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Income Tax Appellate Tribunal, ‘’ A’’ BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-5, Ahmedabad, dated 23/12/2015 (in short “Ld. CIT(A)”) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dt. 12/03/2014 relevant to the Assessment Year 2011-2012.
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The assessee has raised following grounds of appeals
1.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the additions of Rs.21,20,240/- on account of the alleged difference in stock. 1.1 The learned Commissioner of Income Tax (Appeals) ought to have appreciated that the all the items of stock were of perishable nature and totally impracticable to hold such a huge stock. The appellant prays that the arbitrary additions made under this head may be deleted. 2.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the additions of Rs.49,39,400/- on account of the allegedly unaccounted receivables. 2.1 The Commissioner (Appeals) brushed aside the explanation that the ' entire amount of receivables cannot be treated as income and the income ought to have been assessed by applying the normal GP rate. The appellant, therefore, prays that additions made under this head are totally arbitrary, unjustifiable and deserve to be deleted. 3.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the disallowance of Remuneration to Partners amounting to Rs.1,53,346/- on the ground that the same is not permissible under section 40b of the I T Act. 4.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the initiation of penalty proceedings under section 271(l)(c) of the Income Tax Act, 1961 for the alleged concealment and/or furnishing of inaccurate particulars of income. 5.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the charging of interest under section 234A, 234B and 234C of the Income Tax Act, 1961.
6.0 The appellant craves leave to add to, alter, delete or modify the above ground of appeal either before or at the time of hearing of this appeal.
For the purpose of adjudication, we have clubbed the ground Nos. 1 and 2 raised by the assessee. The issue raised by the assessee is that learned CIT (A) erred in confirming the order of the AO by sustaining the addition of Rs. 21,20,240/- and Rs.49,39,400/- on account of discrepancy in the stock and receivables.
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The facts in brief are that the assessee in the present case is a partnership firm and engaged in the in whole sale business of vegetables and grains. There was a survey conducted under section 133A of the Act, at the business premises of the assessee dated 07th January 2011. On the date of survey, the physical stock found therein was inventoried as detailed under:
Items Quantity (In kgs) Price (Rs.) Value (Rs) Garlic 324 bags x 35 = 11340 160 18,14,400 Onion 286 bags x 40 = 11440 37 4,23,280 Potato Indore 453 bags x 60 = 27180 8 2,17,440 Potato Jalandhar 72 bags x 50 = 3600 Total 24,78,520
3.1 Whereas the value of stock in the books of account of the assessee on the date of survey stand at Rs 3,58,280/- thus leading to a difference of Rs. 21,20,240/- (Rs. 24,78,520.00 – 3,58,280.00)
3.2 Further during the course of survey a lose sheet, bearing Annexure A-10 was also found, reflecting the receivables from certain parties amounting to Rs. 51,52,720/- only.
3.3 On confrontation, the managing partner Shri Rahimbhai A. Chhedawala in the statement furnished under section 133A of the Act, vide question number 15 to 17 has admitted that such excess stock and receivable are part of unaccounted business and agreed to disclose such discrepancy as additional income. But the assessee in the income tax return filed dated 30th September 2011 has only offered an amount of Rs. 2,13,320/- out of total receivables of Rs. 51,52,720/- and offered no income on account of difference in stock.
3.4 On question by the AO, the assessee with respect to difference in stock submitted that the survey team has valued the stock on the date of survey in arbitrary manner. It was also contended that, it is dealing in the perishable goods
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and therefore it is not practicable for it to restore such huge value of stock. Further the survey team has not pointed out any discrepancy in the purchases made by it. Accordingly the assessee has not disclosed additional income in the income tax return qua the difference found in the value of stock on the date of survey.
3.5 The assessee, in relation to receivables submitted that such receivables are representing the unaccounted sales which cannot be the income in its entirety. At the most the element of gross profit embedded in such sales can be brought to tax. Accordingly the assessee offered an income of Rs. 2,13,320/- representing the gross profit embedded in such sales
However, the AO disregarded the contention of the assessee by observing as under: 1. The quantity of the stock was found physically by the survey team during the survey proceedings in the presence of the partner of the firm which was accordingly valued. 2. The major discrepancy with respect to the stock found relates to the onion and garlic which are not immediately perishable goods. 3. The impugned income on account of stock and receivables represents unaccounted income which was also admitted by the assessee during the survey proceedings. Thus such unaccounted income is to be considered as deemed income of the assessee and therefore no expense against the same can be allowed. 4.1 Accordingly the AO made addition of Rs. 21,20,240 on account of discrepancy in stock and Rs. 49,39,400/- ( 51,52,720 - 2,13,320) being balance amount of receivables.
Aggrieved assessee preferred an appeal to the learned CIT (A).
