2016 (4) TMI 511 - AT - Income Tax

Rejection of books of accounts - Held that - In view of the defects pointed out by the Assessing Officer and ld. CIT(A) in the books of account, we are of considered opinion that the books of account cannot be said to be correct in terms of Section 145(3) of the Act and we find the order of the ld CIT as well reasoned and no interference is required by us, accordingly, we uphold the finding of ld. CIT(A) on this issue in dispute - Decided against assessee Addition on unexplained cash - Held that - The appellant does not have any explanation for the cash found during the search. Therefore the AO rightly treated the same as unexplained. Even if the books and imaginary huge cash balance built up is rejected as untrue, there has to be some cash belonging to the business of the appellant if judicious view of the issue is taken. We uphold the finding of ld. CIT(A) on this issue in dispute - Decided against assessee Enhancement of unexplained investment in purchase of raw material - Held that - CIT(A), relying on the evidences of sales found during the course of search and inability of the assessee to explain the corresponding purchases, logically held the amount of ₹ 3,92,700/- after allowing the gross profit @ 15% on sales of ₹ 4,62,000/- as unexplained investment. We find that the decision of the ld. CIT(A) on the issue in dispute is well reasoned and we do not find any infirmity in his findings.- Decided against assessee Enhancement of addition on account of net profit - CIT(A) applying the net profit rate of 10% on total sales - Held that - CIT(A) as taken into consideration all the aspects while arriving at his conclusion including the fact of cash expenditure, the net profit rate declared by the assessee in regular return, net profit rate declared in the books of account prepared subsequently after search and the sales recorded in seized papers as worked out by the assessee including the labour charges. We do not find any infirmity in the order of the ld. CIT(A) and the finding are well reasoned, thus, we uphold the same - Decided against assessee Addition under Section 69 on account of purchase of Kisan Vikas Patra in the joint name of wife of the assessee - Held that - It is noted that the investment in KVPs (4 numbers of ₹ 10,000 each) was made on 29/4/00. It is also noted that the KVPs stand in joint names of appellant & Mrs. Zahida Khan. The first name is that of appellant. If the amount was out of Mehar received by Muslim women at the time of marriage, it would have been invested in her individual name. It is a kind of her personal property similar to Stridhan for Hindu ladies. Moreover the appellant has not produced any evidence to show that the investment was out of maturity proceeds of earlier KVPs. In view of this the investment in KVPs remains unexplained and accordingly the addition of this amount as undisclosed income is confirmed - Decided against assessee Addition for the purchase of Santro Car - Held that - The fact that the books were manipulated to inflate the cash balance is proved by the results of test check of books conducted by me personally. During test check it was found that entry of cash receipt of ₹ 16,500 on 16/4/02 in the name of Arifbhai was wrong as there was no such noting in seized diary. Similarly cash receipt of ₹ 47,000 is shown on 23/4/02 from Rehanbhai whereas amount noted in seized dairy is only ₹ 7000. Fictitious loan from one Bano Begum is also shown on 20/4/02. It may therefore be seen that the appellant had made incorrect/fictitious entries in the books just to inflate cash on 25/4/02 the date when cash payment for Santro car was made. No other explanation about the source of cash except reliance on books of account has been given. Accordingly the addition as undisclosed income confirmed - Decided against assessee Addition for unexplained investment in the stock - Held that - It is evident that the assessee was engaged in sales and purchases of kites which did not appear in the return of income filed and thus certain amount of stock was not as per the trade figure reported in return of income. We are of the considered opinion that the ld. CIT(A) has allowed a reasonable amount of stock towards legitimate stock of business and the additions sustained by him is reasonable and justified. Accordingly, we uphold the finding of the ld. CIT(A) - Decided against assessee Disallowance of initial investment and the profit ploughed back by the assessee in the business - telescoping benefit - Held that - It may be noted that there is no income (inflow of funds) before the undisclosed investment of ₹ 3,92,700. Therefore this amount cannot be set off with any income. Thereafter there is sufficient income before any other undisclosed investment shown in the table. Therefore income (inflow) and expenditure/investment (outflow) can be set off against each other and only higher of the two is to be taxed. The inflow is ₹ 9,45,485 whereas outflow is ₹ 11,21,770 (Rs 15,14,470 - 3,92,700). Hence investment to the extent of ₹ 9,45,485 can be treated to have been made out of income earned. Hence both income & investment may not be taxed. Investment being higher of the two is only brought to tax. Therefore the total undisclosed income to be taxed therefore works out to ₹ 15,14,470 (Rs 3,92,700 11,21,770) in view of the telescopic benefit allowed to the appellant. The AO is directed to compute the tax accordingly - Decided against assessee

