2025 (4) TMI 38 - AT - Income Tax

Addition on account of increase in inventory - assessee did not furnish any explanation for such increase in the value of the inventory - CIT(A) deleted addition - HELD THAT - We find that the CIT (A) has rightly deleted the addition in respect of increase in inventories as well as income added on the basis of ITS details. So far as the deletion of balance addition is concerned the CIT (A) called for the remand report from the AO for this addition and when the AO failed to give any reasons for the same the ld. CIT (A) deleted the same. We note that in this case the ld. AO has already added in the liability sites of the balance sheet which comprises of 4 items namely share application money loans received increase in sundry creditors and advance from customers. We do not find any infirmity in the order of the ld. CIT (A) therefore the order of ld. CIT (A) is confirmed on this issue. The ground no.1 of the Revenue s appeal is dismissed. Addition on account of manufacturing selling administrative expenses and on account TDS which was treated as unexplained expenditure u/s 69C - CIT (A) has rightly deleted the addition as prima facie it appears that TDS relates to the same assessment year which was disallowed u/s 69C of the Act and thus the ld. CIT (A) allowed the benefit of doubt. Accordingly we are also inclined to confirm the order on this issue. The ground no.2 of the appeal of the Revenue is dismissed.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the CIT (A) was justified in deleting the addition of Rs. 26,60,32,067/- made on account of an increase in inventory, given the lack of explanation for such increase by the assessee.

2. Whether the CIT (A) was justified in deleting the addition of Rs. 4,91,906/- made on the basis of Income Tax Summary (ITS) details, without providing a valid reason.

ISSUE-WISE DETAILED ANALYSIS

1. Deletion of Addition on Account of Increase in Inventory

Relevant Legal Framework and Precedents: The addition was made under Section 69C of the Income Tax Act, 1961, which deals with unexplained expenditure. The Assessing Officer (AO) treated the increase in inventory as unexplained investment due to the absence of an explanation from the assessee.

Court's Interpretation and Reasoning: The Tribunal examined the reasoning of the CIT (A) who found that the AO did not provide a factual basis for the addition. The CIT (A) applied the theory of telescoping, suggesting that the unexplained liabilities could be the source of the increase in inventory. The Tribunal agreed with the CIT (A) that the mere absence of compliance by the assessee does not justify the addition when unexplained credits under Section 68 were already considered.

Key Evidence and Findings: The CIT (A) noted that the AO had already added liabilities of Rs. 44,00,02,044/- in the balance sheet, which included share application money, loans, and advances from customers. The CIT (A) found that the AO's failure to apply the theory of telescoping and provide a convincing explanation for the addition warranted its deletion.

Application of Law to Facts: The Tribunal upheld the CIT (A)'s application of the theory of telescoping, which presumes that unexplained liabilities can fund asset increases. This application was deemed appropriate given the lack of evidence to support the AO's addition.

Treatment of Competing Arguments: The Revenue argued that the addition was justified due to non-compliance by the assessee. However, the Tribunal found the CIT (A)'s reasoning persuasive, particularly the lack of factual basis for the AO's addition and the plausible application of the telescoping theory.

Conclusions: The Tribunal confirmed the CIT (A)'s deletion of the addition, finding no infirmity in the CIT (A)'s order.

2. Deletion of Addition Based on ITS Details

Relevant Legal Framework and Precedents: The addition was made under Section 69C for unexplained expenditure, specifically related to TDS details.

Court's Interpretation and Reasoning: The CIT (A) observed that the addition was made solely due to the assessee's non-compliance. However, the CIT (A) noted that the TDS appeared to relate to the same expenditure, which was disallowed under Section 69C, and allowed the benefit of doubt to the assessee.

Key Evidence and Findings: The CIT (A) found that the addition lacked a substantive basis beyond the non-compliance issue. The Tribunal agreed that the CIT (A)'s decision to delete the addition was justified, given the lack of evidence to support the AO's determination.

Application of Law to Facts: The Tribunal upheld the CIT (A)'s decision to allow the benefit of doubt, considering the apparent relation of the TDS to the disallowed expenditure.

Treatment of Competing Arguments: The Revenue's argument centered on the non-compliance of the assessee. However, the Tribunal found the CIT (A)'s reasoning and application of the law to be appropriate and confirmed the deletion of the addition.

Conclusions: The Tribunal confirmed the CIT (A)'s deletion of the addition related to ITS details, agreeing with the rationale provided by the CIT (A).

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The present Assessing Officer also in his remand report has not given any convincing reply in favour of the addition. He has suggested the theory of presumption that investment in inventory might have been made out of the money added u/s 68 on account of unexplained liability."

Core Principles Established: The judgment reinforces the principle that mere non-compliance by an assessee does not automatically justify additions without a factual basis. The application of the theory of telescoping is appropriate when unexplained credits can reasonably account for asset increases.

Final Determinations on Each Issue: The Tribunal dismissed the Revenue's appeal, confirming the CIT (A)'s deletion of both the addition on account of inventory increase and the addition based on ITS details.

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