2019 (5) TMI 2037 - AT - Income Tax

Partial relief: additions deleted for month-to-month sales memorandum discrepancies; Rs.36,730 added using 8% gross profit on specified amounts

ITAT allowed in part. Additions for alleged unaccounted sales were deleted where month-to-month memorandum discrepancies showed an April excess offset by ... Unaccounted sales for excess quantity received from the job worker - addition made by the AO is on the basis of memorandum of records which is not periodical performance and such facts have been clearly stated by the assessee during the course of assessment proceedings - HELD THAT:- As seen that the process cloth received by the assessee in the month of April 2007 is more by 8308 metres whereas in the subsequent month i.e. May 2007 the same is less by equal quantity i.e. 8308 metres which is only account of difference in notings made by the assessee. Therefore, considering the small amount and the mere entry of memorandum which could not be tallied month to month as some part of the quantity is received in the next month. Therefore, the addition made by the AO is accordingly deleted. Unaccounted investment in grey cloth - there is a deficit in the quantity of goods sent to job worker against the goods received from them - HELD THAT:- We find that the deficit in the quantity of goods sent by the assessee for the job work against the goods received from job workers is not fully explained. CIT(A has examined the details during the remand proceedings and confirmed addition in respect of parties which we are not count traceable. However, it is also to be noted that the entire deficit in the quantity of goods sent for job work and received could not be added in totality. Therefore, we are of the considered opinion to accept the alternative plea of that addition could be made in respect by applying Gross Profit rate of 7.39% (rounded off 8%) disclosed by the assessee in preceding year on the addition of (Rs. 1,80,943 + Rs. 2,78,191). Therefore, the addition of Rs. 36,730/- is confirmed and balance is deleted, accordingly ground of the appeal is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether additions on account of alleged unaccounted sales arising from excess quantity received from job workers (Rs. 53,645) were correctly made on the basis of memorandum records. 2. Whether additions on account of alleged unaccounted investment/purchases in grey cloth (Rs. 1,80,943 and Rs. 2,78,191) based on deficits between goods sent for job work and goods received from job workers were sustainable where books, challans and remand verification produced varying levels of proof. 3. Whether, if some unexplained deficits are held, the correct method and quantum of addition is to be direct addition of value of alleged unaccounted purchases or to apply an alternate gross profit percentage to the unexplained transactions. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Addition of Rs. 53,645 as unaccounted sales for excess quantity received from job worker Legal framework: Assessment additions for unexplained receipts may be founded on books/records; however, the character and reliability of the record relied upon (periodicity, completeness and reconciliation) determine permissibility of addition. Precedent treatment: No judicial precedents were relied upon or discussed in the impugned orders or the Tribunal's reasoning. Interpretation and reasoning: The Tribunal examined the basis of the Assessing Officer's addition - differences in memorandum of records/process charges register showing 2,032 metres discrepancy. The Tribunal noted that the memoranda in question were not primary accounting records but internal notings and jotting prepared by the assessee for convenience and not maintained on a periodical basis. The Tribunal observed that apparent month-to-month discrepancies (e.g., surplus in April of 8,308 metres and corresponding deficit in May of 8,308 metres) reflected timing/noting differences rather than substantive excess receipts. Given the informal nature of the memoranda and the ability to reconcile over adjoining months, the Tribunal found the AO's reliance on such records for making a monetary addition to income to be unsustainable, particularly since the amount was small and attributable to non-periodic entries. Ratio vs. Obiter: Ratio - An addition founded solely on internal memorandum entries that are not part of primary, periodical accounting records and that demonstrate timing/notational discrepancies cannot be sustained. Obiter - The observation on smallness of amount influenced deletion but is ancillary. Conclusion: Addition of Rs. 53,645 based on memorandum discrepancies was deleted. Issue 2 - Additions of Rs. 1,80,943 and Rs. 2,78,191 as unaccounted investment in grey cloth for deficits vis-à-vis job work Legal framework: When discrepancies exist between goods sent for job work and goods received, the revenue may treat unexplained deficits as unaccounted purchases/income; however, such treatment requires credible corroboration (invoices, challans, verification of counter-party documents) and reasoned quantification. Precedent treatment: No precedent was invoked; the Tribunal relied on the record and remand verification carried out under Rule 46A. Interpretation and reasoning: The AO determined an aggregate alleged unaccounted purchase of Rs. 8,02,657 based on memorandum month-wise details and an average shortage percentage (10.27%), supported in part by remand verification. The appellate authority (CIT(A)) after remand deleted certain items (Rs. 3,43,889) where bills/challans were verified, but confirmed additions of Rs. 1,80,943 for transactions with four parties whose notices were returned unserved and Rs. 2,78,191 for a shortage of 28,650 metres where the assessee's explanations were found unconvincing. The Tribunal noted that the deficit was not fully explained but also found it inappropriate to sustain the entire quantified additions. The Tribunal accepted the assessee's alternative submission to apply the preceding year's gross profit percentage (7.39%, rounded to 8%) to the confirmed deficiency amounts (Rs. 1,80,943 + Rs. 2,78,191) as a reasonable method of determining taxable effect, rather than holding entire value of alleged unaccounted purchases to be taxable. The Tribunal thereby computed the addition at Rs. 36,730 and deleted the balance. Ratio vs. Obiter: Ratio - Where unexplained deficits exist but verification and corroboration are partial or inconclusive, it is permissible to adopt a proportionate measure (e.g., applying an established gross profit rate) to quantify the taxable effect rather than making gross additions equal to full invoice value; such approach is a fact-sensitive remedial measure. Obiter - The specific use of the prior year gross profit rounded to 8% is an evidentiary compromise tailored to facts of this assessment year. Conclusion: The Tribunal affirmed that not all alleged deficits could be added; it confirmed a net addition of Rs. 36,730 (computed by applying 8% gross profit to the combined confirmed deficiency amounts) and deleted the remaining additions, thereby partly allowing the appeal on these grounds. Cross-references and cumulative observations 1. The Tribunal repeatedly distinguished internal memorandum entries from primary accounting records and gave weight to periodic, corroborated documentary evidence (bills, challans) and remand verification; where such corroboration existed, additions were deleted. 2. Where counter-party verification failed (notices returned unserved) or explanations were unsatisfactory, the Tribunal recognized a residual obligation to quantify taxable effect fairly and adopted a prior-year gross profit rate as a proportional basis for computation rather than endorsing full invoice-value additions. 3. No statutory or judicial principle purporting to mandate full-value additions in absence of complete documentary proof was applied; the Tribunal's approach is fact-driven and evidentiary in scope.