2019 (1) TMI 687 - AT - Income Tax

Addition of unexplained jewellery on the basis of notings made on loose papers - description of items found at the time of search did not match with the items declared in Wealth-tax returns/VDIS - Held that - So long as the total gold jewellery in weight found at the time of search matches with the earlier declarations made by the assessee in his Wealth-tax returns and VDIS, there can be no question of making any addition simply on the ground that the description of items in the list declared under Wealth-tax returns/VDIS is different from those actually found. If such is a position, then an inference has to be drawn that the items initially declared in Wealth-tax returns/VDIS were converted into the items of jewellery found at the time of search. A contrary stand can be taken only if the authorities demonstrate that the jewellery items given in the Wealth-tax returns/VDIS were over and above the items of gold jewellery disputed. We are confronted with a situation in which total jewellery found at the time of search as per the panchnamas tallies with the gold jewellery declarations by the assessee and his family members in Wealth-tax returns/VDIS, save and except the additional income offered by the assessee in his return for the A.Y. 2006-07. In such a scenario, there can be no question of making any addition in respect of gold jewellery. Addition on protective basis - assessee claimed that out of total marriage expenses, a sum of ₹ 17,50,000/- was borne by Mr. Om Prakash Agarwal, Jalgaon, father of Trupti Agarwal, the daughter-in-law of the assessee - addition confirmed as assessee could not furnish any details/evidence of said expenses having been incurred by Mr. Om Prakash Agarwal - Held that - In the assessment completed u/s.153C on 30-12-2008 in the hands of Om Prakash Agarwal, a copy of which has been placed on record, the AO accepted that sum of ₹ 17,50,000/- was withdrawn by Mr. Om Prakash Agarwal from his bank account, which was given to the assessee as his share of marriage expenses. Since the explanation of Mr. Om Prakash Agarwal has been accepted in his assessment completed u/s.153C, there can be no rationale in sustaining the addition of ₹ 17,50,000/- on protective basis in the hands of the assessee. We, therefore, order to delete the addition. Treatment to sale proceeds received on sale of shares - Income from other sources - Held that - PIL is a penny stock company and the assessee obtained only accommodation entries in the garb of short term gain from transfer of shares of PIL, for which an appropriate addition has rightly been made and upheld by the authorities below. We, therefore, countenance the impugned order on this score. Addition on account of commission paid by the assessee for arranging deal of sale of shares of PIL - Held that - As the transactions of purchase and sale of shares of PIL were only accommodation entries provided by the brokers. Such accommodation entries are obviously provided against certain commission. Considering the entirety of facts and circumstances of the instant case, we are of the considered opinion that it would be just and fair if the rate of commission is restricted to 2% as against 6% upheld in the first appeal. Disallowance of interest - assessee diverted interest bearing borrowed funds for non-business purposes without charging any interest - Held that - As AR claimed that some of the advances were given during the course of business, which were in the nature of sundry debtors and not advances. Since such details were not before the authorities below, in our considered opinion, it would be in the fitness of things if the impugned order on this score is set-aside and the matter is restored to the file of AO. We order accordingly and direct him to examine the assessee s claim of having charged interest in respect of certain advances included in the table drawn and thereafter proceed to calculate the amount of interest not allowable as per law. Addition u/s 68 - held that - As the assessee failed to prove the capacity of the donors and also the genuineness of the transactions, not only before the authorities below but the Tribunal as well. Under the given circumstances, we do not find any reason to deviate from the impugned order. Addition on account of excess stock and additional excess stock - Held that - It is seen that stock of ₹ 20,18,702/- was found at the time of survey which figure was calculated by reducing the amount of gross profit @ 23.45% from the tag price. As against this, the value of stock as per books of account was only ₹ 17,30,760/-. Since excess stock was found at the time of survey, the addition to that extent was required to be made. The contention of the assessee that higher gross profit was declared and such excess stock was shown in terms of the higher gross profit cannot be countenanced as the excess stock is required to be separately disclosed as income. We, therefore, approve the addition of ₹ 2,87,944/-. 42. As regards the remaining addition of ₹ 1,17,466/-, we hold that the same cannot be sustained because it represents nothing but difference in the tag price of excess stock as reduced by the cost price of such excess stock. It goes without saying that an addition can be made only for the amount of costs incurred on producing the stock and not the potential profit included in the tag price. We, therefore, sustain the addition of ₹ 2,87,944/- and delete the addition of ₹ 1,17,466/-.

