2020 (10) TMI 1014 - AT - Income Tax

Shortage of stock as sales outside the books and applying GP Rate thereon - HELD THAT - CIT (A)'s reasoning for treating it as sale to M/s PBR Agro, we find, is patently absurd. Merely because the payment has been received in lieu of stock, does not make it sale consideration. There is a huge difference between sale consideration and compensation and the two cannot be equated. And the assesseee having proved with evidence that the shortage in stock was on account of misappropriation by M/s PBR Agro Industries and the revenue not having brought before us any evidence to the contrary to controvert this explanation of the assessee, the payment cannot be said to be on account of sale. Hold the explanation of the assessee for the shortage of stock to be bonafide and direct the deletion of addition made to the income of the assessee by treating the shortage of stock as sales outside the books and applying GP Rate thereon. Addition on account of cash found short by invoking the provisions of Section 68 and also holding that the same to be taxed u/s 115BBE - addition made to the income of the assessee on account of cash found short with the assessee - HELD THAT - Cash short, at the most represents expenses / outgoings out of cash available with the assessee not accounted for in the books of the assessee. Such unaccounted expenses are sourced from cash available with the assessee. How therefore can they be treated or deemed to be income of the assessee u/s 69/69B/69C of the Act when the said sections deem investments/money, the source of which the assessee offers no explanation about, as income of the assessee . We therefore hold that there is no case for making any addition on account of cash found short with the assessee and the addition is directed to be deleted. - Appeal of the Assessee is allowed.

Summary

Issues Involved:
1. Addition of ?5,87,189/- by applying GP rate on stock found short.
2. Addition of ?9,06,522/- on account of cash found short and its taxation under Section 115BBE.

Issue-wise Detailed Analysis:

1. Addition of ?5,87,189/- by applying GP rate on stock found short:

The primary issue revolves around the addition of ?5,87,189/- made by the Assessing Officer (AO) by applying a Gross Profit (GP) rate of 7.53% on the stock found short by ?77,98,000/- during a search conducted on the assessee. The assessee contended that the stock was misappropriated by M/s PBR Agro Industries, supported by a civil suit and a Memorandum of Understanding (MOU) indicating a liability of ?70 lacs payable to the assessee. The AO, however, considered the difference in stock as unaccounted transactions, leading to the addition.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, reasoning that the payment received from M/s PBR Agro Industries, even if considered compensation for misappropriation, effectively represented sales. The CIT(A) concluded that the addition was justified as only the income element was taxed by applying the GP rate.

Upon appeal, the Tribunal found merit in the assessee's explanation, noting that the evidences, including the civil suit, MOU, and cheque payment, substantiated the misappropriation claim. The Tribunal disagreed with the CIT(A)'s reasoning, emphasizing the distinction between sale consideration and compensation. It concluded that the payment was not for sales but compensation for misappropriated stock, thus directing the deletion of the addition of ?5,87,189/-.

2. Addition of ?9,06,522/- on account of cash found short and its taxation under Section 115BBE:

The second issue pertains to the addition of ?9,06,522/- due to cash found short during the search. The physical inventory revealed ?6,88,200/- against a cash balance of ?19,94,722/- as per the cash book, leading to a discrepancy of ?13,06,522/-. The assessee explained that ?6 lacs was given to a director for safe custody, and the remaining discrepancy was due to non-punching of entries. The AO allowed a benefit of ?4,00,000/- found at the director's residence but added ?9,06,522/- as unexplained, invoking Section 115BBE for special tax rates.

The CIT(A) upheld the AO's decision, noting the lack of documentary evidence supporting the assessee's claims. The CIT(A) reasoned that the unaccounted cash could represent unaccounted expenses or investments, justifying the addition under Sections 69, 69B, or 69C.

The Tribunal, however, disagreed, stating that cash short represents unaccounted expenses, not unexplained investments or money. It held that such expenses sourced from available cash cannot be deemed income under the cited sections. Consequently, the Tribunal directed the deletion of the ?9,06,522/- addition.

Conclusion:

The appeal was allowed, resulting in the deletion of both contested additions. The Tribunal's decision emphasized the importance of distinguishing between compensation and sales and clarified the treatment of unaccounted cash as expenses rather than deemed income.