2023 (4) TMI 489 - HC - Income Tax

Undisclosed investment in stock and property - HELD THAT - As according to CIT(A), assessee had shown higher value for the closing stock than the value arrived at by the AO meaning thereby, that assessee had admitted more income in the return of income filed by him by admitting more closing stock. That being the position, CIT(A) was of the opinion that addition made by the assessing officer was not justified and accordingly, the same was deleted. When the matter reached the Tribunal, a view was taken by the Tribunal that the only conclusion possible was that assessee had suppressed sales which was utilized for making investment towards purchase of goods reflected in the closing stock as on 31.03.1996. We are afraid, there was no material on record to support such a conclusion reached by the Tribunal. As pointed out by the CIT(A), when the assessee himself had disclosed higher stock, question of taking a view that assessee had suppressed sales for making investment towards purchase of goods which is reflected in the higher stock figures does not appear to be reasonable. As we have noted above, the quantum of closing stock was reflected in the books of account of the assessee. When such closing stock is reflected in the books of account, assessing officer was not justified in holding that assessee had made investments, which are not recorded in the books of account. There is no material on record to justify such a finding. The closing stock disclosed by the assessee cannot be said to be investment of the assessee in the form of closing stock not reflected in the books of account. Therefore, such addition made by the assessing officer and affirmed by the Tribunal cannot be sustained. Investment in house property- Before the CIT(A), assessing officer did not produce any valuation report. As a matter of fact, CIT(A) had observed that assessing officer could very well had obtained a report from the departmental valuation cell to arrive at the correct figure of investment in house property. Before the Tribunal, the departmental representative filed extracts from the valuation report. From a reading of the order of the Tribunal, it is not discernible as to how such extracts could have been filed before the Tribunal that too without furnishing copy to the assessee. In our view, placing reliance on the extracts from the valuation report was not at all justified by the Tribunal. CIT(A) had clearly mentioned that assessee had obtained loan from the Bank to the tune of Rs.3.5 lakhs. In addition, Tribunal itself gave credit for a sum of Rs.3 lakhs on account of VDIS. That apart, Tribunal also gave credit for disclosing income of Rs.84,962.00. If the three figures are added i.e., Rs.3.5 lakhs Rs.3 lakhs Rs.84,962.00, the total figure is much higher than the alleged unexplained investment figure of Rs.6,50,734.00. That being the position, we set aside the aforesaid finding of the Tribunal as well. Substantial questions are answered in favour of the appellant/assessee.

Summary

Issues Involved:
1. Justification of the Tribunal in sustaining the addition of Rs.6,90,876.00 on account of undisclosed investment in stock.
2. Justification of the Tribunal in sustaining the addition of Rs.2,56,772.00 on account of unaccounted investment in property.

Detailed Analysis:

1. Justification of the Tribunal in Sustaining the Addition of Rs.6,90,876.00 on Account of Undisclosed Investment in Stock:

The appellant, an individual engaged in the business of selling electronic goods, filed a return of income for the assessment year 1996-97. During the assessment proceedings, the assessing officer (AO) noted a discrepancy in the closing stock figures. The appellant declared a closing stock of Rs.26,25,634.00, whereas the AO calculated it as Rs.19,34,758.00, leading to an alleged excess stock of Rs.6,90,876.00. The AO presumed this excess stock to be an investment from undisclosed sources and added it to the appellant's income.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, reasoning that the appellant had shown a higher value for the closing stock than the AO's calculation, thereby admitting more income. The CIT(A) opined that the AO's further addition was unjustified as the higher closing stock was already reflected in the appellant's books of account.

The Tribunal, however, overturned the CIT(A)'s decision, concluding that the appellant had suppressed sales amounting to Rs.6,90,876.00, which was used to purchase goods reflected in the closing stock. The High Court found no material on record to support the Tribunal's conclusion. The Court emphasized that the closing stock was already recorded in the appellant's books, and hence, the AO's addition under Section 69 of the Income Tax Act was not justified. Consequently, the High Court set aside the Tribunal's decision, reaffirming the CIT(A)'s deletion of the addition.

2. Justification of the Tribunal in Sustaining the Addition of Rs.2,56,772.00 on Account of Unaccounted Investment in Property:

During a survey under Section 133A of the Income Tax Act, the AO found vouchers indicating an unexplained investment of Rs.6,50,734.00 in house property. The appellant explained that the investment was covered by a loan of Rs.3.5 lakhs from State Bank of Hyderabad, a declaration of Rs.3 lakhs under the Voluntary Disclosure of Income Scheme (VDIS), and an additional income of Rs.1.5 lakhs for the assessment year. The CIT(A) accepted this explanation and deleted the addition.

The Tribunal, however, partially reversed the CIT(A)'s order, sustaining an addition of Rs.2,56,772.00, based on extracts from a valuation report. The High Court criticized the Tribunal's reliance on these extracts, noting that they were not presented before the CIT(A) and were not shared with the appellant. Furthermore, the High Court found that the appellant had adequately explained the sources of investment, which exceeded the alleged unexplained amount. The High Court, therefore, set aside the Tribunal's finding and upheld the CIT(A)'s deletion of the entire addition.

Conclusion:

The High Court allowed the appeal, answering both substantial questions in favor of the appellant/assessee. The Court found that the Tribunal had erred in sustaining the additions made by the AO regarding both the undisclosed investment in stock and the unaccounted investment in property. The appeal was allowed, and the Tribunal's orders were set aside, reaffirming the CIT(A)'s decisions to delete the additions.