2025 (1) TMI 1572 - AT - Income Tax

Revenue's appeal dismissed as additions under Section 68 and Section 69B deleted for lack of evidence

The AT dismissed Revenue's appeal against CIT(A)'s order for AY 2017-18. Revenue challenged deletion of Rs. 12.83 crores addition under Section 68 for ... Addition u/s 68 - Application of provisions of section 115BBE - unexplained cash credits - CIT(A) deleted addition - HELD THAT:- CIT (A) has categorically mentioned that the AO has not disputed corresponding purchases / manufacturing stocks made by the assessee before sale and has not disputed quantum of closing stock. The entire sales have been made out of available stock with the assessee and sufficient stock was available with the assessee. There was not back dated purchase or purchases shown in bank accounts which was held as bogus by the AO. The statement of partner also mentioned modus operandi of sales after the announcement of demonetization including packing of jewellery for less than 2 lakhs, number of employees and other staff who served the client. A.R. further submitted that there was a free stock as mentioned by the D.R. is not justifiable and thus, the CIT (A) has rightly deleted the said addition. Decided in favour of assessee. Addition u/s 69B - undervaluation of closing stock (Freeze stock) - as per AO assessee did not have any basis for adopting the same value of free stock of 22 carat gold ornaments and the value for earning stock t Rs. 940 per gram was not justified by the assessee as per Accounting Standard-2 issued by ICAI - HELD THAT:- AO while estimating the business income as against the expenditure as shown Audited Annual Accounts has not taken into account the purchases and other direct expenses corresponding to sales - The undervaluation of closing stock cannot be justifiable when the books of accounts was not rejected but only the observation of the AO that the same are not reliable. AO contracted himself as at one point accepted the books of accounts in respect of addition. Thus, the plea of the Revenue that there was a free stock undervaluation is not justifiable. Hence, Ground No. 2 of the Revenue’s appeal is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Appellate Tribunal (AT) in this appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2017-18 are:(a) Whether the deletion of addition of Rs. 12,83,75,566/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, on account of unexplained cash credits after applying provisions of Section 115BBE was justified, given the facts and evidence on recordRs.(b) Whether the deletion of addition of Rs. 2,92,90,122/- made by the AO under Section 69B on account of undervaluation of closing stock (referred to as 'free stock') was justified without appreciating the facts and accounting standards applicableRs.(c) Whether any other grounds or modifications could be entertained by the Tribunal at the time of hearing.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Validity of Deletion of Addition under Section 68 for Unexplained Cash CreditsRelevant Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. If the assessee fails to satisfactorily explain the nature and source of such credits, the amount can be added to income. Section 115BBE prescribes a special rate of tax on income from unexplained sources. The burden lies on the assessee to prove the genuineness of the credits.Court's Interpretation and Reasoning: The AO made an addition of Rs. 12.83 crores on account of unexplained cash credits, primarily based on discrepancies observed during a survey under Section 133A and forensic analysis of digital data. The AO noted that a large turnover of sales was recorded on 08.11.2016 (post demonetization announcement), constituting more than 75% of the showroom stock. The AO relied on the partner's statement that sales were made post 8:30 PM on 08.11.2016 but found inconsistencies such as the preparation and printing of sale bills mostly between 09.11.2016 and 12.11.2016, indicating possible manipulation. The AO also highlighted that the sales were structured to be below Rs. 2 lakh to avoid scrutiny, which raised suspicion.However, the CIT(A) observed that the AO did not dispute the corresponding purchases or manufacturing stock, nor the quantum of closing stock. The CIT(A) found that the entire sales were made from available stock, with no backdated purchases or bogus entries in bank accounts. The partner's statement detailed the modus operandi of sales post demonetization, including packing and staff deployment, which was accepted as credible. The CIT(A) concluded that the addition under Section 68 was not justified.Key Evidence and Findings: Survey report, partner's statement under Section 131(1A), forensic analysis of digital sale data, stock records, and purchase details.Application of Law to Facts: The Tribunal noted that the AO's reliance on timing of bill printing and structuring of sales was insufficient to establish unexplained cash credits. Since the purchases and stock were not disputed, and