2012 (8) TMI 165 - HC - Income Tax

Addition as unexplained investment in excess/shortage of stock - ITAT deleted the addition - Held that - No material has been brought to show that the findings of Tribunal are perverse that departmental personnel had not followed any of the basic steps of stock checking and had proceeded to inventorise the stock in a haphazard manner - the revenue was directed to place on record the documents or material on the basis of which it can be said that the factual findings recorded by the Tribunal are mentioned wrong but till the date of final hearing of the appeal the revenue has not been able to produce any document or material to buttress its challenge to the Tribunal s findings - that no substantial question of law arises - in favour of assessee. Disallowance of the expenses - ITAT deleted the disallowance - Held that - The seized material should be followed in its entirety and both the receipts and the payments are to be taken into consideration and it would be unjust and contrary to the principles of income tax law to take note of only the income part reflected in the seized material, excluding the expenditure part reflected in the same seized material, provided the expenditure part is allowable as business expenditure - as the expenses represent turning charges, overtime payments, payments to temporary workers, remuneration to excise consultants, incentives etc.are expenses incurred by the assessee for the purpose of the business deletion of disallowed expenses is thus warranted - in favour of assessee. Levy of surcharge u/s 113 - ITAT deleted the levy - Held that - According to the judgment of in Commissioner of Income Tax v. Suresh N. Gupta (2008 (1) TMI 396 - SUPREME COURT ) it was held that even without the proviso under Section 113, the Finance Act, 2001 was applicable to a block assessment year passed under Chapter XIV-B. The amendment made by inserting the proviso to Section 113 was merely clarificatory and that the Finance Act of the year in which the search was initiated would apply - Tribunal therefore was in error in holding that since the search was conducted on 29.08.1996, at a time when the proviso to Section 113 was not in existence, the levy of surcharge was not proper - against assessee.

Summary

Issues Involved:
1. Deletion of addition of Rs. 1.98 crores and Rs. 1.16 crores made by the Assessing Officer as unexplained investment in excess/shortage of stock.
2. Direction by ITAT to allow expenses of Rs. 9,62,801/- and Rs. 17,931.48 while computing undisclosed income by way of unaccounted sales.
3. Cancellation of levy of surcharge u/s 113 of the Act by ITAT.
4. Allegation of the ITAT's order being perverse in law and on facts.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 1.98 Crores and Rs. 1.16 Crores:
The discrepancies in the stock inventorized by the revenue officers were challenged by the assessee, who contended that the inventory was unreliable due to improper physical verification during the search. The assessee highlighted several errors and omissions, such as incorrect classification of items and double counting. The Tribunal found merit in these contentions, noting that the inventory process was completed in an improbably short time of one day, which itself vitiated the accuracy of the stock-taking exercise. The Tribunal observed that the Assessing Officer ignored the reconciliations and explanations provided by the assessee, which included detailed submissions and physical verification reports. The Tribunal also noted that the statement of the factory manager, relied upon by the Assessing Officer, was not sufficient to support the additions, especially given the technical complexities involved in stock verification. Consequently, the Tribunal deleted the additions, finding the discrepancies satisfactorily explained by the assessee.

2. Direction to Allow Expenses of Rs. 9,62,801/- and Rs. 17,931.48:
The Tribunal addressed the issue of disallowance of expenses recorded in the seized material. The seized documents included details of both unaccounted sales and corresponding expenses. The Tribunal emphasized that the seized material should be considered in its entirety, and it was unjust for the Assessing Officer to consider only the income part while ignoring the expenses. The Tribunal found that the expenses were incurred for business purposes, such as turning charges, overtime payments, and incentives to laborers, and thus should be allowed as deductions. The Tribunal's approach was deemed correct, as it ensured a fair and comprehensive consideration of the seized material.

3. Cancellation of Levy of Surcharge u/s 113:
The Tribunal's decision to cancel the levy of surcharge under Section 113 was overturned based on the Supreme Court's judgment in Commissioner of Income Tax v. Suresh N. Gupta, which clarified that the proviso to Section 113, inserted by the Finance Act, 2002, was clarificatory and retrospective. The Finance Act applicable to the assessment year in which the search was initiated (1997-98) authorized the levy of surcharge. Therefore, the Tribunal's reasoning that the surcharge was not applicable due to the timing of the search was incorrect. The High Court ruled in favor of the revenue on this issue, reinstating the levy of surcharge.

4. Allegation of ITAT's Order Being Perverse:
The High Court found no substantial question of law arising from the Tribunal's findings regarding the addition of Rs. 1.98 crores and Rs. 1.16 crores. The Tribunal's findings were based on a thorough appreciation of the evidence and rival submissions, and no material was presented to demonstrate any perversity in these findings. The revenue's failure to produce supporting documents or material further weakened their challenge. Consequently, the High Court upheld the Tribunal's findings on this issue.

Conclusion:
The High Court upheld the Tribunal's deletion of additions related to stock discrepancies and the allowance of business expenses, finding no substantial question of law or perversity in the Tribunal's findings. However, the High Court reversed the Tribunal's decision on the levy of surcharge, ruling in favor of the revenue based on the Supreme Court's clarification on the retrospective application of the proviso to Section 113. The appeal was thus allowed in part, with no order as to costs.