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The assessee before the learned CIT (A) besides reiterating the submissions as made before the AO also contended that the partner Shri Rahimbhai A. Chhedawala whose statement was recorded was not versed with the technicality of income tax law. Hence he out of fear and pressure of survey agreed to disclose additional income on the alleged discrepancy.
However the learned CIT (A) disregarded the contention of the assessee and confirmed the order of the AO by observing as under: “there was a difference of Rs, 21,20,240/- in the stock 'declared as per the books of the assessee and as found on physical verification. As an acknowledgement that the physical stock found ar the business premises of the assessee during action u/s 133A(1), was correct and accurate and that it was verified before him, Shri Rahimbhai A. Chhedawala, partner, has also signed on the relevant Annexure prepared at the time of the survey. Not only this, the same was also acknowledged and accepted by the partner Shri Rahimbhai A. Chhedawala in his statement during the survey, in response to question no. 17. Even if, no reliance is placed on the partner's statement at the time of the survey, the physical evidence in the form of the relevant Annexure for Stock Inventory, having partner's sign, cannot be ignored as its evidentiary value has to be accepted. Assessee's argument that the partner was under stress due to survey is of no relevance, as the Assessing Officer has not based the addition on this account solely on the statement of the partner Shri Rahimbhai A. Chhedawala, but has relied on physical evidence in the form of inventory of the actual physical stock available at the time of the survey proceedings. Assessee's arguments in this regard, stating that the stock was actually not available during survey, it is physically impossible to stock so much these items as they are perishable in nature, are after- thought and are not valid. All the traded items like potato, onion, garlic have longer shelf life as compared to other vegetables and stocking of these items in periods of scarcity is not unusual. Consequently, assessee's contention that he could not have maintained unusually high stocks of these items as the same were perishable, cannot be accepted. There is hard evidence on record that the physical stock, found at the time of the survey, was far more than the recorded stock and the same was verified in the presence of the partner himself and that the physical stock found during survey was in excess of stock as per books by Rs. 21,20,240/-. The assessee has failed to reconcile the difference. In view of the above discussion, I have no hesitation in upholding the order of the Assessing Officer in this regard. The assessee fails on this ground of appeal. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx “There is concrete evidence on record in the form of impounded pages 20 to 32 of Ann. A-10, that these amounts represent unaccounted income of the assessee. The assessee has failed to justify why it has offered only 4.57% on these receivables to tax. The assessee has himself accepted unaccounted income of Rs. 2,35,479/- on this account. It has offered gross profit @ 4.57% to tax, which means that out of total receivables of Rs. 51,52,720/-, Rs. 2,35,479/- is unaccounted profit and rest of Rs.
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49,17,241/- is its expenditure. However, no proof of unaccounted expenditure of Rs. 49,17,241/- has been submitted by the assessee. All the regular expenses incurred by the assessee were already accounted for in its regular Profit and Loss Account. Since the assessee has failed to establish that it had incurred expenses of Rs. 49,17,241/-, it cannot be accepted that its profit is limited to 4.57% of the receivables. Since all the expenses have already been debited to Profit and Loss account, in the absence of any evidence, no further allowance can be made for additional expenses and whole of the receivables of Rs. 51,52,720/- must be treated as income of the assessee. Since the assessee had already offered a sum of Rs. 2,35,479/-, it was the duty of the Assessing Officer to tax the balance of Rs. 49,17,241/-, which he has rightly done in the impugned order u/s 143(3). In view of this, I have no reason to interfere with the order of the Assessing Officer in this regard and the order is upheld. The assessee fails on this ground of appeal.”
Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.
The learned AR before us submitted that the assessee was engaged in the unaccounted business of vegetables and grains in wholesale. Accordingly he contended that only the element of profit embedded in such amount of receivables and discrepancy in the stock can be added to the total income of the assessee.
On the other hand the learned DR before us vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, during the course of survey the discrepancies were found with respect to the ‘Receivables’ and the ‘physical stock’. The word receivables in connection with the business denotes/refers to the sundry debtors which are generated against the sales made by the assessee on credit. Similarly, the physical stock found during the survey represents the purchases made by the assessee. Undoubtedly the stock cannot be generated in the business without effecting the purchases. Thus what is transpired from the findings of the authorities below that the assessee was engaged in the unaccounted business, meaning thereby, the income generated by the assessee from such activity has to be brought to tax. This fact can also be verified from the statement recorded by the survey
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team during the survey proceedings where the partner Shri Rahimbhai A. Chhedawala while replying to Question number 15 and 17 admitted that the assessee has made unaccounted sales and purchases.