the sales were supported by available stock, the addition under Section 68 was not sustainable.Treatment of Competing Arguments: The Revenue emphasized the suspicious timing and nature of sales and cash credits, while the assessee relied on stock availability, accounting records, and partner's explanations. The Tribunal favored the latter due to lack of concrete evidence of bogus transactions.Conclusion: The Tribunal upheld the CIT(A)'s deletion of the addition of Rs. 12,83,75,566/- under Section 68. Ground No. 1 of the Revenue's appeal was dismissed.Issue (b): Validity of Deletion of Addition under Section 69B for Undervaluation of Closing StockRelevant Legal Framework and Precedents: Section 69B empowers the AO to make additions where the value of closing stock is found to be understated. The valuation must conform to accepted accounting standards, such as Accounting Standard-2 (AS-2) issued by the Institute of Chartered Accountants of India (ICAI), which prescribes valuation norms for inventories.Court's Interpretation and Reasoning: The AO made an addition of Rs. 2.92 crores on account of undervaluation of closing stock, particularly 'free stock' of 22 carat gold ornaments valued at Rs. 940 per gram, which the AO found unjustified. The AO contended that the assessee had no basis for adopting the valuation method and that the books of accounts could not be relied upon for this purpose.The CIT(A) noted that while the AO questioned the reliability of the books of accounts, the AO had not rejected the books outright and had accepted them for the purpose of addition under Section 68. The CIT(A) found that the AO did not take into account corresponding purchases and direct expenses relating to the sales, which undermined the basis for addition under Section 69B. The Tribunal agreed that the undervaluation claim was not sustainable given the acceptance of accounts and lack of cogent evidence to establish undervaluation.Key Evidence and Findings: Audited annual accounts, stock valuation records, AO's observations on valuation method, and accounting standards.Application of Law to Facts: The Tribunal applied the principle that additions under Section 69B require clear evidence of undervaluation inconsistent with accounting standards. Since the AO accepted the books for other additions and did not conclusively prove undervaluation, the addition was unjustified.Treatment of Competing Arguments: The Revenue stressed non-compliance with AS-2 and lack of basis for valuation; the assessee relied on adherence to accounting standards and acceptance of books. The Tribunal sided with the assessee.Conclusion: The Tribunal dismissed Ground No. 2 of the Revenue's appeal, upholding the deletion of addition under Section 69B.Issue (c): Leave to Add, Modify, Amend GroundsThe Revenue sought liberty to add, modify, or alter grounds of appeal at or before hearing. The Tribunal did not specifically record any ruling on this procedural ground but proceeded to adjudicate on the grounds already raised.3. SIGNIFICANT HOLDINGSThe Tribunal's crucial legal reasoning includes the following verbatim excerpts:'The CIT (A) has categorically mentioned that the Assessing Officer has not disputed corresponding purchases / manufacturing stocks made by the assessee before sale and has not disputed quantum of closing stock. The entire sales have been made out of available stock with the assessee and sufficient stock was available with the assessee. There was not back dated purchase or purchases shown in bank accounts which was held as bogus by the Assessing Officer.''The statement of partner also mentioned modus operandi of sales after the announcement of demonetization including packing of jewellery for less than 2 lakhs, number of employees and other staff who served the client.''The undervaluation of closing stock cannot be justifiable when the books of accounts was not rejected but only the observation of the Assessing Officer that the same are not reliable. The Assessing Officer contracted himself as at one point accepted the books of accounts in respect of addition of Rs. 12,83,75,566/-.'Core principles established include:An addition under Section 68 for unexplained cash credits cannot be sustained if the assessee satisfactorily explains the source and genuineness of credits, supported by stock and purchase records, despite suspicious circumstances.Undervaluation of stock under Section 69B requires clear and cogent evidence of non-compliance with accounting standards and rejection of books of accounts; mere suspicion or observation of unreliability is insufficient.The acceptance of books of accounts for one addition (Section 68) militates against making contradictory additions for undervaluation under Section 69B without adequate proof.Final determinations:The Tribunal dismissed the Revenue's appeal on both grounds, upholding the CIT(A)'s deletion of additions under Sections 68 and 69B, thereby confirming the assessee's declared income and stock valuation for the Assessment Year 2017-18.