ASST CIT PALGHAR CIR PALGHAR, PALGHAR vs. K.K. INFRASTRUCTURE, PALGHAR

The present appeal filed by the revenue is directed against the order passed by the CIT(A)-3, Thane, dated. 15.02.2016, which in itself arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short ‘Act’), dated. 28.03.2014. The revenue had assailed before us the order of the CIT(A) by raising the following grounds of appeal :

Briefly stated, the facts of the case are that the assessee firm which is engaged in the business of construction had filed its return of income on 16.02.2012, declaring total income of Rs. 53,98,130/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2).

The issue involved in the present appeal lies in a narrow compass. Survey action under Sec. 133A was conducted on the assessee on 16.03.2011. During the course of the proceedings the survey team found raw materials valued at Rs. 51,25,042/- which were neither recorded in the books of accounts, nor any purchase bills supporting the same were found. The assessee on being confronted with the aforesaid discrepancy offered an additional income of Rs. 51,25,042/- for the year under consideration. The return of income filed by the assessee for the year under consideration, viz. A.Y 2011- 12, declaring an income of Rs. 53,98,130/-, as claimed by the assessee was inclusive of the additional income of Rs. 51,25,042/- which was offered in respect of the aforesaid unaccounted excess stock of raw materials found at its premises during the course of the survey proceedings. However, the A.O during the course of the assessment proceedings observed that as the assessee had in order to bring the unaccounted stock in its regular books of account debited P a g e | ACIT Vs. M/S K.K. Infrastructure. its ‘Purchase account’ by the amount of additional income (i.e value of unaccounted excess stock of raw materials found during the course of survey proceedings) which resultantly increased the Closing ‘Work in Progress’ (for short Closing ‘WIP’), and on the other hand had credited the respective ‘Capital accounts’ of the partners by the said amount, therefore, the disclosure of the additional income of Rs. 51,25,042/- which was made by the assessee in respect of the unaccounted excess stock of raw material found during the course of the survey proceedings was not offered for tax. The A.O was of the view that as the excess stock of Rs. 51,25,042/- found at the time of survey was purchased by the assessee from his unrecorded sources of income and hence represented its unaccounted income to the said extent, therefore, the assessee ought to have offered the said undisclosed income over and above the income reflected in the profit and loss account, without availing any deduction of any expenditure against the same in its profit and loss account. The A.O on the basis of his aforesaid conviction made an addition of Rs. 51,25,042/- in the hands of the assessee.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The assessee submitted before the CIT(A) that as the unaccounted excess stock of raw materials of the value of Rs. 51,25,042/- found during the course of the survey proceedings were by the year ending 31.03.2011 consumed/utilized in the construction of the residential building project (under construction) of the assesses, therefore, the same formed part of the closing WIP of Rs. 3,50,80,935/- as on 31.03.2011. It was further submitted by the assessee that the net profit of Rs. 53,98,134/- shown in the profit and loss account after charging partners interest and remuneration was inclusive of the amount of disclosure of additional income of Rs.

The CIT(A) during the course of the hearing of the appeal deliberated on the contentions raised by the assessee in the backdrop of the facts available on record. The CIT(A) observed that as the unaccounted stock was not a bogus entry, but rather, duly inventorised unaccounted excess stock of raw materials of Rs. 51,25,042/- found during the course of the survey proceedings conducted on the assessee on 16.03.2011, therefore, the assessee had rightly debited the same to the purchase account and the same resultantly increased the Closing W.I.P for the year ending 31.03.2011 to the said extent, which the assessee was entitled to carry forward as opening WIP of the subsequent year. It was further observed by the CIT(A) that the assessee after debiting the value of the unaccounted stock of excess raw material to the purchases account in its profit & loss account for the year under consideration had given a corresponding credit of the same to the partners capital accounts in their respective profit sharing ratios. The CIT(A) after giving a thoughtful consideration to the aforesaid facts concluded that as the net profit of Rs. 53,98,134/- arrived at by the assessee after charging the remuneration and interest on capital to partners was inclusive of the unaccounted excess stock of raw material which was offered by the assessee as its additional income, therefore, the further addition of the value of the same by the A.O would tantamount to double addition P a g e | ACIT Vs. M/S K.K. Infrastructure. in the hands of the assessee. The CIT(A) on the basis of his aforesaid observations deleted the addition of Rs. 51,25,042/- made by the A.O.

The revenue being aggrieved with the order of the CIT(A) had further carried the matter in appeal before us. The Learned Authorized Representative (for short ‘A.R’) placed heavy reliance on the order passed by the CIT(A). It was submitted by the Ld. A.R that as the assessee had already offered the value of the unaccounted excess stock of raw materials of Rs. 51,25,042/- found during the course of the survey action for tax, therefore, the further addition of the said amount by the A.O had led to double addition in the hands of the assessee, which was rightly deleted by the CIT(A).