Summary

Issues Involved:
1. Addition on account of unexplained jewellery.
2. Addition on protective basis for marriage expenses.
3. Addition of income from sale of shares as 'Income from other sources'.
4. Disallowance of interest on borrowed funds.
5. Addition under Section 68 for unexplained gifts.
6. Addition for excess stock found during survey.

Issue-wise Detailed Analysis:

1. Addition on account of unexplained jewellery:
The first issue pertains to the addition of ?22,10,000/- on account of unexplained jewellery based on notings on loose papers found during a search action under Section 132 of the Income-tax Act, 1961. The assessee admitted to purchasing jewellery worth ?13,55,263/- from undisclosed sources and offered the same for taxation. The remaining jewellery was claimed to be disclosed in Wealth-tax returns and VDIS declarations. The Tribunal noted that the total weight of jewellery found during the search matched the declarations made by the assessee and his family members. It was held that no addition could be made merely because the description of jewellery items did not match exactly with the declarations, as long as the total weight tallied. Hence, the additions of ?17,10,000/- and ?5 lakhs were deleted.

2. Addition on protective basis for marriage expenses:
The second issue involved the addition of ?17,50,000/- on a protective basis, claimed to be borne by Mr. Om Prakash Agarwal for the marriage expenses of the assessee's son. The Tribunal noted that in the assessment of Mr. Om Prakash Agarwal, the AO accepted the withdrawal of ?17,50,000/- from his bank account for marriage expenses. Therefore, the addition on a protective basis in the hands of the assessee was deleted.

3. Addition of income from sale of shares as 'Income from other sources':
The third issue concerns the addition of ?22,77,943/- by treating the sale proceeds from shares of Prraneta Industries Limited (PIL) as 'Income from other sources' instead of short-term capital gains. The AO observed that PIL was a penny stock with manipulated prices, and the transactions were deemed sham. The Tribunal upheld the addition, citing that the assessee could not provide sufficient evidence to prove the genuineness of the transactions. The Tribunal relied on the principles laid down by the Hon’ble Supreme Court in CIT vs. Durga Prasad More and Sumati Dayal vs. CIT, emphasizing that apparent transactions should be ignored if there are reasons to believe they are not real.

4. Disallowance of interest on borrowed funds:
The fourth issue involved the disallowance of interest of ?23,98,329/- and ?4,37,817/- on borrowed funds, claimed to be diverted for non-business purposes. The AO observed that the assessee did not charge interest on certain advances. The Tribunal remanded the matter back to the AO to examine the assessee's claim of having charged interest on certain advances and to calculate the disallowable amount of interest accordingly.

5. Addition under Section 68 for unexplained gifts:
The fifth issue pertains to the addition of ?4 lakhs under Section 68 for unexplained gifts. The assessee failed to provide sufficient evidence to prove the genuineness of the gifts, including the identity and capacity of the donors. The Tribunal upheld the addition, noting that the assessee could not satisfy the requirements of Section 68.

6. Addition for excess stock found during survey:
The sixth issue involved the addition of ?2,87,941/- for excess stock found during a survey. The AO determined the excess stock by valuing the physical stock found at the time of the survey. The Tribunal upheld the addition, stating that the excess stock should be separately disclosed as income. However, the Tribunal deleted the additional excess stock addition of ?1,17,466/-, representing the difference between the tag price and the cost price of the excess stock.

Conclusion:
The Tribunal provided a detailed analysis of each issue, upholding some additions while deleting others based on the evidence and legal principles. The judgment emphasizes the importance of substantiating claims with proper documentation and the necessity of matching the total weight of declared assets with those found during searches.