MAHMOOD ALAM ,KOLKATA vs. ACIT, CIRCLE - 29, KOLKATA

This appeal filed by the assessee is directed against the order of ld. Commissioner of Income Tax (Appeals)-5, Kolkata dated 09.08.2018.

Ground No. 1 raised by the assessee in this appeal is general in nature, which does not call for any specific adjudication.

Grounds No. 2 & 3 involve a common issue relating to the addition of Rs.18,27,346/- made by the Assessing Officer and confirmed by the ld. Assessment Year: 2007-2008 Mahmood Alam CIT(Appeals) on account of the excess stock found during the course of survey.

The assessee in the present case is an individual, who is engaged in the business of manufacturing and export of leather bags and wallets. The return of income for the year under consideration was filed by him on 01.11.2007 declaring total income of Rs.33,71,900/-. A survey under section 133A was carried out at the business premises of the assessee on 26.02.2007. During the course of survey, stock available at the business premises of the assessee was physically verified and as per the inventory prepared by the survey team, the same was valued at Rs.3,13,76,527/-. Although no stock register was maintained by the assessee, stock as per the books of account of the assessee as on the date of survey was worked out by the survey team by taking into consideration the opening stock as well as purchases and sales till 26.02.2007 at Rs.2,95,49,181/-. There was thus an excess stock of Rs.18,27,346/- found during the course of survey, which the assessee failed to explain. Even during the course of assessment proceedings, the Authorized Representative of the assessee could not offer any satisfactory explanation in respect of the excess stock of Rs.18,27,346/- found during the course of survey. The Assessing Officer, therefore, added the said amount to the total income of the assessee in the assessment completed under section 143(3) of the Act vide his order dated 30.12.2009.

The addition made by the Assessing Officer on account of the alleged excess stock found during the course of survey was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and since the submission made on behalf of the assessee in support of his case on this issue was not found acceptable by the ld. CIT(Appeals), he confirmed the addition made by the Assessing Officer for the following reasons given in his impugned order:- “I have considered the submission of the appellant and perused the relevant assessment records. The A.O. had added 2 Assessment Year: 2007-2008 Mahmood Alam

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The ld. Counsel for the assessee has reiterated before the Tribunal the submissions made on behalf of the assessee before the ld. CIT(Appeals) on this issue. However, as rightly pointed out by the ld. D.R., the said submissions has already been duly considered by the ld. CIT(Appeals) and rejected by giving cogent and convincing reasons. The ld. Counsel for the assessee has also contended that the stock of finished goods was valued by the survey team at selling price and not at cost. In this regard, he has invited our attention to the list of finished goods prepared by the survey team (copy at page no. 32 of the paper book) and submitted that the Assessing Officer may be directed to verify the stand of the assessee. It is, however, observed that no such stand was taken by the assessee either before the Assessing Officer during the course of assessment proceedings or even before the ld. CIT(Appeals) during the course of appellate proceedings. There is also no evidence brought on record by the assessee in the form of relevant bills to support and substantiate his stand that the stock of finished goods was valued by the survey team at selling price and not at cost. We, therefore, find no merit in the contention raised by the ld. Counsel for the assessee on this issue and rejecting the same, we uphold Assessment Year: 2007-2008 Mahmood Alam the impugned order of the ld. CIT(Appeals) confirming the addition made by the Assessing Officer on account of excess stock found during the course of survey. Grounds No. 2 & 3 of the assessee’s appeal are accordingly dismissed.

In Ground No. 4, the assessee has challenged the addition of Rs.2,01,008/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of the estimated profit from the sale of excess stock presumed to have been made by the assessee.

In the assessment completed under section 143(3) of the Act, the Assessing Officer presumed that the excess stock found during the course of survey must have been sold by the assessee outside the books of account and such sale should have generated disclosed profits to the assessee. He accordingly applied gross profit rate of 11% to the excess stock of Rs.18,27,346/- and made an addition of Rs.2,01,008/- to the total income of the assessee on account of the undisclosed profit. On appeal, the ld. CIT(Appeals) confirmed the said addition made by the Assessing Officer.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As rightly submitted by the ld. Counsel for the assessee, the excess stock found during the course of survey having been added to the total income of the assessee as unexplained investment, the same became part of the stock of the assessee as incorporated in his books of account and in the absence of any evidence to show that it was sold by the assessee outside the books of account generating any undisclosed profit to the assessee, the addition of Rs.2,01,008/- made by the Assessing Officer was purely based on assumptions and surmises and the ld. CIT(Appeals) was not justified in confirming the same. We, therefore, delete the said addition made by the Assessment Year: 2007-2008 Mahmood Alam Assessing Officer and confirmed by the ld. CIT(Appeals) and allow Ground No. 4 of the assessee’s appeal.

As regards the issue involved in Ground No. 5 relating to the disallowance of Rs.44,558/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) out of telephone expenses, it is observed that the said disallowance being 10% of the total telephone expenses of Rs.4,45,576/- claimed by the assessee was made by the Assessing Officer on account of personal uses of telephone by the assessee. Although the ld. Counsel for the assessee has submitted that the disallowance so made by the Assessing Officer at 10% is excessive and unreasonable, we are of the view that the disallowance of 10% of the total telephone expenses claimed by the assessee for personal uses is quite fair and reasonable. Having regard to all the facts and circumstances of the case including the fact that the assessee was carrying on the business in his proprietary capacity where the personal usage could not be ruled out in the absence of any record maintained by the assessee in the form of call register, etc. to show that this substantial expenditure on telephone was wholly and exclusively incurred for the purpose of business. We accordingly uphold the impugned order of the ld. CIT(Appeals) confirming the disallowance made by the Assessing Officer out of telephone expenses and dismiss Ground No. 5 of the assessee’s appeal.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on March 18, 2020.