2020 (3) TMI 393 - AT - Income Tax

Addition on account of sale out of books on presumption basis made by AO - CIT(A) enhancing the addition for credit allowed on account of expenditure @ 30% without serving notice u/s 251(2) - HELD THAT - It is pertinent to note that once the assessee has produce the relevant documentary evidences in support of the fact that certain goods imported from Chinese supplier were found to be defective and this fact was accepted by the counterpart by giving the credit of said amount from the purchase bills then the assessee has discharged his onus by production of the documentary evidences. The AO has not doubted the fact that the assessee has not paid in respect of the goods found to be defective and therefore, to the extent of cost of the purchase of the goods found to be defective was reduced from the total cost of purchase as per import bill. Therefore, accepting the fact of non-payment of purchase price due to the reason as is manifest from the record being defective goods, the corresponding sale of the goods is not possible. AO has not disputed that the value of these goods as per the invoice is USD 219700 and the corresponding value is in ₹ 1,37,40,718/-. These facts were confirmed by the supplier which is also recorded in the books of account of the assessee, ledger account, supporting invoice, Debit Notes and Credit Notes etc. The goods imported by the assessee are perishable in nature having limited shelf life. Therefore, the goods received by the assessee were found to be out dated or expiry date then it would certainly become useless having no value as chemical properties and compounds gets changed after the said period of shelf life. Accordingly, we find that the claim of defective goods reduced from purchase is established by supporting evidence and therefore, the addition made by the AO purely on presumption and assumption is liable to be deleted. It is pertinent to note that requirement of issuing show cause notice is must prior to enhancement of the assessment as envisaged in Section 251(2) of the Act for each and every enhancement and it does not depend on overall outcome of the total income of the assessee in pursuant to the order of the ld. CIT(A). If the AO has made more than one addition to the total income of the assessee and some of the additions are found to be not sustainable by the ld. CIT(A) and accordingly deleted then the addition which is enhanced by the ld. CIT(A) shall satisfy the conditions of issuing show cause under sub-section 2 of Section 251 as the same is not obliterated due to reason that certain other additions made by the AO were deleted by the ld. CIT(A). Therefore, the enhancement of assessment has to be considered in the context of each issue raised in the appeal before the ld. CIT(A). Without going into the controversy of the validity of the order, once we find that the assessee has established the facts of defective goods received from the Chinese suppliers then the addition itself would not survive and the same is deleted. Thus the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Addition of ?96,18,503/- on account of presumed out-of-books sales.
2. Enhancement of the addition by ?41,22,215/- without serving notice under Section 251(2) of the I.T. Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of ?96,18,503/- on Account of Presumed Out-of-Books Sales:
The primary issue in this case was whether the amount of ?1,37,40,718/- should be treated as out-of-books sales. The assessee, engaged in the import and sale of chemical adhesive, filed a return declaring a total income of ?9,34,220/-. During the assessment, the AO noted discrepancies between the value of imported goods and the payments made for purchases. The assessee explained that certain goods were defective and issued debit notes to the supplier, who issued corresponding credit notes. The AO did not accept this explanation and treated the amount as out-of-books sales, making an addition of ?96,18,503/- after allowing 30% as expenditure.

The assessee contended that the defective goods were of no value and thus issued debit notes, which were accepted by the supplier. The AO's decision was based on the presumption that the goods were sold outside the books. The Tribunal found that the assessee had provided sufficient documentary evidence, including invoices, debit notes, credit notes, and email correspondence, to support the claim that the goods were defective. The Tribunal concluded that the AO's addition was based on presumption and not on any material evidence, and thus, the addition was deleted.

2. Enhancement of the Addition by ?41,22,215/- Without Serving Notice under Section 251(2):
The second issue was the enhancement of the addition by ?41,22,215/- by the CIT(A) without serving a notice under Section 251(2) of the I.T. Act. The CIT(A) not only confirmed the AO's addition but also enhanced it by disallowing the 30% expenditure allowed by the AO. The CIT(A) argued that since the final addition was higher than the original addition, no separate notice was required.

The Tribunal observed that issuing a show-cause notice is mandatory for any enhancement of assessment as per Section 251(2). The requirement does not depend on the overall outcome of the total income but on each specific enhancement. The Tribunal noted that the assessee had established the facts regarding the defective goods with supporting evidence. Therefore, the enhancement by the CIT(A) was not sustainable, and the addition itself was deleted.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting the addition made by the AO and the enhancement by the CIT(A). The Tribunal emphasized the importance of documentary evidence over presumptions and upheld the necessity of following procedural requirements for enhancement of assessment. The order was pronounced in the open court on 06/03/2020.