2012 (7) TMI 42 - AT - Income Tax

Tribunal upholds revenue's appeal on cash payments but deletes unaccounted purchases & profit

The Income Tax Officer, Bharuch Versus Shri Baldev T. Hariyani,

The Tribunal partly allowed the revenue's appeal, upholding the addition under section 40A(3) for cash payments but deleting the additions related to ... Peak investment for unaccounted purchases - CIT(A) deleted the additions made by AO - Held that:- The assessee had claimed that in his wholesale business of edible oil, cash and credit purchases were made however the goods were sold only on cash basis at very low margin of profit. The low margin of profit in this nature of trade is accepted by the revenue. In this circumstance the Revenue ought to have probed further to establish that the assessee had made investments for his trading activity outside the books with some reliable materials, thus the revenue has not looked into the nature of business and transactions and come out with any concrete evidence to establish that the assessee had made investment for such purchases made outside the books of accounts - in favour of assessee. Addition u/s 40A(3) on account of cash payments - CIT(A) deleted the additions - Held that:- As the Act vividly stipulates that twenty percent of the expenses for which payment is made by cash exceeding rupees twenty thousand shall be disallowed, AO had rightly came to the conclusion for making the disallowance of Rs.14,82,877 since it was established that the assessee had made cash purchases of Rs.71,88,782/- which were more than Rs.20,000/- outside the books of accounts - against assessee. Addition on account of profit earned from purchases and sales of goods outside the books of accounts - CIT(A) deleted the addition - Held that:- As the AO made addition on account of difference in physical cash balance and book balance as per the books of accounts there is no dispute to the fact that assessee is earning profit from purchases and sales made outside the books of accounts. It is obvious that such profit will remain in the hands of the assessee outside the books of accounts and requires to be taxed. However, in such situation the surplus cash found during the course of survey which was not recorded in the books of accounts can be obviously pointed out to be the profit earned from the purchases and sales of goods made outside the books of accounts - in favour of assessee. Issues Involved:1. Deletion of addition on account of unaccounted purchases.2. Deletion of addition under section 40A(3) for cash payments.3. Deletion of addition on account of unaccounted net profit from sales.Deletion of addition on account of unaccounted purchases:The appellant, engaged in trading edible oil, made disclosures during a survey under section 133A of the IT Act, including peak investment in undisclosed trading. The Assessing Officer (AO) made additions based on these disclosures. The CIT(A) deleted the addition for peak investment, stating that the AO failed to provide corroborative evidence and did not consider the nature of the business. The CIT(A) accepted the explanation that purchases were made from a local party on a daily basis and that there was no significant difference in inventory. The Tribunal upheld the CIT(A)'s decision, emphasizing the lack of concrete evidence of investments made outside the books of accounts.Deletion of addition under section 40A(3) for cash payments:The AO added an amount under section 40A(3) for cash purchases made outside the books of accounts. The CIT(A) deleted this addition, citing Tribunal decisions that this section does not apply to transactions recorded outside the books. However, the Tribunal noted that the decisions were not provided. The Tribunal referred to the Act, which clearly states that twenty percent of expenses paid in cash exceeding a specified amount shall be disallowed. Consequently, the Tribunal upheld the AO's decision and set aside the CIT(A)'s order on this issue.Deletion of addition on account of unaccounted net profit from sales:The AO added an amount for unaccounted profit from sales outside the books. The CIT(A) deleted this addition by telescoping it with the excess cash found during the survey. The Tribunal agreed with the CIT(A), stating that the profit earned from trading outside the books of accounts should be taxed. The excess cash in hand not recorded in the books was considered as profit from unaccounted sales. The Tribunal confirmed the CIT(A)'s decision on this matter.In conclusion, the Tribunal partly allowed the revenue's appeal, upholding the addition under section 40A(3) for cash payments but deleting the additions related to unaccounted purchases and unaccounted net profit from sales. The Tribunal emphasized the importance of concrete evidence and adherence to statutory provisions in making such additions, ensuring a fair and just assessment.