2019 (5) TMI 1153 - AT - Income Tax

Unexplained investment u/s. 69 - valuation of work-in-progress by the Assistant Commissioner of Commercial Taxes (ACCT) at the time of inspection in the business premises of the assessee - ACCT estimated the valuation of WIP without mentioning the quantity or rate of the individual item. It was a rough estimate - AO arrived at the difference between the valuation of WIP done by the ACCT and what was accounted in the books of accounts - HELD THAT - To estimate this difference, first of all the AO has to reject the books of account of the assessee. Without rejecting the books of account, it is not proper to make addition towards unexplained investment u/s. 69 . ACCT has not at all pointed out the method of valuation of work-in-progress. Without determining the method of valuation of work-in-progress, it is not possible to sustain the addition. AO has to reject the books of account of the assessee and thereafter, he has to estimate the unexplained investment in work-in-progress in the relevant assessment year by following the market price or cost which was lower which the AO has failed to do so. Being so, we are inclined to delete the addition made u/s. 69 - Decided in favour of assessee.

Summary

Issues:
1. Addition of unexplained investment u/s. 69 of the Income Tax Act, 1961.
2. Valuation of 'Work-in-Progress' based on inspection for VAT registration purposes.
3. Application of Section 69 to determine unexplained investment.
4. Rejection of books of accounts for making additions under Section 69.
5. Method of valuation of work-in-progress for sustaining additions.

Issue 1: Addition of unexplained investment u/s. 69:
The assessee appealed against the CIT(A)'s order adding ?4,83,426 as unexplained investment u/s. 69. The Assessing Officer calculated this amount as the difference between stock as per books and the Commercial Tax Department's inspection report. The CIT(A) upheld this addition, stating that any excess stock found during inspection indicates suppression of investment, justifying assessment under section 69. The CIT(A) rejected the assessee's reliance on precedents, emphasizing the discretion of the Assessing Officer under section 69. The Tribunal, however, found that without rejecting the books of account, it was improper to make such an addition. The lack of clarity on the valuation method for work-in-progress by the Commercial Tax Officer led to the deletion of the addition under section 69.

Issue 2: Valuation of 'Work-in-Progress' based on inspection:
The firm's valuation of 'Work-in-Progress' was contested based on the inspection for VAT registration. The Commercial Tax Department's rough estimate significantly differed from the firm's records. The Assessing Officer used this difference to assess unexplained investment, leading to the dispute. The CIT(A) upheld the addition, emphasizing the excess stock found during inspection as indicative of undisclosed investments. However, the Tribunal highlighted the necessity of rejecting the books of account before making such additions, especially when the valuation method for work-in-progress was unclear.

Issue 3: Application of Section 69 to determine unexplained investment:
The application of Section 69 to determine unexplained investments was a key contention. The assessee argued against the invocation of Section 69, citing the absence of unrecorded investments and the accuracy of sales turnover in the books of accounts. The Tribunal emphasized the conditions necessary for invoking Section 69 and the discretion of the Assessing Officer. The lack of evidence for unrecorded investments and the acceptance of books of accounts led to the deletion of the addition under Section 69.

Issue 4: Rejection of books of accounts for making additions under Section 69:
The Tribunal stressed the importance of rejecting the books of account before adding unexplained investments under Section 69. In this case, the Assessing Officer had not rejected the books of account, making the addition of ?4,83,426 improper. The lack of clarity on the valuation method for work-in-progress further weakened the basis for such an addition.

Issue 5: Method of valuation of work-in-progress for sustaining additions:
The Tribunal highlighted the necessity of a clear method for valuing work-in-progress to sustain additions under Section 69. The rough estimate by the Commercial Tax Officer without specifying quantity or rate raised doubts on the validity of the addition. Without a proper valuation method and rejection of books of account, sustaining such additions becomes questionable.

In conclusion, the Tribunal allowed the assessee's appeal, emphasizing the importance of proper valuation methods, rejection of books of account, and adherence to legal provisions when assessing unexplained investments under Section 69 of the Income Tax Act, 1961.