2017 (2) TMI 600 - AT - Income Tax

Appeal partly allowed: additions deleted, stock shortage sustained, cash payments exceeding Rs. 20,000 remanded

The Tribunal partly allowed the appeal, deleting additions for unaccounted sales, unexplained purchases, and lump sum disallowances. The addition for ... Addition on account of profit on undisclosed sales - valuation of purchases and adhoc estimation - treatment of stock shortage as sales outside books - application of gross profit rate declared for the year - disallowance under 40A(3) and exceptions under Rule 6DD - adhoc lump sum disallowance of business expenses - telescoping of additionsAddition on account of profit on undisclosed sales - application of gross profit rate declared for the year - Deletion of addition computed as gross profit on alleged unaccounted sales of Rs. 2,31,400/-. - HELD THAT: - The tribunal found that the transaction of Rs. 2,31,400/- pertained to goods rejected by the buyer (Shri Shyam Sunder) and that the buyer had executed an affidavit and gave a statement in remand proceedings confirming no purchase. Comparable affidavits/statements led to deletion of other additions based on impounded loose papers. As no actual sale occurred, applying gross profit to the non-existent sale was unwarranted. Consequently the addition made by applying the declared GP rate for the year was deleted; the question of rate application therefore was not examined further.Addition of Rs. 78,005/- on account of gross profit on alleged unaccounted sale of Rs. 2,31,400/- deleted.Valuation of purchases and adhoc estimation - Deletion of the adhoc/estimated addition of Rs. 33,908/- claimed as unexplained investment in purchases. - HELD THAT: - The Assessing Officer's higher valuation of purchases rested on estimated rates derived from impounded papers; the remand report conceded that the AO's valuation was estimative and that quantities recorded by the assessee were not disputed. No clear valuation methodology was shown on the record. An adhoc addition based on such estimation was found unsustainable in law and therefore deleted.Addition of Rs. 33,908/- on account of unexplained/unaccounted purchases deleted.Treatment of stock shortage as sales outside books - application of gross profit rate declared for the year - Sustainment of addition computed as gross profit on stock shortage of Rs. 7,77,010/-; application of GP rate 33.71% upheld. - HELD THAT: - The books showed stock at Rs. 37,88,130/- while physical verification recorded Rs. 30,11,120/-, yielding a shortage of Rs. 7,77,010/-. The assessee failed to prove that alleged omitted stock (rough stone in bottom rows) was excluded from inventory or to furnish documentary evidence supporting his stock valuation. The tribunal accepted the view that the shortage could be treated as sales outside books. Since the unaccounted sales related to the year under appeal, the gross profit rate declared by the assessee for that year (33.71%) was applied by the CIT(A), and the tribunal found no infirmity in that approach and confirmed the resultant addition.Addition of Rs. 2,61,930/- (gross profit on stock shortage) sustained.Disallowance under 40A(3) and exceptions under Rule 6DD - Matter remanded to Assessing Officer for fresh examination of evidence in respect of cash payments amounting to Rs. 1,23,500/- alleged to be ineligible for Rule 6DD exceptions. - HELD THAT: - The remand report and papers contained contradictory statements about whether affidavits supporting exceptions under Rule 6DD were on record for two specific payees. Because the affidavits were not found in the paperbook before the tribunal and the AO had given inconsistent positions, the tribunal directed that the AO examine any affidavits the assessee filed and decide the issue afresh in accordance with law.Addition of Rs. 1,23,500/- under section 40A(3) set aside and matter remanded to the Assessing Officer for fresh consideration.Adhoc lump sum disallowance of business expenses - Deletion of adhoc lump sum disallowance of Rs. 75,000/- made out of various business expenses. - HELD THAT: - The Assessing Officer disallowed a percentage of expenses without establishing that the expenditures were bogus or not incurred for business purposes. The CIT(A) had reduced the original disallowance but offered no basis demonstrating the disallowance was justified. An adhoc estimation of expenses without supporting material was held unsustainable, and the tribunal deleted the lump sum disallowance.Lump sum disallowance of Rs. 75,000/- deleted.Telescoping of additions - Claim for