2012 (9) TMI 391 - AT - Income Tax

Tribunal decision: Assessee's appeal partly allowed, CIT(A)'s decision upheld

The Tribunal partly allowed the assessee's appeal, dismissing the Department's appeal. The Tribunal upheld the CIT(A)'s decision to restrict the gross ... Survey on 18.02.2009 followed by assessment u/s 143(3) – addition under head such as suppression of sales - investment in purchases corresponding to unaccounted sales – under valuation of closing stock - Bogus liability (existing sundry creditors) - bogus liability (non existing s/creditors) - dis-allowance u/s 40A(3) – CIT(A) deleted the addition except addition made for suppression of sales by applying GP at 12% - Revenue contesting deletion of various additions made whereas assessee contesting rate of GP – Held that:- It was the survey operation which resulted in finding by CIT(A) that the suppressed sales are not undisclosed income of the assessee. Sales were computed suppressed after a gap of 11 months by AO The technical accounting of the closing stock and the advances received from the prospective buyers whether could be shown in the closing stock when the period for purchase and sales exceeded one year was not accepted by the AO r. CIT(A) therefore thought it fit on the basis of facts brought on record in his order in pursuant to the survey operation carried out that the purported closing stock which may have been in the hands of the buyers already or were to be booked as sales to be shown against the purchases has already been part of the books of account would at best result into bringing into tax the purported margin on the gross in the sales when the main ingredient leading to computation of gross rate of margin is purchase, sales and stock. Therefore, addition on account of valuation of closing stock, bogus liabilities, dis-allowance u/s.40A(3) and investment in purchase corresponding to unaccounted sales are rightly deleted. The Books of account could not be changed as per the finding of the Assessing Officer. It is considered fair that the rate of gross profit margin at 13% on the purported suppressed sales as have been computed and confirmed by the CIT(A) to be restricted at 12% to meet the ends of justice – Decided partly in favor of assessee. Issues Involved:1. Addition of Rs.21,05,008 on estimation.2. Deletion of quantum of addition/disallowances under various heads by CIT(A).3. Justification of CIT(A) in holding no investment outside the books for unaccounted purchases and sales.4. Application of statutory provisions of section 40A(3) for cash payments.5. Cross objection by the assessee supporting CIT(A)'s order.Detailed Analysis:1. Addition of Rs.21,05,008 on Estimation:The assessee contested the addition of Rs.21,05,008, arguing it was unsustainable. The Assessing Officer (AO) had determined this amount by estimating a net profit of 12% on suppressed sales of Rs.1,61,92,373. The learned CIT(A) upheld the AO's estimation of a gross profit rate at 13% on unaccounted sales but deleted other related additions.2. Deletion of Quantum of Addition/Disallowances by CIT(A):The Revenue challenged the deletion of several additions made by the AO:- Investment in Purchases Corresponding to Unaccounted Sales (Rs.12,25,245): The AO treated this as deemed income under section 69 of the IT Act, arguing that such purchases required capital investment outside the books. The CIT(A) deleted this addition, which the Revenue argued was erroneous.- Valuation of Closing Stock (Rs.6,18,000): The AO added this amount due to non-production of a stock register, which the CIT(A) deleted.- Bogus Liabilities (Rs.7,37,566 and Rs.14,53,129): These amounts were added by the AO under section 133(6) of the IT Act for existing and non-existing sundry creditors, respectively. The CIT(A) deleted these additions.- Disallowance under Section 40A(3) (Rs.3,58,474): The AO disallowed this amount for cash payments violating Rule 6DD of the IT Rules. The CIT(A) deleted this disallowance.3. Justification of CIT(A) in Holding No Investment Outside the Books:The CIT(A) held that there could not be any investment outside the books for purchases and sales made outside the books. The AO had determined an unexplained investment of Rs.12,25,245, which the CIT(A) deleted. The Revenue argued that this deletion was erroneous, as the AO had reasonably determined this amount by analyzing the capital purchase ratio.4. Application of Statutory Provisions of Section 40A(3):The AO disallowed Rs.3,58,474 under section 40A(3) for cash payments. The CIT(A) deleted this disallowance, which the Revenue contested, arguing that the CIT(A) ignored the statutory provisions.5. Cross Objection by the Assessee:The assessee filed a cross objection supporting the CIT(A)'s deletion of the additions. The learned AR argued that the CIT(A) upheld the gross profit rate without a basis and that the AO should have considered the average net profit of the last five years. The AR also contended that the AO's estimation was excessive and should have been based on the average net profit of preceding years.Tribunal's Findings:The Tribunal considered the rival contentions and material on record. It agreed with the CIT(A) that the suppressed sales were not undisclosed income and that the technical accounting of closing stock and advances received from buyers was appropriately handled. The Tribunal noted that the AO's effort to impound books and subsidiary records after 11 months was judiciously considered by the CIT(A).The Tribunal found no basis for enhancing the gross profit margin rate and directed it to be restricted to 12%. It also found no merit in the AO's attempt to correlate deleted expenditures with estimated income, as there was no link between the two. The Tribunal upheld the CIT(A)'s deletion of additions related to valuation, bogus liability, and investment in purchases, affirming that these were rightly considered by the CIT(A).Conclusion:- The appeal of the assessee was partly allowed.- The appeal of the Department was dismissed.- The cross objection of the assessee was allowed to the extent it supported the CIT(A)'s order.