2011 (1) TMI 125 - AT - Income Tax

Tribunal allows appeal on cash credits & excess stock, increases partner remuneration under Section 40(b).

Chokshi Hiralal Maganlal Versus Dy. CIT

The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine the issue of unexplained cash credits and confirming that the ... Survey - On verification of the accounts filed by the assessee, AO found that assessee has included the value of excess stock of Rs. 35,70,518 in the inventory of closing stock as on 31.3.2004 - The ld. CIT(A) confirmed the order of the AO holding that excess stock should be added separately and, therefore, remuneration payable to the partners should be consequently restricted in accordance with section 40(b) - for invoking deeming provisions under sections 69, 69A, 69B & 69C there should be clearly identifiable asset or expenditure - Once excess stock is treated as business income then assessee is entitled for higher remuneration to the partners as per section 40(b) - As a result, this ground of assessee is allowed Cash credit - Since the assessee was not able to further clarify, the AO treated the sum in respect of above persons as cash credit and added the sum of Rs. 1,05,000 in the total income - However, the assessee has raised the ground as cash credit - In the result, appeal filed by the assessee is allowed but for statistical purposes Issues Involved:1. Legality of the CIT(A)'s order upholding the assessment order under section 143(3).2. Classification of income from excess stock found during the survey.3. Admissibility of deduction under section 40(b) for income declared from excess stock.4. Addition of unexplained cash credits amounting to Rs. 1,05,000.Issue-wise Detailed Analysis:1. Legality of the CIT(A)'s Order:The assessee challenged the CIT(A)'s order, claiming it was illegal, unlawful, and against the principles of natural justice. However, the judgment does not provide further analysis or a separate ruling on this ground, implying it was not the primary focus of the appeal.2. Classification of Income from Excess Stock:The core issue was whether the income of Rs. 37,70,518 from excess stock found during the survey should be assessed under 'profits and gains of business or profession' or as deemed income under sections 69A/B/C. The AO treated it as deemed income under section 69B, relying on the Gujarat High Court's decision in Fakir Mohmed Haji Hasan. The assessee argued that the excess stock should be considered business income, referencing the Tribunal's decision in M/s Fashion World, which held that if excess stock found during a survey is part of the overall stock and not separately identifiable, it should be treated as business income. The Tribunal agreed with the assessee, stating that since the excess stock was not separately identifiable and was part of the mixed stock, it should be treated as business income.3. Deduction under Section 40(b):The assessee contended that the income from excess stock, being business income, should allow for higher remuneration to partners under section 40(b). The AO had disallowed this deduction, treating the excess stock as deemed income under section 69B. The Tribunal, agreeing with the assessee's classification of the excess stock as business income, ruled that the assessee is entitled to higher remuneration to partners as per section 40(b).4. Addition of Unexplained Cash Credits:The AO added Rs. 1,05,000 as unexplained cash credits under section 68, based on unserved letters sent to creditors and the assessee's failure to provide further clarification. The CIT(A) confirmed this addition. The Tribunal noted confusion regarding whether the amounts were advances given by the assessee or borrowed by the assessee. It clarified that if these were advances given, they could not be added under section 68 but might fall under sections 69 or 69C. Due to the lack of clear facts, the Tribunal remanded the matter to the AO for re-examination and a fresh decision after providing the assessee a reasonable opportunity to be heard.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine the issue of unexplained cash credits and confirming that the excess stock should be treated as business income, thus allowing higher remuneration to partners under section 40(b). The order was pronounced in open Court on 21.1.2011.