2019 (2) TMI 173 - HC - Income Tax

Estimation of income - Undisclosed stock - addition based on statement taken in search - disclosure made by an employee of assessee - Held that - When there is a finding of fact that on the basis of physical verification, a difference was found in the goods with the assessee, and therefore, addition was made, then it cannot be said that the Tribunal erred in law while holding the additions to be valid because such additions were not solely based on the disclosure made by an employee of assessee which was later on retracted, but on the basis of stock verification, therefore, first and second proposed substantial questions of law are answered in the following terms, namely, when discovery of stock is based on physical verification then merely retraction of disclosure by the assessee is not sufficient to discard findings of physical verification and thus in the light of the law laid down in the case of Dialust (2002 (1) TMI 9 - BOMBAY HIGH COURT) information from survey may be used to justify addition, no illegality be attributed to such addition. Appellant s contention is that the tax Tribunal made addition of ₹ 10 Lacs resorting only to guess work. This too is not correct inasmuch as on physical verification excess stock was found and in fact the Tribunal accepted explanation given by the assessee that the supervisor present at the time of survey was not knowing the value of the goods, and therefore, treating the book value of goods approximately at 40 percent of the MRP cannot be said to be an arbitrary guess work taking into consideration the traits of the industry, and therefore, there being no other material to prove to contrary, restriction of addition to a sum of ₹ 10 Lacs by way of estimate and preponderance of probability cannot be said to be arbitrary and illegal. In the present case addition is not based on guess but on the basis of estimates and preponderance which could not be refuted by the assessee, and therefore, addition cannot be faulted with. The view taken by the Tribunal is a possible view and is not based on any wild guess or suspicion. - Decided against assessee

Summary

Issues:
Appeal under Section 260-A of the Income Tax Act against the order of the Income Tax Appellate Tribunal for assessment year 2007-2008; Coercion in obtaining declaration during a search under Section 133-A of the IT Act; Disallowance of expenses and undisclosed income surrender; Additions made by Assessing Authority and subsequent appeal outcomes; Appeal before the Income Tax Appellate Tribunal challenging additions based on stock valuation; Interpretation of law regarding additions made during surveys under Section 133-A; Application of Supreme Court judgment on gross profit rates; Tribunal's decision based on stock verification and estimation; Allegation of guesswork in making additions; Comparison with previous court rulings on undisclosed income additions.

Analysis:
The appellant filed an appeal under Section 260-A of the Income Tax Act against the Income Tax Appellate Tribunal's order for the assessment year 2007-2008. The appellant, a wholesale trader of fireworks, contested a declaration obtained under coercion during a search under Section 133-A of the IT Act, where he surrendered a total of ?24,75,000. The appellant argued that the declaration was retracted and not binding due to lack of oath. The Assessing Authority made additions to the taxable income, including on account of gross profit, surrendered income, and disallowed expenses. The Appellate Authority affirmed some additions but deleted others. The Income Tax Appellate Tribunal partially allowed the Revenue's appeal, restricting the addition based on stock valuation to ?10,00,000.

The appellant relied on the Supreme Court's ruling in Dhakeshwari Cotton Mills Ltd. v. CIT to challenge the Tribunal's additions. The Tribunal's decision was based on stock valuation during the survey, which was deemed valid. The Tribunal's estimation of stock value at ?10 Lacs was considered reasonable, not arbitrary guesswork. The Tribunal's decision was found to be a possible view, not based on wild guess or suspicion. The appellant's argument that the addition was solely guesswork was rejected, as the addition was based on estimates and preponderance, not pure guess or suspicion.

The Tribunal's decision was supported by the finding that the stock valuation was based on physical verification during the survey, justifying the additions made. The Tribunal's approach was deemed lawful, as it was not solely reliant on the retracted declaration but on stock verification. The Tribunal's decision was compared to previous court rulings, such as Dialust v. Deputy Commissioner Of Income-Tax, to validate the additions based on stock verification during surveys under Section 133-A. The appellant's contentions were dismissed, and the appeal was rejected, with no costs awarded.