2025 (9) TMI 1434 - AT - Income Tax

Addition of Rs 5.19 crore for alleged suppression of purchases and stock set aside due to unreliable AO figures

ITAT HYDERABAD - AT held that the AO's addition of Rs. 5.19 crore for alleged suppression of purchases, sales and closing stock could not be sustained ... Addition u/s 69A/69C - multi-facet quantitative suppression of purchases/sales/closing stock - HELD THAT:- The alleged discrepancy finds its roots in the failure of the AO in not appreciating that the 12,030 bags of 'opening stock' of MOP (parent item) was comprised of 2020 quintals of PPL-MOP, (a brand item of MOP). We, thus, are of a firm conviction that the glaringly distorted quantitative facts/figures taken by the AO had resulted to the drawing of the alleged discrepancies in the form of suppression of purchases, sales, and closing stock in the hands of the assessee. We are unable to comprehend the very basis for the adoption of the distorted figures by the A.O., based on which he has drawn adverse inferences, both regarding the parent items and the brands/sub-heads (of the parent items) in the hands of the assessee, resulting to an exorbitant addition in the hands of the assessee. Assessee, to substantiate his aforesaid claim, had filed before the CIT(A) the summary of his purchases/sales turnover for the subject year as was disclosed in his VAT returns, along with copies of the same. We find on a perusal of the summary of the turnover report of the VAT returns filed by the assessee for the F.Y. 2016-17 that the same duly supports the purchases/sales disclosed by the assessee during the subject year. We thus, in terms of our deliberations, are unable to fathom the very basis on which the A.O. had inferred suppression of purchases, sales and closing stock in the hands of the assessee, that had resulted to an addition of Rs. 5.19 crore (supra) in his hands. Although, we find that the alleged discrepancy, i.e, the suppression of the purchases/sales/closing stock based on which the impugned addition had been made by the A.O. finds its roots in his failure to correctly appreciate the facts of the case as were discernible from the record available him, and thus, the same cannot be sustained, but for the sake of completeness, we deem it apposite to deal with the adverse inferences drawn by the A.O regarding each of the parent item and their corresponding brands/sub-heads. Thus, we not being able to persuade ourselves to concur with the view taken by the A.O., herein set aside the order passed by the CIT(A) and vacate the addition made in the hands of the assessee. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the addition of Rs. 5.19 crore made under Sections 69A/69C of the Income-tax Act on account of alleged quantitative suppression of purchases/sales/closing stock is sustainable where the assessing officer compared consolidated parent-product figures with manufacturer/brand-wise sub-head figures. 2. Whether manufacturer/brand-wise records and a product-wise reconciliation placed during appeal proceedings (including documents admitted under Rule 46A) can explain away the AO's alleged quantitative discrepancies and displace adverse inferences drawn in the assessment order and remand report. 3. Legality of treating the assessee's commodity-wise manufacturer/brand notation as separate products for purposes of making additions under Sections 69A/69C (i.e., whether the AO's characterization of sub-heads as independent items is a valid basis for additions). 4. Whether documents produced before the CIT(A) and verified in remand proceedings, but criticized by the AO/JAO as after-thoughts lacking supporting bills/vouchers and GST/VAT reconciliation, ought to be rejected or accepted for adjudication. 5. Applicability of Section 115BBE (rate amendment) to the assessment year in question (whether enhanced tax rate at 60% applies to income assessed under Sections 68/69/69A/69B/69C/69D for AY 2017-18). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustainability of addition under Sections 69A/69C based on quantitative discrepancies Legal framework: Sections 69A/69C permit taxation of unexplained money/expenditure where the assessee cannot account satisfactorily for receipts/expenditure/transactions; AO must base additions on reliable and correctly interpreted facts. Precedent treatment: No contrary authority expressly relied upon to overturn the statutory tests; approach is fact driven requiring proper reconciliation of books, stock records and statutory returns. Interpretation and reasoning: The Tribunal examined the AO's tabulated discrepancies and compared them with the fertiliser trading account and a manufacturer-wise reconciliation produced by the assessee. It found the AO's approach to be factually distorted: the AO compared consolidated 'parent product' opening stock figures with manufacturer/brand-wise sales/closing stock figures (or vice versa), thereby treating brands/sub-heads as separate products. On consolidation of parent and brand figures (as shown in the trading account and reconciliation), the purported shortfalls are explained. The Tribunal also referred to the summary of VAT returns which corroborated the assessee's purchases/sales disclosures. Ratio vs. Obiter: Ratio - an addition under Sections 69A/69C cannot be sustained where the apparent discrepancy arises from AO's misclassification of manufacturer/brand-wise sub-heads as distinct products and where a coherent reconciliation (supported by trading account and VAT returns) explains opening stock, purchases, sales and closing stock. Obiter - remarks on the AO's methodology and the general risks of treating brand-wise nomenclature as independent products. Conclusions: The Tribunal set aside the additions aggregating Rs. 5.19 crore, directing deletion of the specific amounts attributable