9.1 The next question arises how to determine the income from such unaccounted business. Can the entire amount of receivables of Rs. 51,52,720/- and the value of excess stock (Rs. 21,20,240/-) be treated as income of the assessee from the unaccounted business. In this regard, we note that the amount of receivables represents the sales which cannot be treated as income in the entirety. In our considered view only a percentage of profit embedded in such amount of receivables can be brought to tax. In this regard we find support and guidance from the order of the Hon’ble Gujarat High Court in the case of CIT vs. President Industries reported in 258 ITR 654 where it was directed to make the addition only to the extent of gross profit. The relevant extract of the order is reproduced as under: ‘The amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales. The sales only represent the price received by the seller of the goods for the acquisition of which it has already incurred the cost. It is the realisation of excess over the cost incurred that only forms part of the profit included in the consideration of sales. Therefore, unless there is a finding to the effect that the investment by way of incurring cost in acquiring goods which have been sold has been made by the assessee and that has also not been disclosed, the question whether entire sum of undisclosed sales proceeds can be treated as income, answers by itself in the negative.”
9.2 Now the question arises whether the excess stock found during the survey represents the unaccounted income in its entirety. In this regard we note that such unaccounted stock represents the unaccounted purchases which were made for unaccounted sales in future. As such, the unaccounted purchases cannot be treated as unaccounted income in its entirety. To our humble understanding it is the only profit percentage which needs to be brought to tax on account of such unaccounted purchases/excessive stock found during survey. In holding so, we draw support and guidance from the judgment of Hon’ble Gujarat High Court in case of CIT vs. Sathyanarayn P. Rathi reported in [2013] 38 taxamann.com 402, wherein it was held as under:
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“5. From the record, we noticed that the Commissioner (Appeals) as well as the Tribunal found that the purchase of raw-material, in which the assessee was trading, were only made, but not from the disclosed sources. In other words, the case against the assessee was that the purchases were made in the grey market through cash payment and some entries were obtained from certain suppliers who had not sold such goods. 6. The present case, thus, being one of only purchase but not from disclosed sources, it would be only profit element embodied in such purchase which could be added in the income of the assessee and thus, rightly so done by the Commissioner (Appeals) and the Tribunal. 7. If this be our conclusion, only question arises whether such profit element should be estimated at the rate of 30% or 12½%. Whenever such a question arises, some reasonable estimation is always permissible. Hardly any question of law on such aspect would arise. Merely, it is pointed out that the assessee was a trader and that the Tribunal retained 12½% of the purchase towards its possible profit, we do not find any reason to entertain the appeal. In the result, Tax Appeal is dismissed”
9.3 We also draw support and guidance from the order of the Hon’ble Calcutta High Court in the case of PCIT vs. Subarna Rice Mill reported in [2018] 96 taxmann.com 286 wherein it was held as under: “9. According to the Appellate Tribunal the value of the entire quantity of additional stocks that were discovered in course of the survey operation could not be regarded as the additional income of the assessee and amenable to tax. There was a specific ground taken before the Appellate Tribunal, which was a legal question, as to whether the undisclosed purchase could be taken as the additional income without reference to the possible sale of the paddy when converted. 10. The assessee refers to a judgment of the Gujarat High Court Vijay Trading v. ITO [2016] 388 ITR 377/76 taxmann.com 366. The principle enunciated in such judgment is that when undisclosed purchases of such nature are discovered, it is only the profit embedded in the transaction which can be added to the total income. The Gujarat High Court relied on some of its previous judgments to hold that "not the entire purchase price but only the profit element embedded in such purchases can be added to the income of the assessee." 11. In the circumstances and particularly since the factual findings rendered by the Commissioner (Appeals) as to the quantum of additional stocks have now been restored, the order impugned on the methodology for the ascertainment of the income which escaped assessment would pass muster. The Appellate Tribunal merely directed the gross profit that the additional purchase was capable of generating to be regarded as the additional income for tax to be assessed on such basis. Such view of the Appellate Tribunal does not call for any interference”.
9.4 Before parting, it is important to highlight the fact that such unaccounted business requires the investments. However none of the authority below, has touched this aspect. Therefore, we do not find any reason to comment on this.
9.5 Now the last issue arises what rate of profit should be applied to determine the income on such unaccounted receivables and unaccounted stock. For this
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purpose, we note that the assessee claimed its gross profit ratio at the rate of 4.57% of the sales which has not been disputed by the Revenue. Thus we are of the view that justice will be served to the revenue as well as to the assessee if the amount of receivables and excessive stock found during survey brought to tax at the rate of 5% of such amount put together. Hence the grounds of appeal of the assessee are partly allowed.
The 3rd issue raised by the assessee is that the learned CIT (A) erred in confirming the order of the AO by sustaining the addition of Rs. 1,53,346/- on account of remuneration to the partners.
At the outset the learned AR for the assessee before us submitted that he has been instructed by the assessee not to press this ground of appeal on account of the smallness of amount. Accordingly we dismiss the same.
In the result the appeal filed by the assessee is partly allowed.
Order pronounced in the Court on 19/08/2020 at Ahmedabad.
-Sd- -Sd- (RAJPAL YADAV) (WASEEM AHMED) VICE PRESIDENT ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 19/08/2020 manish