2015 (8) TMI 1209 - AT - Income Tax

Appeal Dismissed: Unexplained Stock Investments & Interest Disallowance Upheld.

The Income Tax officer Ward IV, Khanna Versus M/s Triple V Timber Sales Corpn.

The appeal was dismissed, and the CIT(A)'s orders deleting the additions under Section 69 for unexplained investment in stock and the disallowance of ... Unexplained investment in stock - CIT(A) deleted the addition under section 69 - Held that:- Commissioner of Income-tax (Appeals) has particularly referred to the decision of the hon'ble Punjab and Haryana High Court in the case of Chauhan Papers P. Ltd. [2006 (10) TMI 426 - PUNJAB & HARYANA HIGH COURT] wherein it was held that if stock statement is made on estimate basis then addition is not called for. As observed earlier the assessee has merely given statement of monthly stock on the basis of a rough estimate by incorporating monthly purchases and sales and, therefore, that statement cannot be made the basis of addition. If there was a difference in stock, the differences should have been ascertained as at the end of the year then possibly the Assessing Officer could have made addition which has not been done. Therefore, we find nothing wrong with the order of the Commissioner of Income-tax (Appeals) and we confirm the same. - Decided against revenue. Disallowance of proportionate interest with regard to debit balance in the name of its related concern - Held that:- Commissioner of Income-tax (Appeals) has correctly noted the fact that once it is a case of sale then even if the amount has not been received it cannot be construed as a case of diversion of funds. In any case one of the partner of M/s. Vibhor Sood and Bros., i.e., Smt. Kiran Sood has also given a loan of ₹ 10 lakhs to the assessee-firm.Therefore, we find nothing wrong with the order of the learned Commissioner of Income-tax (Appeals) and we confirm the same.- Decided against revenue. Issues Involved:1. Deletion of addition under Section 69 of the Income-tax Act, 1961 on account of unexplained investment in stock.2. Deletion of addition on account of disallowance of proportionate interest regarding debit balance in the name of a related concern.Issue-wise Detailed Analysis:Issue 1: Deletion of Addition under Section 69 on Account of Unexplained Investment in StockThe Assessing Officer (AO) noticed a discrepancy between the stock value reported to the bank and the stock value in the assessee's books as of September 30, 2007. The bank statement showed stock valued at Rs. 76,60,229, while the assessee's books showed Rs. 63,53,283, resulting in a variation of Rs. 13,06,946. The AO considered this unexplained investment in stock and made an addition under Section 69 of the Income-tax Act, 1961.Upon appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] found that the stock statements given to the bank and those in the books were both prepared on an estimated basis without actual physical inventory verification. The CIT(A) noted that the stock statement provided to the bank was valued uniformly, which is not realistic for a business dealing in timber, where stock value varies based on quality and other factors. Additionally, the AO did not point out any defects in the purchases and sales recorded by the assessee.The CIT(A) concluded that the difference in stock statements could not be the sole basis for making an addition under Section 69. The CIT(A) referenced the case of Chauhan Papers Pvt. Ltd., where it was held that if stock statements are made on an estimated basis, additions are not justified. The CIT(A) distinguished the present case from B.T. Steels Ltd. v. CIT, where the bank had verified the stock, which was not the case here. Consequently, the CIT(A) deleted the addition.The Appellate Tribunal upheld the CIT(A)'s decision, noting that the AO did not establish that the stock shown to the bank was the same as that in the stock register. The Tribunal agreed that estimated stock statements could not form the basis for additions and confirmed the CIT(A)'s order.Issue 2: Deletion of Addition on Account of Disallowance of Proportionate InterestThe AO noticed a debit balance of Rs. 8,58,380 in the name of M/s. Vibhor Sood and Bros. in the assessee's balance sheet, with no movement during the year. The assessee explained that this was due to regular business transactions and that one of the partners, Smt. Kiran Sood, had given an unsecured loan to the assessee-firm. However, the AO disallowed proportionate interest of Rs. 1,28,757, citing the principles laid down in CIT v. Abhishek Industries Ltd.On appeal, the CIT(A) found that the debit balance represented regular business transactions and not an interest-free advance. The CIT(A) also noted that Smt. Kiran Sood had provided an interest-free loan of Rs. 10 lakhs to the assessee. Given the commercial expediency and the interest-free loan from Smt. Kiran Sood, the CIT(A) deleted the disallowance of proportionate interest.The Tribunal upheld the CIT(A)'s decision, agreeing that the debit balance was due to business transactions and that the interest-free loan from Smt. Kiran Sood justified the deletion of the disallowance. The Tribunal confirmed the CIT(A)'s order.Conclusion:The appeal was dismissed, and the CIT(A)'s orders deleting the additions under Section 69 for unexplained investment in stock and the disallowance of proportionate interest were upheld. The Tribunal agreed with the CIT(A) that the stock statements were on an estimated basis and that the debit balance was due to regular business transactions, supported by an interest-free loan from a partner.