2019 (6) TMI 529 - AT - Income Tax

Trading addition - adopting the N.P. rate of 5% on an estimated sales - what should be the turnover of the assessee for the year under consideration? - HELD THAT - The assessee has reported a turnover of ₹ 13,82,346 and the undisclosed balance with the debtors as on 31 March 2004 comes to ₹ 13,20,574 basis the diary found during the course of survey which has been owned up by the assessee. There is nothing on record to show that corresponding sales relating to the undisclosed balance with the debtors as on 31 March 2004 forms part of the reported turnover and thus, the same is clearly the undisclosed turnover of the assessee. Given that the Revenue is not in appeal, we are of the view that the ld CIT(A) is reasonable enough to determine the turnover of the assessee at ₹ 25,00,000. In the result, the ground of appeal is dismissed. Addition of capital employed in the business u/s 68 - assessee must be requiring the funds to run the business as he makes credit sales - sales are made on credit basis and funds would be required/tied up in sundry debtors and also for purchase of material - HELD THAT - Such an addition cannot be sustained by invoking the provisions of section 68 which talks about any sum found during the books of accounts and in respect of which the assessee offers no explanation or the explanation so offered is not found satisfactory. In the instant case, there is no sum which is found credited in the books of accounts of the assessee and hence, on this ground itself, the assessee deserve the relief and the addition so made is hereby deleted. In view of the same, we have not dealt with other contentions so raised by the ld AR. In the result, the ground of appeal is allowed. Estimation of turnover - addition based on dairy found during the course of survey - HELD THAT - AO basis the dairy found during the course of survey which has been owned up by the assessee has determined the undisclosed sales for the year amounting to ₹ 29,91,458 as against the reported turnover of ₹ 21,69,740 in the return of income. The matter relating to sales return are considered but not found established and hence, not acceptable. Therefore, the turnover is determined at ₹ 29,91,458 as against the figure of ₹ 35,00,000 sustained by the ld CIT(A). The assessee thus get s the consequent relief on profit determination on the turnover of ₹ 29,91,458 and the ground is thus partly allowed.

Summary

Issues Involved:
1. Reopening of assessment under section 147 of the IT Act, 1961.
2. Trading addition after adopting the N.P. rate on estimated sales.
3. Addition under section 68 of the IT Act, 1961.

Detailed Analysis:

Issue 1: Reopening of Assessment under Section 147 of the IT Act, 1961
The assessee challenged the reopening of assessment under section 147 for both AY 2004-05 and AY 2005-06. However, during the course of the hearing, the assessee did not press this ground. Consequently, this ground was dismissed as not pressed.

Issue 2: Trading Addition after Adopting the N.P. Rate on Estimated Sales
AY 2004-05:
The Assessing Officer (AO) estimated the turnover at ?30,00,000 based on a diary found during the survey, which showed an undisclosed balance with debtors of ?13,20,574. The AO applied a 5% presumptive profit rate, resulting in a trading addition of ?68,341. The CIT(A) reduced the turnover estimate to ?25,00,000 and confirmed the addition of ?43,341. The assessee argued that the estimation of turnover should be based on past history and average growth rate, suggesting a turnover of ?18,40,408. However, the CIT(A) rejected this claim, noting the absence of regular books of accounts and the probability of cash sales. The Tribunal upheld the CIT(A)'s determination of ?25,00,000 as reasonable, dismissing the ground of appeal.

AY 2005-06:
The AO estimated the turnover at ?35,00,000, while the CIT(A) confirmed the same. The assessee contended that the estimation should consider past history and average growth rate, suggesting a turnover of ?20,79,661. The Tribunal noted that the AO determined undisclosed sales of ?29,91,458 based on the diary found during the survey. The Tribunal found the CIT(A)'s estimation of ?35,00,000 to be excessive and determined the turnover at ?29,91,458, granting the assessee relief on profit determination.

Issue 3: Addition under Section 68 of the IT Act, 1961
AY 2004-05:
The AO made an addition of ?5,00,000 under section 68, later reduced to ?3,00,000 by the CIT(A), on the ground that the assessee required funds to run the business. The assessee argued that no capital was required as the business operated on credit from suppliers. The CIT(A) confirmed the addition due to the lack of supporting evidence. The Tribunal held that the addition could not be sustained under section 68 as no sum was found credited in the books. Therefore, the addition was deleted.

AY 2005-06:
The facts and circumstances were identical to AY 2004-05. The Tribunal applied the same reasoning and deleted the addition under section 68.

Conclusion:
The appeals for both AY 2004-05 and AY 2005-06 were partly allowed. The Tribunal upheld the CIT(A)'s determination of turnover for AY 2004-05 but granted partial relief for AY 2005-06 by adjusting the turnover estimate. Additions under section 68 were deleted for both assessment years.