2020 (9) TMI 28 - AT - Income Tax

Discrepancy in the stock and receivables - survey conducted under section 133A of the Act at the business premises of the assessee - HELD THAT - 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 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. Determine the income from such unaccounted business - Can the entire amount of receivables and the value of excess stock be treated as income of the assessee from the unaccounted business? - HELD THAT - 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 in the case of CIT vs. President Industries 1999 (4) TMI 8 - GUJARAT HIGH COURT where it was directed to make the addition only to the extent of gross profit. Whether the excess stock found during the survey represents the unaccounted income in its entirety - 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 2013 (6) TMI 257 - GUJARAT HIGH COURT What rate of profit should be applied to determine the income on such unaccounted receivables and unaccounted stock? - 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.

Issues Involved:
1. Addition of Rs. 21,20,240 on account of alleged difference in stock.
2. Addition of Rs. 49,39,400 on account of allegedly unaccounted receivables.
3. Disallowance of remuneration to partners amounting to Rs. 1,53,346 under section 40b of the IT Act.
4. Initiation of penalty proceedings under section 271(l)(c) for alleged concealment and/or furnishing of inaccurate particulars of income.
5. Charging of interest under sections 234A, 234B, and 234C of the IT Act.

Detailed Analysis:

Issue 1: Addition of Rs. 21,20,240 on Account of Alleged Difference in Stock
The assessee, a partnership firm engaged in wholesale business of vegetables and grains, was subject to a survey under section 133A of the IT Act on January 7, 2011. The survey revealed a physical stock valued at Rs. 24,78,520, while the stock recorded in the books was Rs. 3,58,280, leading to a discrepancy of Rs. 21,20,240. The managing partner admitted the discrepancy during the survey but later contended that the stock valuation was arbitrary and impractical due to the perishable nature of goods. The AO disregarded this contention, noting that the stock of onions and garlic, which are not immediately perishable, was found in significant quantities. The CIT(A) upheld the AO's decision, emphasizing the physical evidence and the partner's acknowledgment during the survey.

The Tribunal, however, noted that the excess stock represents unaccounted purchases for future sales, and only the profit element embedded in such stock should be taxed. Citing precedents from the Gujarat High Court and Calcutta High Court, the Tribunal concluded that only a percentage of profit should be added to the income, not the entire stock value. The Tribunal decided to apply a profit rate of 5% on the excess stock value.

Issue 2: Addition of Rs. 49,39,400 on Account of Allegedly Unaccounted Receivables
During the survey, a loose sheet (Annexure A-10) reflecting receivables of Rs. 51,52,720 was found. The managing partner admitted these as unaccounted receivables but only offered Rs. 2,13,320 as income, representing the gross profit. The AO added the balance amount of Rs. 49,39,400 to the income, which was upheld by the CIT(A), who noted the lack of evidence for any unaccounted expenditure.

The Tribunal agreed that the receivables represent unaccounted sales, but only the profit element should be taxed. Referring to the Gujarat High Court's judgment in CIT vs. President Industries, the Tribunal ruled that only the profit embedded in the receivables should be added to the income. The Tribunal decided to apply a profit rate of 5% on the total receivables.

Issue 3: Disallowance of Remuneration to Partners Amounting to Rs. 1,53,346
The assessee did not press this ground of appeal due to the smallness of the amount. Therefore, the Tribunal dismissed this ground.

Issue 4: Initiation of Penalty Proceedings under Section 271(l)(c)
The Tribunal did not specifically address this issue in the detailed analysis, implying that the initiation of penalty proceedings would follow the outcome of the substantive additions.

Issue 5: Charging of Interest under Sections 234A, 234B, and 234C
The Tribunal did not specifically address this issue in the detailed analysis, implying that the interest charges would follow the outcome of the substantive additions.

Conclusion:
The Tribunal partly allowed the appeal, deciding that only the profit element embedded in the unaccounted stock and receivables should be taxed at a rate of 5%. The disallowance of remuneration to partners was dismissed as it was not pressed by the assessee. The issues related to penalty proceedings and interest charges were not specifically addressed, implying they would follow the substantive additions' outcome.

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