2018 (4) TMI 868 - AT - Income Tax

Assessee's Appeal Granted: Closing Stock Increase Approved

The Tribunal allowed the assessee's appeal, directing the increase in closing stock claimed by the assessee at Rs. 6 crore to be allowed. The order was ... Undisclosed income - work in progress (closing stock) - acceptance of books of account - survey under section 133A - requirement of show cause before disallowance - retraction of surrender - double benefitUndisclosed income - work in progress (closing stock) - acceptance of books of account - double benefit - Whether the Assessing Officer was justified in disallowing the assessee's claim of increasing closing stock by the amount introduced out of surrendered/unrecorded receipts while accepting the cash component of the surrender. - HELD THAT: - The Tribunal found that the assessee had surrendered unrecorded receipts and introduced the same into its audited financial statements by bifurcating the amount between cash and investment in work-in-progress. The AO accepted the cash portion but denied the investment in work-in-progress, treating the surrendered amount as undisclosed income under the relevant law while not rejecting the books of account. The Tribunal held that once the AO accepted the surrendered income and did not reject the books of account, he could not accept one part of the accounting treatment and disallow the balancing entry that represented application of that same income to work-in-progress. The Tribunal observed that the AO applied inconsistent yardsticks and that denial of the claimed closing stock effectively nullified the accounting treatment accepted in part and produced a selective result tantamount to permitting a double adverse treatment. The architect's certificates and the trading account were considered and the Tribunal found that the AO's conclusion that the investment was not substantiated was not supported by valid reasons; the architect's limited certificate did not negate broader records showing work-in-progress and expenditures. On these grounds the Tribunal allowed the claim of increase in closing stock.The claim of increase in closing stock of Rs. 6 crore, introduced out of the surrendered/unrecorded receipts, is to be allowed.Survey under section 133A - requirement of show cause before disallowance - acceptance of books of account - retraction of surrender - Whether the AO could reduce closing stock by estimation without rejecting the books of account or issuing a show cause notice, and whether allowing the assessee to treat the surrendered amount as invested in closing stock amounted to retraction of the surrender. - HELD THAT: - The Tribunal noted that the survey had led to a surrender and that the assessee subsequently reflected the surrender in its audited financial statements in accordance with statutory accounting requirements. The AO accepted books to the extent of the cash component but denied the closing stock without formally rejecting the accounts or issuing any show cause notice prior to the disallowance. The Tribunal held that such piece-meal rejection was impermissible: if the books were not rejected, the AO could not make an ad hoc estimation to disallow the claimed investment. Further, the Tribunal found that treating the admitted unrecorded receipts as invested in work-in-progress did not amount to retraction of the surrender, particularly since the assessee paid tax on the surrendered amount and consistently recorded the entries; there was no evidence of any retraction aimed at defeating tax consequences. In the absence of a show cause and without rejection of accounts, the AO's action was unsustainable.AO's reduction of closing stock without rejecting books or issuing show cause notice is unsustainable; no retraction of surrender is established, and the claimed investment must be recognized.Final Conclusion: The Tribunal allowed the appeal for Assessment Year 2011-12 and directed that the assessee's increase in closing stock of Rs. 6 crore (introduced out of surrendered/unrecorded receipts) be allowed, holding that the AO could not disallow the investment while accepting part of the surrender and without rejecting the books of account or issuing a show cause notice. Issues Involved:1. Denial of increase in closing stock claimed by the assessee.2. Treatment of surrendered income during the survey.3. Assessment of unrecorded cash advances.4. Rejection of the investment claim in the Maruti City project.5. Acceptance of books of account and subsequent discrepancies.Issue-wise Detailed Analysis:1. Denial of Increase in Closing Stock Claimed by the Assessee:The assessee contended that the authorities erred in law and on facts by arbitrarily denying the increase in closing stock of Rs. 6 crore without giving an opportunity of hearing or issuing any show cause notice. The authorities had not rejected the audited books of account. The assessee argued that the amount of Rs. 6 crore was shown in the trading account as an amount voluntarily offered for tax and a corresponding debit entry was shown as an investment in Maruti City as work in progress.2. Treatment of Surrendered Income During the Survey:During a survey under section 133A of the Act, the survey party found and impounded incriminating documents, including a ledger indicating cash advances amounting to Rs. 8,00,02,000 from 43 persons, which were not recorded in the regular books of account. The assessee's director surrendered this amount as unexplained/undisclosed income for the relevant year. The assessee filed its return declaring income of Rs. 8,06,36,220, including the surrendered income. Out of this, Rs. 8 crore was introduced in the books as an increase in work in progress (closing stock), and Rs. 2,00,02,000 was disclosed as cash balance in the Cash Book.3. Assessment of Unrecorded Cash Advances:The AO framed the assessment at a total income of Rs. 8,00,35,220, as per the income returned by the assessee. However, the AO observed that while the assessee had surrendered the amount based on unrecorded amounts received from 43 persons, it had apportioned and taken it into its closing stock value, increasing it by Rs. 6 crore. The AO treated this as the assessee's undisclosed income under section 68 of the Act and added it to the assessee's income. The AO denied the benefit of closing stock for the assessment year 2011-12 and the opening stock for the assessment year 2012-13 on the grounds that there was no evidence of investment in the value of building construction under progress.4. Rejection of Investment Claim in Maruti City Project:The CIT(A) dismissed the assessee's appeal, noting that the director never stated or provided evidence that the amount received was invested in work in progress of the Maruti City project. The certificates from the architect showed investments that did not match the amounts claimed by the assessee. The CIT(A) concluded that the claim of investment of Rs. 6 crore in Maruti City was not supported by evidence and was found to be false based on the certificates filed by the assessee.5. Acceptance of Books of Account and Subsequent Discrepancies:The assessee argued that the AO accepted the books of account without rejecting them but disallowed the closing stock increase by estimation. The assessee produced complete books of account and vouchers, which were endorsed by the AO. The AO did not find any discrepancy in the books of account. The assessee also provided a certificate from a registered architect, which was not found to be false. The AO's denial of the Rs. 6 crore investment in work in progress was not supported by valid reasons, and no specific show cause notice was given before denying the benefit.Conclusion:The Tribunal found the assessee's grievance justified and directed the increase in closing stock claimed by the assessee at Rs. 6 crore to be allowed. The appeal was allowed, and the order was pronounced in open court on 12/04/2018.