2018 (4) TMI 566 - AT - Income Tax

Unaccounted excess stock of raw materials - stock found during the course of the survey action for tax - Held that - Once the assessee had came forth with a disclosure of additional income in respect of unaccounted excess stock of raw material of ₹ 51,25,042/-, thereupon it was incumbent on its part to have credited the amount of such additional income in its profit and loss account for the year under consideration. However, we find that the assessee had credited the corresponding value of the unaccounted excess stock of raw material in the capital accounts of the partners in their respective profit sharing ratios. We are unable to persuade ourselves to subscribe to the aforesaid methodology adopted by the assessee Basis of showing the net profit of ₹ 53,98,134/- by the assessee during the year under consideration and the fact as to whether the disclosure of additional income of ₹ 51,25,042/- made in respect of the unaccounted excess stock of raw material during the course of the survey proceedings was offered for tax by the assessee, or not, requires thorough verification, therefore, in all fairness restore the matter to the file of the A.O. Before parting, we may further observe that the A.O while adjudicating afresh the issue under consideration shall take cognizance of the proviso of Sec. 69C which debars allowability of deduction of any unexplained expenditure which is deemed to be the income of the assessee - Decided in favour of revenue for statistical purpose.

Issues Involved:
1. Deletion of undisclosed income of ?51,25,042.
2. Whether the order of the CIT(A) should be set aside and the Assessing Officer's order restored.
3. Examination of potential double addition of income.
4. Verification of whether the additional income was offered for tax.

Issue 1: Deletion of Undisclosed Income of ?51,25,042
The core issue revolves around the deletion of the undisclosed income of ?51,25,042 by the CIT(A). The assessee, engaged in the construction business, had filed its return of income declaring ?53,98,130. During a survey under Sec. 133A, unaccounted raw materials worth ?51,25,042 were found, which were not recorded in the books. The assessee offered this amount as additional income for the year. However, the Assessing Officer (A.O) observed that the assessee debited this amount to the 'Purchase account' and credited the partners' capital accounts, thereby not offering it for tax as undisclosed income. The A.O added this amount to the assessee's income.

Issue 2: Order of CIT(A) vs. Assessing Officer
The CIT(A) deleted the addition made by the A.O, concluding that the net profit of ?53,98,134 shown by the assessee included the additional income of ?51,25,042. The CIT(A) reasoned that since the unaccounted stock was utilized in the construction project and formed part of the closing Work in Progress (WIP) of ?3,50,80,935, the addition by the A.O would result in double taxation. The CIT(A) found the valuation of the closing WIP to be in conformity with the District Valuation Officer's report.

Issue 3: Potential Double Addition of Income
The CIT(A) observed that the unaccounted stock was not a bogus entry but actual excess stock found during the survey. The assessee had rightly debited this to the purchase account, increasing the closing WIP. The CIT(A) concluded that the net profit shown by the assessee was inclusive of this additional income, and further addition by the A.O would result in double taxation. The CIT(A) deleted the addition of ?51,25,042 made by the A.O.

Issue 4: Verification of Additional Income Offered for Tax
The revenue appealed against the CIT(A)'s order, arguing that the additional income was not offered for tax. The tribunal examined the facts and found that the unaccounted stock was indeed disclosed as additional income by the assessee. However, the tribunal noted that the assessee credited the value of the unaccounted stock to the partners' capital accounts instead of the profit and loss account. This raised doubts about whether the additional income was actually offered for tax. The tribunal emphasized the need for thorough verification of whether the additional income was included in the net profit and offered for tax. The tribunal restored the matter to the A.O for fresh adjudication, instructing the A.O to verify the facts and ensure no double addition occurs.

Conclusion:
The appeal by the revenue is allowed for statistical purposes, with the matter remanded to the A.O for fresh adjudication. The A.O is directed to verify if the additional income of ?51,25,042 was offered for tax and to ensure compliance with the proviso of Sec. 69C, which disallows deductions for unexplained expenditures deemed as income.

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