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2024 (7) TMI 896 - AT - Income TaxRejection of books of accounts u/s 145(3) - addition applying gross profit rate of 18.94% on entire turnover - survey action u/s. 133A as carried out at the business premises of the assessee firm - certain loose papers / documents were found and impounded, and the statements of the partner of the assessee firm were recorded - During the recording of statement the partner of the firm surrendered a sum as undisclosed income Advances Given to Various persons, amount found as excess stock then the stock recorded in the books and bogus expenses HELD THAT - Provision of section 145(3) can be invoked When the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, When the method of accounting provided in Section 145 (1) has not been regularly followed by the assessee and When the accounting standards notified under Section 145 (2) have not been regularly followed by the assessee. From the observations recorded in the order of the lower authority none of the condition is satisfied and thus same is not evident from the finding of the lower authority. Not only that the bench also observed that when the provision of section 145(3) is to be invoked the assessment is to be completed as per the manner provided in section 144 of the Act and the proper opportunity is required to be given by pointing out the defects in the books of account which we observe that the same is not followed and the order is passed u/s. 143(3) of the Act which is also not correct. We get strength to support our view based on the provision of the Act and decision of Pink City Developers 2017 (11) TMI 1082 - RAJASTHAN HIGH COURT - Thus, we considered ground no. 1 in favour of the assessee. Gross profit added instead of excess stock found - The assessee has in the assessment proceeding placed on record all the possible documentary evidence in support of such claim but all the evidences furnished were brushed aside, without assigning a single reason / discrepancy in the same and that too without following the provision of section 145(3) of the Act. As we have while dealing with the ground no. 1 held that without finding any faults in the books of account the same cannot be rejected. Not only that if the revenue intends to invoke the provision of section 145(3), there is a procedure to be followed which has not been followed. We note that the addition was made merely based on the fact that the assessee has disclosed the excess stock and the same is not adhered to in full by the assessee. The apex court in the case of CIT Vs. S. Khader Khan Son 2013 (6) TMI 305 - SC ORDER held that statement itself cannot, by itself be made the basis for making the addition. Thus, merely the assessee has disclosed the unaccounted excess stock in the statement the purchases which remained to be accounted and subsequently demonstrated with evidence that none of the purchases were in cash and is supported by the relevant evidence, we do not find any single reason not to believe the contention of the assessee. As we also note that all the parties are regular from where the assessee has already made purchases and the transaction are not solitary transactions, all the relevant evidence for purchases made were submitted showing the bill, transport receipt and freight payment etc. Merely this list is of 47 parties and the amount based on the documents placed on record that purchases cannot be considered as undisclosed, and the credit of that purchases cannot be denied. Balance amount of excess stock since the assessee has already based on the affidavit and Chartered Accountant Certificate demonstrated that the same is forming part of the closing stock declared by the assessee. The bench noted that this certificate of CA is of the same CA who has signed the annual audited accounts and that is why the assessee at the request of the bench submitted that certificate of the same CA to confirm the contention raised by the assessee. Since this evidence in the form of the additional evidence called for from the assessee at the instance of the bench the same is very well fall within the power of the bench as per rule 29. As it is seen that the credit for purchase remained to be accounted for an amount of Rs. 82,40,125/- expenses vouchers of Rs. 8,58,956/- and sales bills of Rs. 18,57,710/- the actual excess stock figure works out at Rs. 53,17,973/- is incorporated in the books as part of the closing stock by the assessee and thereby offered the additional income we hold that there is no separate addition is required to be made in the hands of the assessee. Based on these observations ground no. 1.1 1.2 are allowed. Bogus expenses declared by the partner of the assessee firm at the time of survey - Cash available with assessee is of its own and though expenses were booked on paper was in fact not booked and thus, the cash of that expenses was very well available and remained with assessee to advance the money to the job worker. Therefore, the contention that the assessee was having the cash balance to the extent of Rs. 10,77,000/- to make the advances so disclosed and the benefit of the telescoping cannot be denied merely on the ground that there is no cash flow statement made available by the assessee. Based on these observations the ground no. 1.3, 1.4, 1.5 1.6 raised by the assessee are allowed.
