2019 (11) TMI 912 - AT - Income Tax

Unaccounted sales and gross profit estimates in jewellery business, plus 'jangad' gold/silver stock additions, struck as duplicative

Rejection of books and separate additions for unaccounted sales and GP estimation were held unsustainable because the computation adopted inconsistent ... Rejecting the books of accounts u/s 145(3) - unaccounted sales - GP estimation - HELD THAT:- Addition made in the present case is in respect of the unaccounted sales are far in excess of the actual sales made by the assessee. In the working shown above, the profit is estimated at 25% and yet the seed capital is taken at 80%. Obviously, when the profit rate is 25%, the cost of goods, and entire related costs, cannot be more than 75%, and yet the seed capital is taken is more than 75%. The outstanding debtors, which are in respect of the sale itself, are also taken separately. The total income computed, after taking into account the estimated profit, seed capital and debtors, is far less than the actual amount offered on the basis of application theory at ₹ 2.19 crores. When the income voluntarily offered to tax on the basis of material on record is far more than income, strictly speaking, legally justified on that basis, there cannot be any good reasons to make separate additions on the basis of the same material. In these circumstances, separate addition on account of income, as profit or as seed capital or for any other related factor, is clearly unwarranted. Addition on account of low GP - assessee has given detailed explanations for the fall in the gross profit rate, on 12.9.2013 22.11.2013, 9.1.2014 and 20.1.2014. The copies of all these submissions are placed before us in the paper-book. The Assessing Officer has referred to, in the impugned assessment order, the submissions dated 12.9.2013 and has not even referred to, or apparently looked at, the other submissions. Without dealing with these submissions, it was not open to reject the stated reasons for fall in the GP rate. In any case, the variation is only 1.04% - we hold that there are no legally sustainable reasons to disturb the GP rate of 18.96% as show by the assessee. This plea is also, therefore, upheld. Addition on account of “Gold Jangad Stock' - HELD THAT:- Jangad gold jewellery of 402 .56 gms received from Kalindi jewellers were later on purchased by Invoice No . 114 dated 1 .12 .2010 and entire amount of the said bill was paid through banking channel. The said purchase of gold is duly reflected on 17 .12 .2010 in the purchase register at Page No .173 of PB. However, the Assessing Officer has, without verifying purchase register available on record and invoices thereof produced during the assessment proceedings, has made addition of the value of 402.56 gms on account of jangad jewellery in the name of Kalindi Jewellers. In the light of these discussions, the addition in respect of 402.56 gms of jangad stock received from Kalaindi Jewellers cannot be sustained either. In view of these discussions, as also bearing in mind entirety of the case, the entire addition of ₹ 1, 90, 21, 318 in respect of jangad stock must stand deleted. Addition on account of “Silver Jangad Stock” - HELD THAT:- No dispute that Chopra Brothers had issued bill no 151 dated 25.10.2010 and bill no. 152 dated 27.10.2010, which suitably explain the purchase transaction, but the assessee’s explanation that as the updation in the stock registers are done at the month end, these two entries could be made therein, cannot be disregarded. In any case, in the cross enquiries conducted by the Assessing Officer with Chopra Brothers, this aspect has been confirmed and the said confirmation is placed on record. One such an exercise is carried out by the Assessing Officer, it has to be taken to the logical conclusion and it cannot be ignored by the Assessing Officer because the conclusion of the enquiry does not favour his stand. All the material in respect to this transaction were duly before the AO and he did not probe the matter further, yet, because of his doubts, the addition has been made. Similarly, so far as jangad stock of 8.250 kgs received from Mohanlal & Sons is concerned, the transaction has been confirmed by the partner of that concern, which was subjected to the survey proceedings at the same point of time when the assessee was subjected to survey. In view of these discussions, as also bearing in mind entirety of the case, we delete this addition Issues Involved:1. Rejection of books of accounts under section 145(3) of the Income Tax Act, 1961.2. Estimation of sales and gross profit rate.3. Addition on account of 'Seed Capital'.4. Double taxation concerns.5. Benefit of telescoping against the income quantified.6. Addition on account of 'Gold Jangad Stock'.7. Addition on account of 'Silver Jangad Stock'.Issue-wise Detailed Analysis:1. Rejection of Books of Accounts under Section 145(3):The assessee's books of accounts were rejected by the Assessing Officer (AO) under section 145(3) of the Income Tax Act, 1961, which was confirmed by the CIT(A). The assessee argued that the rejection was erroneous, but the tribunal found that the AO's approach violated natural justice principles as it was unsupported by facts and lacked specific details.2. Estimation of Sales and Gross Profit Rate:The AO estimated the sales at Rs. 7,50,00,000 and applied a gross profit rate of 20%, resulting in an addition of Rs. 62,95,108. The CIT(A) partially upheld this, reducing the addition by Rs. 7,95,092. The tribunal noted that the AO's estimation was excessive and not supported by specific details. The tribunal upheld the assessee's declared gross profit rate of 18.96%, noting that the variation from the AO's estimate was only 1.04%, which was within acceptable business variations.3. Addition on Account of 'Seed Capital':The AO added Rs. 50,00,000 as 'Seed Capital', which was confirmed by the CIT(A). The tribunal found that the total income computed, including seed capital and profit from unaccounted sales, was far less than the income offered by the assessee based on the application theory. Therefore, the tribunal concluded that separate additions on the same material were unwarranted.4. Double Taxation Concerns:The assessee argued that the additions resulted in double taxation as the income of Rs. 2,19,47,722 was already offered for tax. The CIT(A) rejected this argument, but the tribunal found that the total additions were excessive and not justified, thus addressing the double taxation concern.5. Benefit of Telescoping Against the Income Quantified:The assessee claimed the benefit of telescoping against the income quantified, which was not granted by the AO or CIT(A). The tribunal found that the income voluntarily offered by the assessee was far more than what was legally justified, thus implying that the benefit of telescoping should have been considered.6. Addition on Account of 'Gold Jangad Stock':The AO added Rs. 1,90,21,318 for unaccounted 'Gold Jangad Stock', which was confirmed by the CIT(A). The tribunal found that the assessee provided sufficient corroborative material, including confirmatory letters and audit reports, to support the claim of jangad stock. The tribunal directed the AO to delete the related addition, accepting the assessee's explanation.7. Addition on Account of 'Silver Jangad Stock':The AO added Rs. 14,63,550 for unaccounted 'Silver Jangad Stock', which was upheld by the CIT(A). The tribunal found that the assessee provided sufficient evidence, including confirmatory letters and purchase invoices, to support the claim. The tribunal directed the AO to delete this addition as well.Conclusion:The tribunal allowed the appeal, directing the deletion of the additions made by the AO and confirmed by the CIT(A). The tribunal emphasized the importance of specific details, corroborative material, and adherence to natural justice principles in making such additions. The judgment was pronounced on 5th September 2019.