2022 (2) TMI 768 - AT - Income Tax

Undisclosed sales - difference between the declared sales and the sales as per the VAT return - HELD THAT - As decided in President Industries 1999 (4) TMI 8 - GUJARAT HIGH COURT that entire sales could not be added as income of assessee but addition could be made only to the extent of estimated profits embedded in sales. Further in the case of K Venkatesh 2016 (8) TMI 205 - ITAT BANGALORE upheld the order of Tribunal by holding that it not the entire sales consideration which is to be brought to tax but only the profit attributable on the total unrecorded sales consideration which alone can be subject to income tax. We are of the view that the entire sale consideration cannot be treated as income of the assessee but the addition could be made only to the extent of estimated profits embedded in sales, thus, in that eventuality, we deem it appropriate to restore the matter back to the file of the A.O. with a direction to make addition only to the extent of estimated profits embedded in sales while keeping in view the GP declared by the assessee on the total sales for the year under consideration. Reasonable and adequate opportunity of hearing shall be provided to the assessee before deciding the matter afresh. Disallowance of interest made by the A.O - HELD THAT - CIT (A) completely overlooked the fact that the assessee is having capital balance of ₹ 29,19,242/-. The assessee is having building amounting to ₹ 12,28,000/- the other assets of the assessee are comprising the PNB Bonds, Mutual Funds and PPF. The assumption of the ld.CIT(A) that all these assets are financed through unsecured loans does not hold any strength as it is the matter of very common knowledge that Bonds, Mutual Funds and PPF carry very lower rate of interest and unsecured loans carry very high rate of interest hence, no prudent businessman will invest his higher interest rate borrowed funds in the lower fixed income investments hence these investment must have been made out of the capital balance of the assessee and investment in M/s Kanoria Enterprises must have been made out of the unsecured loans and interest incurred on these loans deserves a complete allowance. As regards the suspected excessive interest, we are of the view that this is the misconception of the ld.CIT(A) as he is comparing the closing balances of unsecured loans with total amount of interest paid. Out of the total amount of ₹ 2,63,659/-, ₹ 15,790/- were paid as brokerage for arranging the loans. ₹ 53,049/- were paid to the HDFC Bank Ltd and remaining interest of ₹ 1,94,820/- were paid to various parties who were not related to the assessee and all the payment have been made through banking channels only. Therefore, considering the totality of facts and circumstances of the case, we found merit in the contention of the ld. AR and therefore, we direct to delete the addition made qua this issue.

Summary

Issues Involved:
1. Jurisdiction and validity of additions and disallowances made under Section 263/143(3) of the Income Tax Act.
2. Addition of ?66,35,957 due to discrepancy between declared sales and sales as per VAT return.
3. Disallowance of interest amounting to ?2,63,660 on unsecured loans.
4. Charging of interest under Sections 234A, 234B, and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of Additions and Disallowances:
The assessee challenged the jurisdiction and validity of the additions and disallowances made in the order under Section 263/143(3) dated 05/03/2015. The Tribunal noted that the original assessment was completed under Section 143(3) with a lump sum addition of ?80,000. However, during the audit, a discrepancy of ?66,35,957 was observed between the declared turnover and the sales tax return. Consequently, an order under Section 263 was passed, directing the AO to verify the total sales/turnover and the genuineness of the loss claimed. The reassessment resulted in the disputed additions and disallowances.

2. Addition of ?66,35,957 Due to Sales Discrepancy:
The primary issue involved the addition of ?66,35,957, representing the difference between the declared sales of ?22,60,16,421 and the sales as per the VAT return of ?23,26,52,378. The assessee argued that the difference was due to consignment sales made on behalf of consignors, which were not part of the total sales. The assessee provided various documents, including the VAT Audit Report, consignment sales accounts, and accounts of the consignors, to substantiate the claim. However, the AO added the entire amount due to the non-production of books of accounts during reassessment. The Tribunal observed that even if the sales were considered ordinary sales, only the profit attributable to the unrecorded sales should be taxed, not the entire sales amount. The Tribunal cited the decisions in CIT vs. President Industries and K Venkatesh vs. ITO to support this view. Consequently, the matter was remanded back to the AO to estimate the profit embedded in the sales of ?66,35,957 and make the addition accordingly.

3. Disallowance of Interest on Unsecured Loans:
The assessee contested the disallowance of ?2,63,660 in interest on unsecured loans. The Tribunal noted that the assessee maintained two sets of books (personal and business) and claimed the interest under "Income from Other Sources." The assessee argued that the loans were used for business purposes, and the interest was allowable under Sections 36(1)(iii) and 37(1) of the Act. The Tribunal found that the entire capital of ?20.43 lakhs in the business was sourced from unsecured loans of ?8.01 lakhs. The genuineness of the loans was not disputed, and the interest payments were made through banking channels with TDS deducted. The Tribunal held that the interest was fully allowable and directed the deletion of the disallowance.

4. Charging of Interest under Sections 234A, 234B, and 234C:
The assessee denied liability for interest charged under Sections 234A, 234B, and 234C. The Tribunal did not provide a detailed analysis of this issue, as it was contingent on the outcome of the primary issues.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, remanding the matter back to the AO to estimate the profit embedded in the sales discrepancy and deleting the disallowance of interest on unsecured loans. The order was pronounced on 14th February 2022.