We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that it remains as a matter of a conceded fact that unaccounted excess stock of raw material of a value of Rs. 51,25,042/- was found at the premises of the assessee during the course of the survey proceedings conducted on 16.03.2011. That no purchase bills supporting the purchase of the said unaccounted excess stock of raw material were found during the course of the survey proceedings. The assessee in reply to Question No. 11 of his statement recorded under Sec. 133A had came up with a disclosure of additional income in respect of the unaccounted excess stock of raw material of an amount of Rs. 51,25,042/-. We find that the assessee after making the aforesaid disclosure had brought the unaccounted excess stock of raw materials in its books of account by debiting the purchases account and crediting the partners capital account in their respective profit sharing ratios. That as the unaccounted excess stock of raw material of Rs. 51,25,042/- was consumed/utilized in the P a g e | ACIT Vs. M/S K.K. Infrastructure. construction of the residential building project of the assessee (under construction), therefore, the closing WIP of Rs. 3,50,80,935/- as on 31.03.2011 was inclusive of the value of the aforesaid unaccounted excess stock of raw material brought by the assessee in its books of account. We are of the considered view that as the assessee after making a disclosure of the unaccounted excess stock of raw material of Rs. 51,25,042/- had rightly brought the same in its books of account by debiting the purchase account, therefore, the same justifiably increased its closing W.I.P for the year ending 31.03.2011 by the said amount, and as such no infirmity does emerge from the said action on the part of the assessee. However, we find that the assessee while debiting the purchase account by the value of the aforesaid unaccounted excess stock of raw material, had given a corresponding credit to the capital accounts of the partners in their respective profit sharing ratios. We are of the considered view that the disclosure of additional income made by the assessee as regards the unaccounted excess stock of raw materials of Rs. 51,25,042/- found during the course of the survey proceedings was by no means in the nature of purchases made by the assessee from its duly accounted sources, which however had inadvertently remained omitted to be recorded in its books of account. Rather, as per the facts emerging from the records, the disclosure of additional income by the assessee was clearly in respect of unaccounted excess stock of raw materials, purchases of which were made by the assessee from unexplained sources. We find that our aforesaid observation that the assessee had clearly made a disclosure of undisclosed income of Rs. 51,25,042/- in respect of investment made in the excess stock of raw materials found during the course of the survey proceedings is fortified from a perusal of the statement of the assessee recorded during the course of the survey proceedings, as under:

We thus in the backdrop of the aforesaid facts are of the considered view that once the assessee had came forth with a disclosure of additional income in respect of unaccounted excess stock of raw material of Rs. 51,25,042/-, thereupon it was incumbent on its part to have credited the amount of such additional income in its profit and loss account for the year under consideration. However, we find that the assessee had credited the corresponding value of the unaccounted excess stock of raw material in the capital accounts of the partners in their respective profit sharing ratios. We are unable to persuade ourselves to subscribe to the aforesaid methodology adopted by the assessee, as from a prima facie perusal of the aforesaid state of affairs, the fact that the value of the unaccounted excess stock of raw material which was disclosed by the assessee as additional income over and above its normal returned income during the course of the survey proceedings, had not been offered for tax, cannot be ruled out. The claim of the assessee that now when despite there being no sales during the year under consideration a net profit of Rs. 53,98,134/- after charging the remuneration and interest on capital to partners P a g e | ACIT Vs. M/S K.K. Infrastructure. was shown by it, therefore, it could be gathered that the disclosure of additional income of Rs. 51,25,042/- was offered for tax by the assessee, to our considered view does not conclusively dispel the doubts that emerges in respect of the issue under consideration. We thus are of the considered view that as the very basis of showing the net profit of Rs. 53,98,134/- by the assessee during the year under consideration and the fact as to whether the disclosure of additional income of Rs. 51,25,042/- made in respect of the unaccounted excess stock of raw material during the course of the survey proceedings was offered for tax by the assessee, or not, requires thorough verification, therefore, in all fairness restore the matter to the file of the A.O. Before parting, we may further observe that the A.O while adjudicating afresh the issue under consideration shall take cognizance of the proviso of Sec. 69C which debars allowability of deduction of any unexplained expenditure which is deemed to be the income of the assessee. That in case the disclosure of the additional income of Rs. 51,25,042/- made by the assessee in respect of the unaccounted excess stock of raw materials is found to have been offered by the assessee for tax, then, the A.O after categorically recording his observations as regards the same, shall not make further addition of the said amount of Rs. 51,25,042/- in the hands of the assessee. The matter is thus set aside to the file of the A.O for fresh adjudication in terms of our aforesaid observations.