2025 (1) TMI 1177 - AT - Income Tax

Unexplained expenditure u/s 69C - assessee had not explained the source of the funds for each item of expenditure - HELD THAT - We are in agreement with the logical analysis of telescoping the additional surrender without any specific incriminating evidences against the additions made by the AO including but not limited to unexplained expenditure u/s 69C and other items recorded in ground no.4 raised by the Revenue. CIT(A) was absolutely right in considering that the said addition is a covered by the declaration made by the Assessee and consequently no separate additions are warranted and in our considered view correctly deleted the additions made. We accordingly hold that the CIT(A) rightly deleted the additions and further on the ground that the same are already covered in the declaration of income made by the assessee and in view of separate taxation of the above issues as well as ad hoc surrender will be a travesty of justice which is not conscionable as per Article 265 of the Constitution of India no separate addition is warranted under law. Thus grounds no.1 to 4 are dismissed in line of our above observations. Addition on account of excess Stock - Correct valuation of stock - Determination of gross profit on alleged deficit stock - HELD THAT - It is beyond doubt that there is no difference in physical quantity. The books of account have never been rejected and no discrepancies have been pointed out u/s 145(3) of the Act. The difference in valuation at the midst of financial year cannot give rise to any income particularly when the year end valuation has been accepted without any grain of salt. We accordingly hold that the addition made by the AO towards the excess stock was not justified and the same has correctly been deleted by the learned CIT(A). We further hold that the addition as confirmed by the learned CIT(A) considering the gross profit on alleged deficit stock also deserves to be telescoped against the ad hoc surrender and hence directed to also be deleted. The grounds no.5 and 6 are also hereby accordingly dismissed.

1. ISSUES PRESENTED and CONSIDERED

The judgment addresses several core legal questions:

Whether the deletion of additions made by the Assessing Officer (AO) under section 69C of the Income Tax Act for unexplained expenditures was justified.
Whether the CIT(A) correctly deleted the addition of excess stock valued at Rs. 5,13,63,972 and recalculated it to the extent of gross profit on alleged deficit stock.
Whether the reconciliation of stock and the valuation differences were appropriately addressed by the CIT(A).
Whether the alleged recoveries from farmers not recorded in the books of accounts were rightly deleted by the CIT(A).
Whether the additional income declared by the assessee during the search covered the miscellaneous additions made by the AO.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deletion of Additions under Section 69C

Relevant Legal Framework and Precedents: Section 69C pertains to unexplained expenditures, which can be added to the taxable income if not satisfactorily explained.
Court's Interpretation and Reasoning: The CIT(A) found that the expenditures were duly reflected in the books of accounts, thus not unexplained.
Key Evidence and Findings: The assessee provided ledger details and reconciliations showing that the expenditures were accounted for.
Application of Law to Facts: The CIT(A) applied the principle that both source and application cannot be taxed simultaneously, aligning with Article 265 of the Constitution.
Treatment of Competing Arguments: The Revenue argued for upholding the AO's additions, but the CIT(A) found the assessee's explanations plausible.
Conclusions: The CIT(A) rightly deleted the additions as they were covered by the income declared by the assessee.

Issue 2: Deletion of Addition of Excess Stock

Relevant Legal Framework and Precedents: The valuation of stock and its reconciliation with the books of accounts is crucial in determining taxable income.
Court's Interpretation and Reasoning: The CIT(A) found that the actual stock was not excess but deficit, and only the gross profit on the deficit stock should be considered.
Key Evidence and Findings: Detailed reconciliation of stock was provided, showing no quantitative difference, only valuation differences.
Application of Law to Facts: The CIT(A) considered the reconciliation and adjusted the stock valuation accordingly.
Treatment of Competing Arguments: The Revenue's arguments were based on the AO's valuation, which the CIT(A) found erroneous.
Conclusions: The CIT(A) correctly deleted the addition, recognizing the deficit stock and applying the gross profit rate.

Issue 3: Alleged Recoveries from Farmers

Relevant Legal Framework and Precedents: Unrecorded recoveries need to be substantiated to avoid additions.
Court's Interpretation and Reasoning: The CIT(A) accepted the explanation that the recoveries were direct payments from farmers to laborers.
Key Evidence and Findings: The assessee provided explanations and evidence supporting the direct payment scenario.
Application of Law to Facts: The CIT(A) found the explanation plausible and deleted the addition.
Treatment of Competing Arguments: The Revenue's insistence on adding the recoveries was not supported by evidence.
Conclusions: The deletion of the addition was justified as the recoveries were not part of the assessee's income.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The theory of telescoping is widely accepted on the premise that both source and application cannot be taxed simultaneously which is in clear violation of Article 265 of the Constitution of India."
Core Principles Established: The principle of telescoping and the necessity of reconciling stock valuations accurately were reinforced.
Final Determinations on Each Issue: The CIT(A) correctly deleted the additions related to unexplained expenditures, excess stock, and recoveries from farmers, aligning with the declared income and reconciliation provided by the assessee.

The judgment concluded with the dismissal of the Revenue's appeal, affirming the CIT(A)'s findings and reasoning.

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