2018 (6) TMI 1377 - AT - Income Tax

Addition for discrepancy in closing stock - Held that - The assessee had denied the value of closing stock arrived at by the survey team throughout i.e. right from the inception when the survey was conducted till the scrutiny proceedings. We find merits in the contentions of the assessee that the Revenue has relied on incorrect set of papers, which reveal two closing stock one at ₹ 2,26,31,232.73/- as per ledger extract and another at ₹ 0.20 as per the balance sheet print out. Addition of total stock difference between what has been found at the time of survey from the print outs and that as per audited accounts cannot be justified. We find merit in the alternative submissions of the assessee that at the most gross profit on the said stock could be added to the income of the assessee. As during the last three years the average gross profit of the assessee is 3.2% and it would be reasonable if the same is applied to bring to tax the income of the assessee - direct the Assessing Officer to apply gross profit @ 3.42% of ₹ 1,15,82,192/- and add it to the income of the assessee and thus the assessee gets relief of ₹ 1,11,86,081/-. Decided partly in favour of assessee Addition on account of undisclosed and unaccounted income - addition to the regular income by not giving opportunity under Rule 46A before admitting new evidences - Held that - The order passed by the CIT(A) is correct in deleting the addition of ₹ 4.39 Cr as it was based upon surmises and presumptions and there is no concrete basis for the same. The learned CIT(A) has give a very clear and comprehensive findings while deleting the addition, and, therefore, we do not find any reason to interfere with the order of the first appellate authority and are inclined to dismiss the appeal by the Revenue. Addition on account of discrepancy in closing stock - Held that - The facts in brief are that the first appellate authority rejected the application of decimal theory by the Assessing Officer and worked out the undisclosed profit at ₹ 3,22,371.51 (by taking sales and purchases at ₹ 51,81,988.77 minus ₹ 48,59,617.26). The contention of the AR is that instead of calculating the undisclosed profit by taking the sales and purchases at respective amount the rate of gross profit should be applied and, thus, average gross profit rate of 3.43% should be applied on the total undisclosed sales of ₹ 51,81,988.77/- need to be rejected - CIT(A) has taken a very balanced view of the mater and we, do not find any reason to interfere with the findings of the CIT(A) on this issue. According, ground no.1 raised by the assessee is dismissed. Addition of opening capital - Held that - The opening balance of cash in hand as on 01.04.2008 was ₹ 4,20,481/- and, therefore, the addition of ₹ 55,603 was wrong and against the facts on record. We find merit in the contention of the learned AR as there was opening cash balance to the tune of ₹ 4,20,481/- as on 01.04.2008. Accordingly, we are inclined to delete the addition of ₹ 55,603 sustained by the CIT(A). Resultantly, ground no.2 is allowed. Additions on account of opening balance, initial capital and unaccounted transactions initially recorded - additions from statement of peak of cash receipts and payments - Held that - The first appellate authority has also made the additions without any basis. On examining the statement of receipts and payments filed by the assessee, we find that there was opening balance of ₹ 8,32,502/- on 15.04.2008 and the difference between the receipt and payments on the same date was also at ₹ 2,47,548/- whereas on all the dates till 12.08.2008 the peak was in negative. Thus, the peak theory has not served the purpose, at the most, on the basis of statement, the highest peak was ₹ 8,32,502/-, which could be sustained by the CIT(A) whereas the remaining two additions of ₹ 2,47,548/- and ₹ 77,13,995/- are not correct and cannot be sustained. Based on our above finding, we direct the Assessing Officer to delete the additions of ₹ 2,47,548/- and ₹ 77,13,995/-, whereas the addition of ₹ 8,32,508/- is sustained. Resultantly, the appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Reopening of assessment under Section 147.
2. Addition on account of discrepancy in closing stock.
3. Restriction of addition to the extent of gross profit embedded in alleged excess stock.
4. Increase in opening stock for the subsequent assessment year.
5. Deletion of addition of undisclosed and unaccounted income.
6. Method of estimation based on annexure entries.
7. Sustenance of addition on account of discrepancy in closing stock.
8. Addition on account of initial investment in unaccounted trading.
9. Addition on account of opening balance.
10. Addition on account of unaccounted transactions initially recorded.
11. Restriction of addition to the peak of unaccounted transactions.