Summary

Issues Involved:

1. Rejection of Books of Account
2. Addition of Unexplained Cash
3. Enhancement of Unexplained Investment in Purchase of Raw Material
4. Enhancement of Addition on Account of Net Profit
5. Addition on Account of Purchase of Kisan Vikas Patra
6. Addition on Account of Purchase of Santro Car
7. Addition for Unexplained Investment in Stock
8. Telescoping of Additions

Issue-Wise Detailed Analysis:

1. Rejection of Books of Account:
The assessee contended that the books of account were prepared based on documents found during the search and should be accepted. However, the Assessing Officer (AO) and the CIT(A) rejected the books due to discrepancies and manipulation. The CIT(A) noted that the books were not produced during the search despite multiple opportunities and found inconsistencies in the entries. The Tribunal upheld the rejection, agreeing with the detailed findings of the CIT(A) that the books were unreliable and manipulated.

2. Addition of Unexplained Cash:
The AO added the entire cash found during the search, Rs. 10,27,000, as unexplained. The CIT(A) allowed Rs. 1,00,000 as legitimate business cash and treated the remaining Rs. 9,27,000 as unexplained due to manipulation and lack of evidence. The Tribunal upheld this finding, noting the CIT(A)'s well-reasoned analysis of the discrepancies and manipulation in the cash book.

3. Enhancement of Unexplained Investment in Purchase of Raw Material:
The AO estimated an initial investment of Rs. 1,50,000 as unexplained. The CIT(A) enhanced this to Rs. 3,92,700 based on sales of Rs. 4,62,000 in the first year without corresponding purchases. The Tribunal found the CIT(A)'s estimation logical and upheld the enhancement, dismissing the assessee's claim of past savings as unsubstantiated.

4. Enhancement of Addition on Account of Net Profit:
The AO computed unaccounted net profit at Rs. 3,55,581, while the CIT(A) applied a 10% net profit rate on total sales, enhancing the addition to Rs. 9,45,485. The Tribunal upheld the CIT(A)'s application of a 10% net profit rate, considering the cash expenditure and net profit rates declared by the assessee in regular returns and manipulated books.

5. Addition on Account of Purchase of Kisan Vikas Patra:
The AO added Rs. 40,000 for the purchase of Kisan Vikas Patra (KVP) as unexplained. The assessee claimed it was from the wife's 'Mehar' money, but the CIT(A) rejected this explanation due to lack of evidence and the fact that the KVPs were in joint names. The Tribunal upheld the CIT(A)'s findings.

6. Addition on Account of Purchase of Santro Car:
The AO added Rs. 1,54,770 for the purchase of a Santro car as unexplained. The CIT(A) noted manipulations in the cash book and rejected the books, confirming the addition. The Tribunal upheld this decision, agreeing with the CIT(A)'s detailed analysis of the manipulated entries.

7. Addition for Unexplained Investment in Stock:
The AO added Rs. 1,50,962 as unexplained stock. The CIT(A) allowed Rs. 50,952 as legitimate business stock and confirmed Rs. 1,00,000 as unexplained. The Tribunal upheld this finding, considering the nature of the business and the discrepancies in the reported stock.

8. Telescoping of Additions:
The CIT(A) allowed telescoping of income and investments, reducing double taxation. The Tribunal agreed with the CIT(A)'s approach, noting that investments preceding income could not be set off, but subsequent investments were allowed telescoping. The Revenue's appeal against this was dismissed, following the Tribunal's decision in the assessee's appeal.

Conclusion:
The Tribunal upheld the CIT(A)'s findings on all issues, confirming the rejection of books of account, additions for unexplained cash, investments, and stock, and the enhancement of net profit. The telescoping of additions was also upheld, ensuring no double taxation. Both the assessee's and the Revenue's appeals were dismissed.