2022 (2) TMI 106 - AT - Income Tax

Unexplained expenditure u/s. 69C - unaccounted purchases from unknown sources - - HELD THAT - There is clear discrepancy in the financial accounts as well as return of income filed by the assessee. It has casually been stated that the stock was inflated for bank purposes only. However, the same stock of ₹ 300 Lacs is reflected in the financial statements whereas stock ₹ 250 Lacs has been reflected in the return of income. Therefore, the various pleas raised by Ld. AR are not acceptable. The complete onus to reconcile the accounts including stock valuation was on the assessee and the assessee has failed to do so. At the same time, we observe that the assessee's turnover has not been doubted by Ld. AO. The assessee is unable to explain the purchases and could not produce any evidence in support of the same. However, all these purchases could not have been termed as income of the assessee since the material purchased by the assessee would have been consumed in the manufacturing process. The manufacturing process would require consumption of raw material. Therefore, it could be presumed that the purchases were made from unknown sources. Under these circumstances, the profit element embedded in unaccounted purchases would have to be brought to tax. Considering the facts of the case as well as the nature of assessee's business, we estimate the profit element in unaccounted purchases @10% - The balance addition stand deleted. The grounds stand partly allowed. Addition u/s. 40(a)(ia) for want of tax deduction at source (TDS) - HELD THAT - AR has pleaded that the payee has taken into account the interest income while computing their income and offered the same to tax. Therefore, the benefit of second proviso to Section 40(a)(ia) would be available to the assessee. Concurring with the same, we deem it fit to restore the matter back to the file of Ld. AO so as to provide an opportunity to the assessee to demonstrate the fulfillment of conditions as imposed in second proviso to Sec. 40(a)(ia). If the assessee succeeds, the disallowance shall stand deleted. This ground stand allowed for statistical purposes.

Summary

Issues:
1. Addition of ?1,05,54,155 as unexplained expenditure u/s. 69C
2. Disallowance of ?13,19,853 u/s. 40(a)(ia) for TDS

Analysis:

Issue 1: Addition of ?1,05,54,155 as unexplained expenditure u/s. 69C

The appeal by the assessee for Assessment Year 2012-13 challenged the order of the Commissioner of Income Tax (Appeals) sustaining the addition of ?1,05,54,155 as unexplained expenditure u/s. 69C. The Assessing Officer concluded that the assessee should have purchased material worth ?118.49 Lacs based on the closing stock shown in the Balance Sheet, despite the assessee producing purchase bills of only ?12.95 Lacs. As no evidence was provided for the expenditure of ?105.54 Lacs, it was added as unexplained expenditure u/s. 69C. During the appellate proceedings, the assessee contended that the closing stock was inflated for bank purposes only, but this argument was rejected. The Tribunal observed discrepancies in the stock records and the failure to provide proper quantitative details. However, considering the nature of the business and the necessity of raw material for manufacturing, the Tribunal estimated the profit element in unaccounted purchases at ?10,55,415, deleting the balance addition. The grounds were partly allowed.

Issue 2: Disallowance of ?13,19,853 u/s. 40(a)(ia) for TDS

The assessee was also saddled with another addition of ?13,19,853 for interest paid to a private finance company, made u/s. 40(a)(ia) due to the lack of tax deduction at source. During the appeal, it was argued that the payee had considered the interest income while computing their income and offered it for tax, making them eligible for the second proviso to Section 40(a)(ia). The Tribunal agreed with this argument and decided to provide the assessee with an opportunity to demonstrate the fulfillment of conditions as per the second proviso. If successful, the disallowance would stand deleted. This ground was allowed for statistical purposes.

In conclusion, the appeal was partly allowed concerning both the addition of unexplained expenditure u/s. 69C and the disallowance u/s. 40(a)(ia). The Tribunal provided detailed reasoning for its decisions, considering the facts presented and the legal provisions applicable to the case.

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