2014 (3) TMI 627 - AT - Income Tax

Tribunal rules in favor of appellant, deems Income Tax Act addition unwarranted.

The Tribunal ruled in favor of the appellant, finding that the addition under section 69 of the Income Tax Act was unwarranted. It determined that the ... Addition made u/s 69 of the Act – Held that:- Meager opening and closing balance shown in the bank account clearly prove that money so deposited in the bank account were only the sale proceeds of goods sold by the assessee against whom periodically and consistently payments have been made to the traders through banking channel - the amounts deposited in the bank account should not have been treated as unexplained investment in the bank account of the assessee. The amount deposited in the bank account was in fact sale proceeds of the goods, which were sold by the assessee from time to time against whom the assessee issued cheques to various dealers and earned commission – thus, the addition u/s. 69 of the IT Act is wholly unwarranted and unjustified in the case of the assessee – the total deposits in the bank account are the sale proceeds of the assessee, the profit rate should have been applied instead of considering the entire sales of income of the assessee – Relying upon Commissioner of Income-Tax Versus President Industries [1999 (4) TMI 8 - GUJARAT High Court] - Since the total deposit being the total sales of the assessee are only Rs.31,62,300/-, thus, the turnover of the assessee did not exceed the amount of Rs.40,00,000/- and as such, the provisions of section 40AF of the Act would apply in the case of assessee for the purpose of computing the profit and gains of retail business, which provides that sum equal to 5% of the total turnover in the previous year on account of such business shall be deemed to be the profit and gains of such business – Decided partly in favour of Assessee. Issues:1. Addition of Rs.31,62,300/- under section 69 of the Income Tax Act.2. Rejection of explanation by authorities regarding the source of deposits in the bank account.3. Justification of treating the entire sale amount as undisclosed income.Analysis:Issue 1: Addition under section 69 of the IT ActThe appellant challenged the addition of Rs.31,62,300/- made by the Assessing Officer and sustained by the CIT(A) under section 69 of the Income Tax Act. The appellant contended that the deposits were sale proceeds of goods brought to Agra for selling against commission, and the amounts were deposited in the bank account and subsequently paid to the parties from whom the goods were purchased. The appellant argued that the provisions of section 69 were not applicable in this case. The authorities, however, treated the entire bank deposit as unexplained investment, leading to the addition. The Tribunal found that the deposits were indeed sale proceeds of goods sold by the appellant against whom payments were consistently made to traders. The Tribunal held that the addition under section 69 was unwarranted and unjustified. Instead, the Tribunal applied a profit rate to compute the income, limiting the addition to Rs.1,58,115/-.Issue 2: Rejection of ExplanationThe authorities rejected the appellant's explanation regarding the source of deposits in the bank account. The appellant maintained that the deposits were from the sale of ladies suits brought from Surat and sold on commission in Agra. The appellant provided confirmations and details from the bank account to support this claim. Despite the appellant's submissions, the authorities did not accept the explanation. However, the Tribunal found that the details in the bank account, along with the appellant's consistent stand, proved that the deposits were indeed sale proceeds. The Tribunal criticized the authorities for not verifying the facts adequately and concluded that the rejection of the appellant's explanation was unjustified.Issue 3: Treating Entire Sale Amount as Undisclosed IncomeThe appellant contested the treatment of the entire sale amount as undisclosed income. The appellant argued that applying a profit rate would be more appropriate to determine the income from commission business. The Tribunal agreed with the appellant, citing judgments from the Gujarat High Court and the Madhya Pradesh High Court to support its decision. The Tribunal held that considering the nature of transactions and the appellant's low reported income, the addition under section 69 was not justified. Therefore, the Tribunal modified the orders of the authorities and restricted the addition to Rs.1,58,115/-.In conclusion, the Tribunal partly allowed the appeal, emphasizing that the authorities should have considered the true nature of the appellant's business transactions and applied a profit rate instead of treating the entire sales amount as undisclosed income.