telescoping of additions dismissed as infructuous. - HELD THAT: - Telescoping was sought for alleged unaccounted sales, unaccounted purchases and shortage of stock. The tribunal deleted additions relating to unaccounted sales and purchases; only the addition for stock shortage was sustained. As there remain no multiple concurrent additions requiring set-off, the claim for telescoping was dismissed.Claim for telescoping denied; ground dismissed.Final Conclusion: The assessee's appeal is partly allowed: additions on account of profit on the alleged unaccounted sale (Rs. 78,005), estimated unexplained purchases (Rs. 33,908) and the adhoc lump-sum disallowance (Rs. 75,000) are deleted; the addition relating to stock shortage (gross profit Rs. 2,61,930) is confirmed; the addition under section 40A(3) of Rs. 1,23,500 is remitted to the Assessing Officer for fresh examination. Appeal disposed of partly in favour of the assessee for statistical purposes. Issues Involved:1. Sustaining an addition by applying G.P. rate on alleged unaccounted sales.2. Sustaining an addition on account of unexplained investment in unaccounted purchases.3. Making an addition on account of Gross Profit in stock alleged as found short.4. Sustaining an addition u/s 40A(3) for making cash payments exceeding Rs. 20,000.5. Sustaining lump sum disallowances on estimate basis out of various expenses.6. Not allowing the benefit of telescoping and set off one income from the other.Detailed Analysis:1. Sustaining an Addition by Applying G.P. Rate on Alleged Unaccounted Sales:The assessee contested the addition of Rs. 78,005 by applying a G.P. rate of 33.71% on alleged unaccounted sales of Rs. 2,31,400. The loose papers found during the survey were claimed to be rough calculations, not actual sales. Affidavits were submitted to support this claim. The Ld. AO, in a remand report, accepted that the figures on the papers did not represent actual sales except for Rs. 2,31,400. The Ld. CIT(A) applied a G.P. rate of 33.71% instead of 26% and sustained the addition. The Tribunal deleted the addition, noting that the goods worth Rs. 2,31,400 were rejected by the buyer, resulting in no actual sales.2. Sustaining an Addition on Account of Unexplained Investment in Unaccounted Purchases:The Ld. AO disputed the valuation of purchases, estimating it at Rs. 65,77,943 instead of Rs. 58,10,975, resulting in an alleged unaccounted purchase of Rs. 7,66,968. The Ld. CIT(A), after considering the remand report, sustained an addition of Rs. 33,908, acknowledging that the difference was due to estimated rates. The Tribunal deleted the addition, noting that the valuation was based on estimation without a proper basis.3. Making an Addition on Account of Gross Profit in Stock Alleged as Found Short:The Ld. AO found a stock shortage of Rs. 7,77,010 during the survey and applied a G.P. rate of 26%, which the Ld. CIT(A) enhanced to 33.71%, resulting in an addition of Rs. 2,61,930. The assessee claimed that the stock was not properly verified. The Tribunal upheld the addition, noting that the assessee failed to provide sufficient evidence to prove the stock valuation and the shortage was rightly treated as sales outside the books.4. Sustaining an Addition u/s 40A(3) for Making Cash Payments Exceeding Rs. 20,000:The assessee made cash payments totaling Rs. 6,10,375, claiming exceptions under Rule 6DD. The Ld. CIT(A) sustained an addition of Rs. 1,23,500 for payments to two parties, as their statements could not be recorded. The Tribunal set aside the matter to the Ld. AO to examine the affidavits and decide afresh.5. Sustaining Lump Sum Disallowances on Estimate Basis Out of Various Expenses:The Ld. AO made a lump sum disallowance of Rs. 1,31,563, which the Ld. CIT(A) reduced to Rs. 75,000. The Tribunal deleted the addition, noting that there was no basis for the disallowance and no evidence that the expenses were either bogus or not incurred for business purposes.6. Not Allowing the Benefit of Telescoping and Set Off One Income from the Other:The assessee requested telescoping of additions on account of unaccounted sales, purchases, and stock shortage. The Tribunal noted that since the additions for unaccounted sales and purchases were deleted, only the addition for stock shortage was sustained, making telescoping inapplicable.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, deleting the additions for unaccounted sales, unexplained purchases, and lump sum disallowances, while sustaining the addition for stock shortage and setting aside the matter of cash payments for fresh examination.