2022 (5) TMI 1619 - AT - Income Tax

Addition based on higher consumption of electricity and lower production - undisclosed amount of paddy milled by the assessee - assessee had failed to furnish quantitative details of paddy milled rice produced by-products for specific period asked by AO - CIT(A) deleted addition - HELD THAT - Addition on the basis of suspicion and noticing the factum of higher consumption of electricity and lower production which could be a case of strong suspicion but it is also settled law that suspicion however strong cannot take the place of evidence against the assessee for making a sustainable addition. From the relevant part of the CIT(A) order we observe that CIT(A) has accepted the explanation of the assessee towards higher electricity consumption in the relevant assessment year which was frequent breakdown and longer load of electricity that has then to be used to restart the milling machinery which consumes higher electricity. CIT(A) also observed that the AO calculated the undisclosed amount of paddy milled by the assessee and enhanced his income accordingly without bringing any evidence on record to suggest a suppression of the stock of paddy by the assessee and the books of accounts have not been rejected by the AO u/s.145(3) of the Act which implies an acceptance of the results therein by the AO. AO merely relied on the figures of electricity consumption available in the internet without verifying the facts and circumstances of the case of the assessee and he rightly held that this is not a plausible approach of the AO. In view of foregoing discussions we reach to a logical conclusion that the CIT (A) was right in deleting the addition made by the AO on the basis of on suspicion conjectures and surmises without bringing any adverse material and positive evidence against the assessee on record to show that the assessee has claimed higher electricity consumption to avoid tax payment. Ground No.1 of the revenue is rejected. Capital contribution by partners - failure to explain the source and nature of cash deposits immediately before transfer and they had not shown adequate in their ITRs for Capital contribution - CIT(A) deleted addition observing that the assessee firm had duly discharged the onus cast upon it by the AO to establish the identity of the partners and their creditworthiness alongwith copies of I.T.returns of three partners copies of bank accounts from where cheques were issued to the assessee firm ledger accounts of the partners - CIT(A) observed that If the AO harboured doubts about the credit entries in the bank accounts of the respective partners then it was open to him to re-open the assessments of these partners and make addition in their hands after conducting inquiries - HELD THAT - In this regard we are in agreement with the conclusions arrived at by the ld CIT(A) and in our considered opinion if the AO was not satisfied with the creditworthiness of the partners then he was eligible to take action against the partners under the relevant provisions of the Act but no addition can be made in the hands of the assessee firm in view of preposition rendered in the case of Odedara Constructions ( 2014 (2) TMI 130 - GUJARAT HIGH COURT and case of Jaiswal Motor Finance ( 1983 (2) TMI 47 - ALLAHABAD HIGH COURT . Respectfully following the same we are compelled to hold that the conclusions arrived at by the CIT(A) does not carry any ambiguity perversity and inferiority. Thus we uphold the same. Ground No.2 of the revenue is rejected.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Justification of addition based on electricity consumption to estimate production and purchases.
3. Justification of addition based on unexplained capital contributions by partners.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal filed by the revenue was barred by a limitation of 111 days. The revenue filed a condonation petition citing COVID-19 as the reason for the delay. The tribunal was satisfied with the reasons provided and condoned the delay, admitting the appeal for adjudication.

2. Addition Based on Electricity Consumption:
The revenue challenged the CIT(A)’s decision to delete the addition made by the AO based on electricity consumption. The AO had used the average electricity consumption from the preceding two years to estimate the production and corresponding purchases, arguing that the higher consumption of electricity indicated suppressed production.

The assessee countered that the AO’s calculation was based on surmises and suspicion, without concrete evidence. The assessee maintained audited books of accounts, and the AO did not reject these books under section 145(3) of the Income Tax Act. The assessee provided detailed figures of electricity consumption for the past three years and explained that frequent power breakdowns and construction activities contributed to higher electricity usage.

The tribunal noted that the AO’s addition was based on suspicion and not supported by tangible evidence. The CIT(A) had accepted the assessee’s explanation regarding higher electricity consumption due to frequent breakdowns and construction activities. The tribunal upheld the CIT(A)’s decision, stating that suspicion, however strong, cannot replace evidence for making a sustainable addition. The tribunal cited several judicial precedents supporting the view that mere variance in electricity consumption cannot justify an addition for suppressed production. Therefore, the tribunal found no infirmity in the CIT(A)’s order and dismissed the revenue’s ground.

3. Addition Based on Unexplained Capital Contributions:
The revenue contended that the CIT(A) was not justified in deleting the addition made by the AO regarding unexplained capital contributions by the partners. The AO had treated the capital introduced by the partners as unexplained cash credits under section 68 of the Act, arguing that the source of these contributions was not satisfactorily explained.

The assessee argued that it had provided all necessary documents, including the partners’ bank accounts, income tax returns, and evidence of creditworthiness. The CIT(A) observed that the AO did not bring any material to indicate that the partners lacked the capacity to introduce the capital. The CIT(A) noted that if the AO had doubts about the credit entries in the partners’ bank accounts, he could have reopened the assessments of the partners and made additions in their hands.

The tribunal agreed with the CIT(A)’s reasoning, emphasizing that the assessee had discharged its onus by providing sufficient evidence of the partners’ identity and creditworthiness. The tribunal cited judicial precedents, including decisions from the Gujarat High Court and Allahabad High Court, which held that if the AO is not satisfied with the partners’ explanations, he should assess the unexplained income in the partners’ hands, not in the firm’s hands. The tribunal upheld the CIT(A)’s order, finding no ambiguity or infirmity in the decision, and dismissed the revenue’s ground.

Conclusion:
The tribunal dismissed the revenue’s appeal, upholding the CIT(A)’s decisions on both the issues of addition based on electricity consumption and unexplained capital contributions. The tribunal emphasized the need for concrete evidence rather than suspicion to justify additions under the Income Tax Act. The order was pronounced on 17/05/2022.