2017 (1) TMI 514 - HC - Income Tax

Unaccounted purchases - method for discerning the cost of the raw material - GP adoption - Held that - Once the raw material quantity that did not appear in the regular books of account was discovered and could be inferred as a result of the search, the onus lay upon the assessee to furnish full particulars as to the cost of that raw material or the average cost. Its explanation by relying upon a letter of 1996 produced more than a year later, was by an afterthought really speaking. Its creditability, was in our opinion correctly doubted and entirely rejected by the AO who adopted a safer method for discerning the cost of the raw material which was not reflected in the regular books of account.In these circumstances, the ITAT s reasoning cannot be sustained. It is plainly contrary to the facts on the record and contrary to any reasonable approach that could have been adopted under the circumstances of the case. Likewise in respect of the same issue-vis-a-vis the stocks relating to M/s Garware Polysters, theassessee s explanation was in fact no explanation at all. It stated that since the reconciliation could not be made on account of bunching of documents (for which the AO was not responsible at least), some leeway or concession ought to be given. The ITAT merely accepted that explanation which in our opinion was correctly rejected by the AO. The AO inferred correctly that since these purchases too were made outside the books of account and proper accounting or reconciliation could not be made by the assessee, the value of the investment and the estimated profits on the basis of the undisputed rate i.e. 4.5 % GP had to be adopted. Therefore, the findings of the ITAT are plainly unreasonable and could not have been arrived at. The impugned order cannot be sustained on this aspect as well. - Decided in favour of the revenue Excess Stock - Held that - As against the valuer s estimate of ₹ 25,490, the value of the stock determined by the AO was ₹ 73,76,782. The ITAT accepted the explanation and went on to independently value each item of the stock all over again. This court is of opinion that the method adopted by the ITAT was not warranted. The assessee did not produce the valuer s report within time; instead, it waited for a considerable period after the search to rely on it. Furthermore, the valuer s report is unverified. This made the document suspect and was correctly brushed aside by the AO. In the circumstances, the AO s decision to rely on materials which showed a clear value of the goods, was an acceptable principle rather than the valuation report, which weighed considerably with the AO. This question too has to be answered in favour of the revenue. When the assessee had admitted ₹ 7,49,459/- made by A.O. on account of unaccounted purchase made from M/s GarwarePlyster Ltd the deletion directed by the ITAT was not justified. Addition made on the basis of Mr. J.P. Agarwal s statement, recorded during the course of search proceedings - Held that - Mr. Agarwal was no doubt a family member and a relative of the assessee s directors. At the same time, it is undeniable that he too was a director of the assessee company at the relevant time. The documents seized (A-5, A-6 and A-7) detailed elaborate workings of accounts and what is more, quantities of raw materials and profits. The documents were prepared at the time a family settlement was arrived at, sometime in 1990-91. The statements- recorded on 20-3-1996 were corroborated by the materials. As far as the question relating to cross examination is concerned, the court notices that though the documents were furnished to the assessee, it had not sought opportunity of cross examination; this was made at the fag end, in March, 1997. This court finds no justification to reject the statements, which merely explain the documents seized; the assessee could well have given a full explanation instead of seeking rejection of the documents on the ground that they were prepared in the context of a family dispute leading to a settlement. This quesiton of law too, is answered against the assessee

Issues Involved:
1. Unexplained initial investment in the purchase of polyester films.
2. Profits on unaccounted purchase and sale of polyester films.
3. Excess stock found during the search.
4. Undisclosed profit based on material seized from the residence of a director.
5. Unaccounted purchase from M/s Garware Polyester Ltd.
6. Profit on sale of material purchased out of books from M/s Garware Polyester Ltd.

Detailed Analysis:

1. Unexplained Initial Investment in Purchase of Polyester Films:
The AO discovered that the documents indicated total unaccounted purchases of 1,26,476.460 kgs valued at ?1,95,71,906 and unaccounted sales of 1,24,095.380 kgs valued at ?2,01,77,223. The assessee disclosed unaccounted purchases at ?6,05,320 but later retracted this figure. The AO valued the unexplained investment at ?1,44,17,441. The ITAT accepted the quantity of raw materials but valued it at ?43.70 per kg, based on invoices from M/s Associated Plastics, which were produced much later. The court held that the ITAT's reliance on these invoices was incorrect, as they were not part of the original search materials. The AO's valuation at ?154.75 per kg was upheld.

2. Profits on Unaccounted Purchase and Sale of Polyester Films:
The AO noted that the unaccounted purchases and sales were not recorded in the regular books of accounts and valued the initial unexplained investment at ?1,44,17,441 and undisclosed profit at ?6,05,320. The ITAT's valuation based on later-produced invoices was rejected by the court, which upheld the AO's findings.

3. Excess Stock Found During the Search:
During the search, the total quantity of stock found was 42,640.144 kgs, which was not reflected in the stock register. The AO valued this excess stock at ?73,76,782, while the assessee relied on a valuer's report estimating it at ?25,490. The court found the valuer's report unverified and upheld the AO's valuation.

4. Undisclosed Profit Based on Material Seized from the Residence of a Director:
The AO added ?4,52,34,000 based on documents seized from the residence of a director, Mr. J.P. Aggarwal, which detailed profits and quantities of goods. The assessee argued that Mr. Aggarwal's statement was unreliable due to a family dispute and that they were not given the opportunity to cross-examine him. The court held that the documents were corroborated by the materials seized and that the assessee did not seek cross-examination in a timely manner. The addition was upheld.

5. Unaccounted Purchase from M/s Garware Polyester Ltd.:
The AO found discrepancies in the transactions with M/s Garware Ltd amounting to ?7,49,459, which were not reconciled by the assessee. The ITAT accepted the assessee's explanation regarding the bunching of bills, but the court found this explanation inadequate and upheld the AO's findings.

6. Profit on Sale of Material Purchased Out of Books from M/s Garware Polyester Ltd.:
The AO added ?33,725 as profit on sales from unaccounted purchases from M/s Garware Ltd, based on a gross profit rate of 4.5%. The ITAT's deletion of this addition was found unjustified by the court, which upheld the AO's findings.

Conclusion:
All questions of law were answered in favor of the revenue and against the assessee. The appeal was accordingly allowed, and the ITAT's order was overturned on all counts.

← Previous Next →