2014 (6) TMI 567 - AT - Income Tax

Additions on account of difference between the purchase and cost of sales - Facts properly not appreciated Held that - CIT(A) was rightly of the view that the AO having failed to point out any quantitative discrepancy in the sales and purchases or any defect in the books of account and had made hypothetical addition on notional basis - the supplier M/s Rabani had also confirmed the fact that the goods were sent on approval basis to the assessee as a regular feature of a particular relationship which confirmation was filed with the AO - the assessee had been consistently following the same method of accounting in the earlier assessment years and its assessments had been earlier completed u/s 143(3) of the Act - the assessee was receiving the goods on approval basis and once the item was sold it requested supplier to issue the purchase bill - sales preceded purchases and not vice versa the method being regularly followed by the assessee the purchases of 31st March could not be matched with the sales of 31st March - the AO did not point out any defect/discrepancy in books of account - there was no difference in the quantitative tally of purchases and sales Decided against Revenue. Liability to deduct TDS u/s 194C of the Act Payment made for specific tailoring/alteration charge Held that - From the statement of Ms. Ratna Vyas recorded by AO, it is evident that the proprietor of both the firms confirmed the transaction of purchases by the assessee s proprietorship firm - there was no basis for treating the amount of purchases made from the above proprietorship firms as job work on conjectures and surmises - a probable fact has to yield against a specific statement unless some material is found to said the statement - The assessee had furnished quantitative tally of goods purchased (including purchases made from Ratna Vyas and RV Company) and sold during the year in which no discrepancy had been found or pointed out by the AO thus, there was no reason to interfere in the order of the CIT(A) Decided against Revenue. Sufficiency of drawings Held that - The AO was quite reasonable in estimating the household expenses @ Rs. 25,000/- per month - he should have taken into consideration the withdrawals of other family members as she was living in joint family thus, the AO is directed to compute the disallowance accordingly Decided partly in favour of Revenue.

Summary

Issues Involved:
1. Closing Stock
2. Disallowance under Section 40(a)(ia) of the Income Tax Act
3. Unexplained Expenditure under Section 69C of the Income Tax Act

Issue-Wise Detailed Analysis:

1. Closing Stock:
The primary issue revolved around the addition of Rs. 3,17,570 to the closing stock. The Assessing Officer (AO) observed that the purchases made on 31.03.2008 exceeded the sales on the same date, but the assessee did not show any closing stock. The AO impounded the books of accounts and, after examination, required the assessee to explain why the difference between purchases and cost of sales should not be treated as closing stock. The assessee argued that the goods were received on approval basis from M/s Rabani and only upon sale, the purchase bill was raised, ensuring no closing stock at any point. The AO did not accept this explanation, citing that the purchases were booked in the assessee's name and thus should be considered as closing stock. The CIT(A) deleted the addition, noting the consistent trade practice of receiving goods on approval basis, absence of defects in the books of accounts, and no discrepancy in the quantitative tally of garments purchased and sold. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere due to the consistent method of accounting followed by the assessee and lack of discrepancies in the books.

2. Disallowance under Section 40(a)(ia) of the Income Tax Act:
The AO disallowed Rs. 12,20,634 under Section 40(a)(ia), treating the entire transaction as alteration/tailoring charges rather than purchases, due to the assessee's failure to deduct TDS on the total amount. The CIT(A) deleted the addition, noting that the assessee had produced all bills, deducted tax on alteration/tailoring charges, and received confirmation from the supplier regarding the nature of transactions. The Tribunal upheld the CIT(A)'s decision, emphasizing that there was no basis for the AO's treatment of purchases as job work and no discrepancies in the quantitative tally of goods purchased and sold.

3. Unexplained Expenditure under Section 69C of the Income Tax Act:
The AO added Rs. 2,70,000 under Section 69C, estimating household expenses at Rs. 25,000 per month, as the assessee had shown only Rs. 30,000 as household expenses for the year. The assessee argued that she lived in a joint family, and other family members also contributed to household expenses. The CIT(A) deleted the addition, considering the withdrawals made by her husband and father-in-law. The Tribunal found the AO's estimation reasonable but directed the AO to consider the withdrawals of other family members while computing the disallowance, thus partly allowing the ground.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on the issues of closing stock and disallowance under Section 40(a)(ia), finding no discrepancies in the assessee's method of accounting and quantitative tally of goods. However, on the issue of unexplained expenditure under Section 69C, the Tribunal partly allowed the ground, directing the AO to consider the contributions of other family members in the household expenses. The department's appeal was thus partly allowed.