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2025 (4) TMI 799 - AT - Income TaxEstimation of gross profit (GP) at 5% and disallowance of expenses estimated at 25% - Bogus purchases - HELD THAT - Revenue could not place on record the rejection of books of accounts merely based on non-furnishing of supporting evidences namely not submitting contra confirmation details of purchase and sales. Furthermore the Revenue could not controvert the submission that there was increase in the price of raw materials which are resulted in reduction of GP whereas the actual GP is 1.18% as per the audited financial statement. Similarly disallowance of business expenses at 25% is not justified by the AO with any material evidences but only on adhoc basis. Thus we do not find any infirmity in the deletion made by the Ld. CIT(A). Thus Ground No.1 of appeal raised by the Revenue is devoid of merits and the same is liable to be dismissed. Addition u/s.68 - unexplained sundry creditors - HELD THAT - As the assessee filed a paper book wherein details of sundry creditors and also produced ledger accounts which clearly states that there is a credit and debit with the closing balances as on 30.11.2016. Thus the AO is not correct in treating the above transaction as unexplained and in the absence of any contra evidence and made addition u/s.68. Hon ble Jurisdictional High Court in the case of PCIT vs. M/s. Adani Agro Pvt. Ltd. 2018 (2) TMI 1215 - GUJARAT HIGH COURT held that the provisions of Section 41(1) of the Act could not have been invoked as there is no remission of cessation of liability - Decided in favour of assessee. Unexplained cash credit - HELD THAT - Hon ble Gujarat High Court in the case of CIT V Ayachi Chandrashekhar Narsangji 2013 (12) TMI 372 - GUJARAT HIGH COURT held that where department had accepted the re-payment of loans in the subsequent year no addition was to be made in the current year on account of cash credit. Addition towards alleged capital work in progress - CIT(A) held that the asset having been not reflecting in the blocks of assets in the depreciation chart he confirmed the addition - HELD THAT - Counsel clarified that the assessee in ITR by mistake shown Rs. 15, 87, 600/- as capital work in progress but actually it comprised of Rs. 10, 71, 100/- of flat and Rs. 5, 16, 500/- being office which is also evident from balance sheet. The above being personal asset and they were not claimed in the block of assets in the depreciation chart however reflecting as Fixed Assets in the balance sheet of the firm. We find force in the submissions of the assessee that the Ld. CIT(A) erred in sustaining the above addition that too u/s.69 of the Act when it is already reflecting in the books. Therefore the addition is liable to be deleted.
ISSUES PRESENTED and CONSIDERED
The Tribunal considered several core legal questions arising from the assessment order and the subsequent appeals by both the assessee and the Revenue: 1. Whether the CIT(A) erred in deleting the addition made by estimating the gross profit (GP) at 5% of purchases and disallowance of 25% of total expenses. 2. Whether the CIT(A) correctly deleted the addition made under Section 68 of the Income Tax Act concerning unexplained credits of sundry creditors amounting to Rs. 8,83,31,369/-. 3. Whether the CIT(A) erred in confirming the addition of Rs. 4,17,662/- under Section 68 for sundry creditors with outstanding balances below Rs. 3 lakhs. 4. Whether the CIT(A) was correct in confirming the addition of Rs. 18,77,688/- under Section 68 concerning unsecured loans. 5. Whether the CIT(A) erred in confirming the addition of Rs. 15,87,600/- under Section 69 related to capital work-in-progress. ISSUE-WISE DETAILED ANALYSIS 1. Estimation of Gross Profit and Disallowance of Expenses: The Tribunal examined the deletion of the addition made by estimating a 5% GP on purchases and disallowance of 25% of expenses. The legal framework involved Section 145(3) of the Income Tax Act, which allows for the rejection of books of accounts if they are deemed unreliable. The CIT(A) found that the AO's estimation was not supported by evidence, as the actual GP was 1.18% due to increased raw material prices. The Tribunal upheld the CIT(A)'s decision, noting that the AO's estimation lacked logical basis and did not align with accounting principles. 2. Addition under Section 68 for Unexplained Sundry Creditors: The Tribunal considered the deletion of the addition under Section 68 for unexplained sundry creditors. The AO had added Rs. 8,83,31,369/- as unexplained credits due to the assessee's failure to provide contra confirmations. However, the CIT(A) found that the assessee provided details for six creditors, leading to the deletion of the addition for those creditors. The Tribunal agreed with the CIT(A), noting that the AO's reliance on the absence of documents was insufficient for such a conclusion. 3. Confirmation of Addition for Sundry Creditors with Balances Below Rs. 3 Lakhs: The Tribunal reviewed the CIT(A)'s confirmation of the addition of Rs. 4,17,662/- for sundry creditors with balances below Rs. 3 lakhs. The assessee argued that these were opening balances and not new credits. The Tribunal found merit in the assessee's argument, noting that no addition under Section 68 is warranted for opening balances and directed the AO to delete this addition. 4. Confirmation of Addition for Unsecured Loans: The Tribunal examined the CIT(A)'s confirmation of the addition of Rs. 18,77,688/- under Section 68 for unsecured loans. The assessee provided evidence of loan repayments and confirmations, which were accepted by the Tribunal. Citing a precedent from the Gujarat High Court, the Tribunal directed the deletion of this addition, as the loans were repaid in subsequent years. 5. Addition for Capital Work-in-Progress: The Tribunal analyzed the CIT(A)'s confirmation of the addition of Rs. 15,87,600/- under Section 69 for capital work-in-progress. The assessee clarified that this amount was mistakenly shown as capital work-in-progress instead of fixed assets. The Tribunal found the explanation credible and noted that the assets were reflected in the balance sheet. Thus, the Tribunal directed the deletion of this addition. SIGNIFICANT HOLDINGS The Tribunal's significant holdings include the following: - "Non-submission of documents should not lead to the conclusion that the accounts are not reliable." This principle was crucial in the Tribunal's decision to uphold the deletion of the GP estimation and expense disallowance. - The Tribunal emphasized the need for substantive evidence when making additions under Section 68, particularly in the absence of contra confirmations. - The Tribunal reiterated that opening balances in the books of accounts do not warrant additions under Section 68. - The Tribunal applied the principle from the Gujarat High Court that accepted loan repayments in subsequent years negate the need for additions in the current year. - The Tribunal recognized the importance of accurate representation in financial statements and directed the deletion of the addition for capital work-in-progress based on the assessee's clarification. In conclusion, the Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, directing the deletion of all contested additions.
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