to the parent products and their brand/sub-heads (MOP, 10.26.26, 12.32.16, SUPER and their brands). The addition is vacated as unsustainable in view of proper consolidation/reconciliation. Issue 2 - Admissibility and weight of manufacturer/brand-wise reconciliation and documents admitted under Rule 46A Legal framework: Rule 46A permits admission of additional evidence before the CIT(A) where material bearing on adjudication is furnished; remand reports and JAO verifications are relevant to weight and credibility of such evidence. Precedent treatment: Lower authority (CIT(A)) admitted documents under Rule 46A; AO/JAO in remand proceedings opined documents were after-thoughts and lacked bills/vouchers/GST reconciliation. Interpretation and reasoning: The Tribunal assessed not only the JAO's and AO's comments that some documents lacked independent vouchers, but also the substance of the reconciliation and external corroboration in the form of VAT return summaries and the audited trading account filed with return. On a conjoint perusal, the Tribunal found the reconciliation and trading account to materially explain the discrepancies and to be consistent with VAT turnover, thereby justifying the admission and consideration of such evidence despite the AO's criticism. Ratio vs. Obiter: Ratio - where documents admitted under Rule 46A (and a trading account lodged with return) furnish a coherent manufacturer/brand-wise reconciliation that explains consolidated figures and are corroborated by statutory returns (VAT), they merit acceptance and can overturn AO's adverse inferences. Obiter - observations on the AO/JAO's view of 'after-thought' are recorded but rejected on the facts when independent corroboration exists. Conclusions: The Tribunal upheld the admission and substantive consideration of the reconciliation and trading account and accorded them decisive weight to overturn the additions; it rejected the AO's characterization of the documents as inadmissible after-thoughts insofar as the reconciliation and VAT corroboration explain the figures. Issue 3 - Legality of AO treating sub-heads/brands as separate products Legal framework: Taxation additions based on stock/purchase/sales discrepancies require correct identification and classification of items; factual mischaracterisation vitiates conclusions drawn. Precedent treatment: Lower authorities accepted AO's treatment; Tribunal reviewed factual matrix de novo on record. Interpretation and reasoning: The Tribunal held that the AO's treatment of manufacturer/brand-wise notations as independent products rather than as sub-heads of parent products was a factual error of fundamental importance. That error produced distorted quantitative comparisons and resultant additions. The correct approach is aggregation of brand-wise figures to reconcile with consolidated parent-product figures, which the assessee's trading account and reconciliation demonstrated. Ratio vs. Obiter: Ratio - AO cannot justify additions based on comparisons that conflate consolidated parent balances with brand-wise sub-ledgers; correct reconciliation of parent and sub-head figures must precede any adverse inference. Conclusions: The Tribunal directed deletion of additions premised on the AO's misclassification and remitted no further enquiry on that issue, having found the reconciliation complete and corroborated. Issue 4 - Weight of remand report/JAO verification that documents lacked bills/vouchers or GST/VAT matching Legal framework: Remand reports and verifications by subordinate officers are relevant but not conclusive; Tribunal evaluates totality of record including statutory returns and trading accounts. Precedent treatment: CIT(A) had called for remand report; JAO/AO criticized the documents; Tribunal examined entire record. Interpretation and reasoning: While acknowledging the JAO's observations, the Tribunal gave primacy to the tangible reconciliation in the trading account and the VAT return turnover summary which corroborated the assessee's disclosures. On balance, the Tribunal found the AO/JAO's negative assessment of evidentiary support insufficient to sustain additions where documentary and statutory return reconciliation explained the alleged shortfalls. Ratio vs. Obiter: Ratio - a remand report criticizing documents as after-thoughts does not withstand scrutiny where independent statutory returns and original trading accounts substantiate the reconciliation; the credibility and explanatory power of the material on record determine outcome. Conclusions: The Tribunal did not accept the remand report's adverse import as a ground to sustain additions and directed deletion of the contested amounts. Issue 5 - Applicability of Section 115BBE rate (60%) for AY 2017-18 Legal framework: Section 115BBE prescribes tax on income assessed under specified sections; legislative amendment increased rate to 60% w.e.f. a specified date. Precedent treatment: CIT(A) relied on High Court decision (Kerala HC) holding enhanced rate applicable for AY 2017-18 onwards. Interpretation and reasoning: The Tribunal noted the CIT(A)'s reliance on the High Court decision and observed that the enhanced rate of 60% applies to the assessment year in question; the assessee's contention on inapplicability was rejected by the CIT(A). Ratio vs. Obiter: Obiter in present appeal since primary dispute disposed on factual reconciliation; nevertheless, Tribunal records that the enhanced rate under Section 115BBE as construed by the High Court was correctly applied by the AO/CIT(A) for the assessment year where relevant. Conclusions: The Tribunal upheld the conclusion that Section 115BBE at the enhanced rate applies to the assessment year, noting the point was rightly addressed at CIT(A) though the additions under Sections 69A/69C were vacated on factual grounds.