added an unexplained amount of ?10,25,021/- due to the assessee's failure to substantiate initial expenditures with necessary evidence. The Tribunal upheld the A.O.'s decision, noting that the assessee did not provide adequate proof for the sources of the expenditure, despite claiming it was met through unsecured loans and opening capital.

3. Addition Towards Unexplained Creditors:
The A.O. found the assessee's confirmation letters from creditors insufficient, as they lacked details and failed to prove the creditworthiness and genuineness of the transactions. The Tribunal upheld the A.O.'s addition, agreeing that the assessee did not discharge the onus to prove the creditors' identity, genuineness, and creditworthiness.

4. Addition Towards Unexplained Credits in Capital Account:
The A.O. questioned the opening capital of ?8,14,500/- due to the assessee's insufficient salary history to justify such savings. The Tribunal agreed with the A.O., stating the assessee failed to prove the sources for the opening capital with necessary evidence, thus upholding the addition.

5. Addition Towards Unexplained Unsecured Loans:
The A.O. added ?31 lakhs as unexplained unsecured loans due to the assessee's failure to substantiate these with credible evidence. The Tribunal upheld this addition, noting the assessee's inability to prove the transactions' genuineness and creditors' creditworthiness.

6. Addition Towards Income from Other Sources:
The A.O. classified interest income from fixed deposits as "income from other sources," rejecting the assessee's claim that it should be considered business income. The Tribunal upheld this classification, stating that interest from fixed deposits, even if kept for bank guarantees, cannot be considered business income.

Conclusion:
The appeal was partly allowed, with the Tribunal directing a lower estimation of net profit while upholding the A.O.'s additions regarding unexplained amounts, creditors, credits in capital account, unsecured loans, and income from other sources. The order was pronounced in open court on 23rd December 2016.