2022 (9) TMI 403 - AT - Income Tax

Unexplained stock - difference in stock found at the time of physical verification on the date of search - HELD THAT - CIT(A) has duly considered the entirety of facts and circumstances of the case and has rightly worked out the profits, applying the gross profit rate as declared by the assessee, on the stock which after proper reconciliation has been found excess in the books of accounts as compared to physical stock and thereby lending credence to the finding that the said stock has been sold outside the books of accounts. Nothing has been brought on record to rebut the said findings of the CIT(A) and therefore, we do not see any justifiable basis to interfere with the finding of the CIT(A) and the same is hereby confirmed and the ground of appeal taken by the assessee is dismissed. Addition u/s. 36(1)(iii) - disallowance was restricted to 12% of the cash found short after updating the books of account - HELD THAT - CIT(A) has accepted the working of cash shortage as submitted by the assessee. The explanation of the assessee that the cash has been handed over to the staff members remain uncorroborated and therefore, as a necessary corollary, we agree with the finding of the AO that the cash so found short has been utilized for non-business purposes. Further, where the taxing authorities have applied average rate of 12% on such funds being utilized for non-business purposes, we do not find any infirmity in the said finding of the CIT(A) and the same is hereby confirmed and the ground of appeal taken by the assessee is dismissed. Addition u/s. 40(a)(ia) - whether Shri Shah Nawaz who besides being an employee of the assessee company has worked as a contractor and got paid for such services or not? - HELD THAT - Basis the said statement, the AO has held that no tax has been deducted at source on amount of Rs. 30 lacs paid by the assessee company during the year to Shri Shah Nawaz, accordingly, 30% of the amount was disallowed invoking provisions of section 40(a)(ia) - The assessee is challenging the said statement of Shri Shaw Nawaz and has raised various contentions before the lower authorities and which have again been reiterated before us. The contentions so advanced are however not backed by any corroborative evidence to dislodge the statement so recorded during the course of search. Passing of entries in the books of accounts which is well within the control of the assessee and not even supported by any receipts signed by the individual workers confirming the receipt of money directly from the assessee company is not sufficient enough to dislodge the findings of the AO that the payment has been made directly to Shri Shah Nawaz who in turn distributes to the workers. There are no statements of any of the workers employed at the assessee's premises which contradict the statement of Shri Shah Nawaz and support the version of the assessee that they were hired directly by the assessee and also paid directly by the assessee. Taking into consideration the entirety of facts and circumstances of the case, we do not find any infirmity in the finding of the CIT(A) and the same is hereby confirmed and the ground of appeal taken by the assessee is dismissed.

Summary

Issues Involved:

1. Sustenance of addition on account of alleged difference in stock found during physical verification.
2. Sustenance of addition under Section 36(1)(iii) of the Income Tax Act.
3. Sustenance of addition under Section 40(a)(ia) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Sustenance of Addition on Account of Alleged Difference in Stock Found During Physical Verification:

The assessee challenged the addition of Rs. 52,150 out of a total addition of Rs. 4,31,000 made by the AO due to an alleged difference in stock found during physical verification on the date of search. The AO had prepared a physical stock inventory valuing Rs. 8,70,77,237, while the closing stock was estimated at Rs. 7,91,44,234 based on the previous year's G.P. rate, leading to a proposed unexplained investment of Rs. 79,33,003. The assessee argued that the stock value was taken at tag price instead of cost, and after accounting for direct expenses, the difference was only Rs. 4.31 lakh. The AO, however, treated this as unexplained investment under Section 69 of the Act.

The CIT(A) accepted the reconciliation of stock but concluded that the deficiency indicated sales outside the books, sustaining an addition of Rs. 52,150 based on the G.P. rate of 12.1%. The Tribunal upheld the CIT(A)'s findings, stating that the profits were rightly worked out on the excess stock, confirming the addition.

2. Sustenance of Addition Under Section 36(1)(iii) of the Income Tax Act:

The assessee contested the addition of Rs. 2,92,875 out of Rs. 12,59,466 made by the AO under Section 36(1)(iii). During the search, cash of Rs. 7,40,050 was found against a book balance of Rs. 1,12,37,807. The assessee explained that the books were not updated, and the actual cash in hand was Rs. 31,80,670, with the remaining cash held by senior employees for petty expenses. The AO disallowed Rs. 12,59,466, applying a 12% interest rate on the alleged non-business use of Rs. 1,04,95,557.

The CIT(A) accepted the updated cash balance and restricted the disallowance to Rs. 2,92,875. The Tribunal agreed with the CIT(A), noting that the cash shortage was uncorroborated and used for non-business purposes, confirming the disallowance.

3. Sustenance of Addition Under Section 40(a)(ia) of the Income Tax Act:

The issue involved the addition of Rs. 9 lakh under Section 40(a)(ia) based on the statement of Shri Shah Nawaz Rehman, who allegedly worked as a contractor. The assessee claimed that Shah Nawaz was an employee supervising casual workers, with payments falling below the TDS threshold under Section 194C. The AO, however, treated Shah Nawaz as a contractor based on his statement and disallowed Rs. 9 lakh for non-deduction of TDS on Rs. 30 lakh paid to him.

The CIT(A) upheld the AO's findings, relying on Shah Nawaz's statement. The Tribunal confirmed this, noting the lack of corroborative evidence from the assessee to rebut Shah Nawaz's statement, and upheld the addition.

Conclusion:

The Tribunal dismissed the appeal of the assessee, confirming the additions made by the CIT(A) on all three issues. The order was pronounced on 03/08/2022.