Issues Involved:
1. Invocation of Section 145(3) of the Income Tax Act. 2. Addition of Rs. 89,94,655/- based on gross profit rate. 3. Addition of Rs. 89,94,655/- on account of excess stock. 4. Addition of Rs. 10,77,000/- on account of bogus expenses. 5. Non-allowance of telescoping benefit of Rs. 10,77,000/- against additional income of Rs. 68,00,000/-. 6. Addition of hypothetical income on a notional basis. Issue-Wise Detailed Analysis: 1. Invocation of Section 145(3) of the Income Tax Act: The Assessing Officer (AO) invoked Section 145(3) due to non-maintenance of a day-to-day quantitative stock register and valuation of closing stock on an estimated basis. The AO found the books of accounts incomplete and invoked Section 145(3) to reject them. However, the Tribunal noted that the assessee had maintained regular books of accounts, which were audited without adverse remarks. The Tribunal emphasized that it is incumbent upon the AO to allow the assessee to complete its books of accounts and then point out specific discrepancies before invoking Section 145(3). The Tribunal found that the AO failed to point out any specific errors or omissions in the completed books of accounts and held that merely stating that the books were incomplete without pointing out specific errors is insufficient to invoke Section 145(3). 2. Addition of Rs. 89,94,655/- based on Gross Profit Rate: The AO made an addition by applying a gross profit (GP) rate of 18.94% on the entire turnover. The Tribunal noted that the assessee had declared a GP rate of 20.32% for the year, which was higher than the previous year. The Tribunal found that the AO had not pointed out any specific discrepancies in the trading results shown by the assessee. The Tribunal held that the AO's addition based on an arbitrary GP rate was not justified, as the assessee had provided a detailed explanation and supporting documents for the trading results. 3. Addition of Rs. 89,94,655/- on Account of Excess Stock: During the survey, excess stock of Rs. 1,25,60,000/- was found. The assessee explained that certain purchase bills worth Rs. 82,40,125/- were not recorded in the books at the time of the survey. After incorporating these purchases, the actual excess stock was Rs. 53,17,973/-, which was included in the closing stock. The Tribunal found that the AO and CIT(A) did not consider the assessee's explanation and supporting documents. The Tribunal noted that the assessee had provided detailed bills and payment proofs, and the AO had not made any independent inquiries to verify the purchases. The Tribunal held that the addition of Rs. 89,94,655/- on account of excess stock was not justified, as the assessee had already included the actual excess stock in the closing stock. 4. Addition of Rs. 10,77,000/- on Account of Bogus Expenses: The AO made an addition of Rs. 10,77,000/- based on the assessee's admission during the survey that certain expenses were bogus. The Tribunal noted that the assessee had claimed that these bogus expenses were covered by the undisclosed cash advances of Rs. 68,00,000/-. The Tribunal found that the AO and CIT(A) had not provided any evidence to show that the cash generated from bogus expenses was used elsewhere. The Tribunal held that the addition of Rs. 10,77,000/- was not justified, as the assessee had provided a reasonable explanation and supporting documents. 5. Non-Allowance of Telescoping Benefit of Rs. 10,77,000/- against Additional Income of Rs. 68,00,000/-: The assessee claimed that the bogus expenses of Rs. 10,77,000/- should be telescoped against the additional income of Rs. 68,00,000/- disclosed on account of cash advances. The AO and CIT(A) denied this benefit, stating that the assessee had not provided a cash flow trail. The Tribunal found that the assessee had provided a reasonable explanation and supporting documents for the cash advances and bogus expenses. The Tribunal held that the telescoping benefit should be allowed, as the cash generated from bogus expenses was used for making advances. 6. Addition of Hypothetical Income on a Notional Basis: The assessee argued that only real income should be taxed and no hypothetical income should be added on a notional basis. The Tribunal agreed with the assessee, stating that the AO and CIT(A) had made additions based on assumptions and without corroborating evidence. The Tribunal held that the additions made on a notional basis were not justified, as the assessee had provided detailed explanations and supporting documents for the income declared. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the additions made by the AO and confirmed by the CIT(A) were not justified. The Tribunal emphasized the importance of considering the assessee's explanations and supporting documents and held that the AO and CIT(A) had failed to provide specific evidence to justify the additions. The Tribunal directed that the additions be deleted, and the income declared by the assessee be accepted.
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