2020 (4) TMI 743 - AT - Income Tax

Rejection of books of accounts - profit estimation - assessment u/s 144 - profit rate determination - HELD THAT - Assessee has explained the difference in the closing stock figure of the last year and the opening stock figure of the current year filed before the AO and the CIT(A). However, the same was rejected on the ground that the details of the expenditure and date of incurring such expenditure along with the purpose was not given. Books results were rejected u/s 145(3) and the AO has gone for estimation of profit. Considering the fact that there is difference of ₹ 77,08,967/- in the closing stock of preceding year and the opening stock of the current year, we are of the considered opinion that adoption of net profit rate of 3% on ₹ 2,16,78,967/- (i.e., the turnover of ₹ 1,39,70,000/- ₹ 77,08,967/- being the difference in stocks) will meet the ends of justice - direct the AO to recompute the addition by considering the net profit at ₹ 6,50,369/- less net profit already disclosed by the assessee at ₹ 1,15,812/- (subject to verification). Grounds of appeal No.2 and 3 filed by the assessee are accordingly partly allowed. Addition u/s 68 - assessee could not substantiate the amount received from three different parties on account of share application money - HELD THAT - Since the ld.CIT(A) has sustained the addition to the tune of ₹ 57 lakhs on the ground that no confirmation was filed by the assessee and considering the fact that there is a running account between the assessee and M/s Rama Ply Board Industries Ltd., therefore, considering the totality of the facts of the case, we deem it proper to restore the issue to the file of the AO with a direction to grant one final opportunity to the assessee to substantiate the nature of transaction to his satisfaction and decide the issue as per fact and law.

Summary

Issues Involved:
1. Addition of ?1,07,00,000/- on account of share application money.
2. Addition of ?77,08,967/- on account of difference in opening and closing stock.
3. Rejection of books of account and estimation of net profit at 8%.

Detailed Analysis:

1. Addition of ?1,07,00,000/- on Account of Share Application Money:
The assessee had received share application money totaling ?4,02,50,000/-, with ?77 lakh received during the year and ?3,25,00,000/- outstanding as on 01.04.2010. The AO requested the assessee to provide confirmations and supporting documents for the share application money. In the absence of such confirmations, the AO added ?1,07,00,000/- to the assessee's total income. On appeal, the CIT(A) restricted this addition to ?57 lakhs, specifically from Rama Ply Board India Private Limited, due to lack of confirmation from the party. The Tribunal found that there was a running account between the assessee and Rama Ply Board Industries Ltd. and restored the issue to the AO for fresh adjudication, directing the AO to give the assessee an opportunity to substantiate the nature of the transaction.

2. Addition of ?77,08,967/- on Account of Difference in Opening and Closing Stock:
The AO observed a discrepancy between the opening stock as on 01.04.2010 (?12,15,76,258/-) and the closing stock as on 31.03.2010 (?11,38,67,290/-). The assessee explained that the difference was due to an expenditure incurred for completing a mall, which was added to the opening stock while filing the return of income. The AO rejected this explanation, leading to an addition of ?77,08,967/-. The CIT(A) upheld the AO's decision, noting that the assessee did not provide sufficient evidence of the expenditure incurred. The Tribunal, considering the totality of facts, directed the AO to adopt a net profit rate of 3% on the turnover plus the difference in stocks, resulting in a recomputed addition.

3. Rejection of Books of Account and Estimation of Net Profit at 8%:
Due to discrepancies in the share application money and stock figures, the AO deemed the assessee's books of account unreliable and invoked Section 145 of the IT Act. The AO estimated the net income at 8% of the gross receipts (?1,39,70,000/-), leading to an additional income of ?10,01,788/-. The CIT(A) upheld this estimation. The Tribunal, however, found that the profit rate of 8% was on the higher side and directed the AO to adopt a net profit rate of 3%, resulting in a revised net profit of ?6,50,369/-, less the net profit already disclosed by the assessee.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO to:
1. Re-examine the addition of ?57 lakhs related to share application money from Rama Ply Board India Private Limited.
2. Recompute the addition by adopting a net profit rate of 3% on the turnover plus the difference in stocks.
3. Provide the assessee with an opportunity to substantiate the nature of the transactions and decide the issues as per facts and law.

The decision was pronounced in the open court on 18.02.2020.