2009 (3) TMI 379 - HC - Income Tax

Undisclosed income - During the course of search, the search party did not find any incriminating material against the assessee-respondent. However, discrepancy was alleged to have been found in stock of raw materials and finished products during search. The Assessing Officer valued the excess stock at Rs. 30,880 and treated the same as undisclosed income of the assessee-respondent - Needless to say that discrepancy worked out on the basis of estimation of quantity and value of stock is not accurate, correct and scientific. Therefore, in the absence of any defect found out in the books of account, maintained in the regular course of business, no addition can be made to the income disclosed by the assessee in its return of income on the basis of discrepancy worked out on estimation of stock - held that no addition can be made on the basis of the discrepancy worked out on estimation

Summary

Issues Involved:
1. Reliance on the case of Haribhagat Agarwalla v. State of Orissa by the ITAT.
2. Ignoring the findings of the Judicial Member regarding the rough calculation sheets and the estimation of stock.

Issue-wise Detailed Analysis:

1. Reliance on the case of Haribhagat Agarwalla v. State of Orissa:

The court examined whether the ITAT's Third Member was correct in law in relying on the case of Haribhagat Agarwalla v. State of Orissa, which involved distinguishable facts and circumstances, to hold that no addition could be made in the case of Utkal Alloys Limited (UAL). The Third Member of the ITAT concurred with the Accountant Member, who opined that no addition could be made based on discrepancy worked out on estimation of stock. The Accountant Member emphasized that the assessee maintained regular books of account, including stock books, which were periodically checked by Central Excise authorities without any adverse comments. The court noted that the ITAT's reliance on Haribhagat Agarwalla was appropriate, as the case established that no addition could be made based on stock differences arrived at by sampling methods. The court concluded that the ITAT was justified in its reliance on this precedent to determine that no addition could be made to UAL's income based on estimated discrepancies.

2. Ignoring the findings of the Judicial Member regarding the rough calculation sheets and the estimation of stock:

The court addressed whether the ITAT's Third Member erred in ignoring the Judicial Member's findings that some items were actually weighed and others were estimated with the assistance of UAL's representative. The Judicial Member acknowledged that the best method for valuing iron scraps was exact weighment, but due to practical constraints, the Department adopted an estimation method. The Judicial Member argued that the estimation method, though not entirely scientific, was logical and statistically sampled. However, the Third Member, considering the reasoning of both members and the principles established in Haribhagat Agarwalla's case, concluded that no addition could be made based on estimated discrepancies. The court supported this view, highlighting that the search did not uncover any incriminating documents or duplicate books of account suggesting clandestine activities by UAL. The Department failed to identify any omissions or unsupported entries in UAL's books. The court reiterated that accounts maintained in the regular course of business should be relied upon unless there are strong reasons to disbelieve them, and discrepancies based on estimation are not accurate or scientific grounds for additions.

Conclusion:

The court answered both questions in favor of the assessee and against the Revenue. It affirmed that no addition could be made based on discrepancies worked out on estimation of stock, and the ITAT's reliance on Haribhagat Agarwalla was justified. The appeal was disposed of accordingly.