2008 (12) TMI 291 - AT - Income Tax

Summary

Issues Involved:
1. Sustenance of addition of Rs. 6,67,753 on account of gross profit from deemed estimated sales due to shortage of stock.
2. Sustenance of estimation of undisclosed income of Rs. 22,69,415 based on documents found during the search.

Detailed Analysis:

Issue 1: Sustenance of Addition of Rs. 6,67,753
Facts:
- A search under section 132(1) of the Income-tax Act was conducted at the assessee's business premises on 22-2-2003.
- The inventory of stock showed a shortage of 5,350.590 grams compared to the stock as per books.
- The Assessing Officer (AO) estimated sales of Rs. 27,82,306 based on the shortage and applied a Gross Profit (G.P.) rate of 24%, resulting in an addition of Rs. 6,67,753.

Arguments by Assessee:
- The shortage was due to the issue of jewellery weighing 2,650 grams to partners and family members on 21-2-2003.
- The safes on the first and second floors were not searched.
- No evidence was found as per section 158BB to justify the determination of undisclosed income.

Findings:
- The AO and CIT(A) observed that no entries were made in the issue voucher book regarding the alleged issue of jewellery on 21-2-2003.
- The jewellery claimed to have been returned was not found at the residential premises of the partners.
- The search party was deemed vigilant, and the contention that safes on the first and second floors were not searched was rejected.
- The undisclosed income was determined based on the inventory and verification from the books, showing a shortage in stock.

Judgment:
- The majority view upheld the addition of Rs. 6,67,753, rejecting the assessee's explanations as unsubstantiated. The Third Member agreed with the findings of the Accountant Member, emphasizing that the stock difference indicated sales outside the books, justifying the addition based on the profit from such sales.

Issue 2: Sustenance of Estimation of Undisclosed Income of Rs. 22,69,415
Facts:
- Pages 1 and 2 of Annexure A-8 found from the residence of Shri Narendra Kumar Paraswani indicated a stock of Rs. 55,00,000 as on 30-9-1996.
- The stock as per books was Rs. 33,38,652, leading to an excess stock calculation of Rs. 21,61,348.
- The AO applied a marginal profit rate of 5%, adding Rs. 1,08,067 to the excess stock value, totaling Rs. 22,69,415 as undisclosed income.

Arguments by Assessee:
- The documents were in the handwriting of the deceased uncle, Shri Balraj Paraswani, and were meant to assess the family's status, not actual transactions.
- The documents were found from a third party, and no actual transaction related to the partition took place.

Findings:
- The CIT(A) and AO concluded that the documents indicated a stock of Rs. 55,00,000 to be divided among partners, justifying the addition.
- The assessee's reliance on various case laws argued that no addition could be made based on loose papers or dumb documents found from a third party.

Judgment:
- The Third Member agreed with the Judicial Member that the documents were dumb and did not justify the addition. The addition was based on scribblings that did not conclusively indicate undisclosed income. The documents were not seized from the assessee but from a third party, and the proper procedure under section 158BD was not followed.

Conclusion:
- The appeal of the assessee was partly allowed. The addition of Rs. 6,67,753 on account of gross profit from deemed estimated sales was upheld, while the addition of Rs. 22,69,415 based on the documents found was deleted.