2017 (3) TMI 952 - AT - Income Tax

Estimation of seed capital - undisclosed income - Held that - Seed capital mainly relates to capital required for initial start of the business. In the given case assessee has not started any new business during the year but is engaged in the business activities of manufacturing jari since last many years and apparently it seems that assessee has not disclosed the alleged sales in the regular books of account which further gets support with the admission of ld. Authorised Representative to the gross profit addition on the undisclosed cash/credit. But certainly no matter it is not an initial start of business but there is certainly a hidden element of capital which the assessee had invested for making unaccounted sales. We are, therefore, of the view that in the totality of facts it would be justified to estimate the seed capital at ₹ 2,00,000/- which the assessee might have invested from its undisclosed income to effect undisclosed sales. In the result, we sustain the addition of ₹ 3,68,605/- as against ₹ 5,85,530/- sustained by ld. Commissioner of Income Tax(A) out of which ₹ 1,68,605/- is on account of gross profit addition @ 10.11% of ₹ 16,69,457/- and an approx. amount of ₹ 2,00,000/- as seed capital invested by the assessee to effect the rotation of the alleged undisclosed sales. Accordingly, the appeal of assessee is partly allowed. Penalty u/s 271(1)(c) - Held that - At the given facts and circumstances of the case that as the assessee has furnished inaccurate particulars of income and has also concealed particulars of income, penalty u/s 271(1)(c) of the Act has rightly been imposed. However, we direct the ld. Assessing Officer to recomputed the penalty u/s 271(1)(c) of the Act vis- -vis our decision given in adjudicating quantum appeal of assessee wherein we have sustained addition of ₹ 3,68,605/-. Accordingly the ground raised by assessee is partly allowed.

Summary

Issues Involved:
1. Quantum of additions in the assessment.
2. Penalty under Section 271(1)(c) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Quantum of Additions:
The assessee, engaged in the business of manufacturing jari, filed a return of income showing a total income of ?1,35,240/-. The case was selected for scrutiny due to AIR information regarding cash deposits of ?16,69,457/- in a savings bank account. The assessee claimed that the account belonged to his HUF, but failed to provide documentary evidence. Consequently, the Assessing Officer (AO) added ?16,69,457/- to the income and initiated penalty proceedings.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] reduced the addition to ?5,85,530/-, comprising ?1,68,605/- as Gross Profit (GP) at 10.11% on ?16,69,457/- and ?4,16,925/- as seed capital. The CIT(A) rejected the peak theory due to lack of evidence that deposits were made from withdrawals and considered the deposits as unaccounted sales.

The assessee accepted the GP addition but contested the seed capital calculation. The Tribunal observed that seed capital is initial capital for starting a business, but in this case, the assessee was already engaged in business. Therefore, the Tribunal estimated the seed capital at ?2,00,000/-, reducing the total addition to ?3,68,605/-.

2. Penalty under Section 271(1)(c):
The AO imposed a penalty of ?1,67,875/- under Section 271(1)(c) for concealing income, which was upheld by the CIT(A). The CIT(A) noted that the assessee failed to explain the source of deposits and the claim that the funds belonged to the HUF was unsubstantiated. The CIT(A) emphasized that the assessee did not disclose the bank account or the deposits in the return of income.

The Tribunal agreed with the CIT(A) that the assessee furnished inaccurate particulars and concealed income. However, it directed the AO to recompute the penalty based on the revised addition of ?3,68,605/-.

Conclusion:
The Tribunal partly allowed the appeals, sustaining the addition of ?3,68,605/- (comprising ?1,68,605/- as GP and ?2,00,000/- as seed capital) and directed the AO to recompute the penalty accordingly. The Tribunal's decision reflects a balanced approach, considering both the assessee's inability to substantiate claims and the need for a reasonable estimation of unaccounted income.