Issue-wise Detailed Analysis:

1. Reopening of assessment under Section 147:
The assessee did not press the ground relating to the reopening of assessment under Section 147. Consequently, this ground was dismissed as not being pressed.

2. Addition on account of discrepancy in closing stock:
The assessee challenged the addition of ?1,15,82,192/- made by the Assessing Officer (AO) due to the discrepancy in closing stock. The AO based the addition on printouts of the ledger extracted during a survey, which showed a higher closing stock than what was reported in the audited accounts. The CIT(A) upheld the AO's addition, noting the lack of quality-wise details and the unreliability of the stock summary. The Tribunal found merit in the assessee's contention that the stock figures relied upon by the AO were incorrect and that no excess stock was found during the survey. The Tribunal directed the AO to apply a gross profit rate of 3.42% on the alleged excess stock, resulting in partial relief to the assessee.

3. Restriction of addition to the extent of gross profit embedded in alleged excess stock:
The Tribunal agreed with the assessee's alternative submission that the addition should be restricted to the gross profit embedded in the alleged excess stock. The average gross profit rate of 3.42% was applied, providing relief to the assessee.

4. Increase in opening stock for the subsequent assessment year:
Since the Tribunal decided on the addition related to closing stock, the ground regarding the increase in opening stock for the subsequent assessment year became infructuous and was dismissed accordingly.

5. Deletion of addition of undisclosed and unaccounted income:
The Revenue challenged the deletion of ?4.39 crores by the CIT(A), which was added by the AO as undisclosed and unaccounted income. The AO based the addition on manipulated figures found during a survey. The CIT(A) partly allowed the appeal, noting that the AO's peak credit calculation was not as per accounting procedures. The Tribunal upheld the CIT(A)'s deletion of the addition, agreeing that the AO's addition was based on surmises and presumptions without concrete evidence.

6. Method of estimation based on annexure entries:
The Revenue contended that the CIT(A) erred in rejecting the AO's method of estimation based on annexure entries by adding two decimal points. The Tribunal found that the AO's addition based on manipulated figures was not justified and upheld the CIT(A)'s deletion of the addition.

7. Sustenance of addition on account of discrepancy in closing stock:
The assessee challenged the sustenance of addition of ?3,22,371/- on account of discrepancy in closing stock. The CIT(A) rejected the decimal theory and worked out the undisclosed profit. The Tribunal upheld the CIT(A)'s findings, noting that the CIT(A) had taken a balanced view.

8. Addition on account of initial investment in unaccounted trading:
The assessee contended that the addition of ?55,603/- was wrong. The Tribunal found merit in the assessee's contention that there was an opening cash balance and deleted the addition.

9. Addition on account of opening balance:
The assessee challenged the addition of ?8,32,502/- on account of opening balance. The Tribunal found that the CIT(A) made the addition without any basis and directed the deletion of the addition.

10. Addition on account of unaccounted transactions initially recorded:
The assessee challenged the addition of ?2,47,548/- and ?77,13,995/- on account of unaccounted transactions. The Tribunal found that the CIT(A) made the additions without any basis and directed the deletion of these additions.

11. Restriction of addition to the peak of unaccounted transactions:
The Tribunal found that the peak theory did not serve the purpose and sustained the addition of ?8,32,502/-, directing the deletion of the remaining additions.

Conclusion:
The appeals filed by the assessee were partly allowed, providing relief on several grounds, while the appeal by the Revenue was dismissed. The Tribunal upheld the CIT(A)'s deletion of significant additions made by the AO based on manipulated figures and unsupported assumptions.