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2023 (3) TMI 1577 - AT - Income TaxSurvey proceedings u/s 133A - excess stock - scope of survey statement recorded on oath - Addition based solely on the basis of statements recorded u/s 133A especially when the assessee has retracted such statements - HELD THAT - As observed by the lower authorities and rightly so the assessee had in the garb of reconciliation of the excess stock sought to nullify the disclosure of additional income towards discrepancies in stock that had emerged in the course of survey proceedings. Also we find substance in the claim of the DR that retraction of the statement of the assessee in the course of the survey proceedings was merely based on an afterthought. We say so for the reason that though it is the claim of the assessee on one hand that as the impugned statement in the course of the survey proceedings was recorded under confused state of mind while for at the same time she had in her return of income admitted the additional income of Rs. 10 lac towards unexplained investment that was disclosed in the same statement. Claim of the AR that the impugned variance in the value of the closing stock as had been arrived at by survey officials on the basis of tentative trading account prepared on 03.03.2011 as against that found available on the basis of physical stock taking was inter alia attributable to the reasons that purchase of Rs. 3, 29, 702/- had remained unrecorded in the books of account on the date of survey i.e. on 03.03.2011 we are unable to persuade ourselves to subscribe to the said unsubstantiated claim. Assessee had neither before the lower authorities nor before us placed on record any such material which would substantiate the authenticity of his aforesaid claim. Also on the same footing the unsubstantiated claim of the assessee that certain direct expenses were not recorded in the tentative trading account that was compiled in the course of the survey proceedings can also not be accepted in absence of any material in support thereof. Thus we are unable to persuade ourselves to subscribe to the contentions advanced by the Ld. AR wherein he had tried to explain the reasons leading to the impugned variance in the stock that was found lying with the assessee on the basis of physical stock taking as against that disclosed in her books of accounts at the time of survey proceedings. Thus the Ground of appeal No. 1 raised by the assessee is dismissed. Disclosure as made by the assessee towards excess cash found in the course of the survey conducted on 03.03.2011 u/s. 133A - We are of the considered view that as the assessee had failed to come forth with any plausible explanation as regards the said variance therefore no infirmity could be related to the orders of the lower authorities who had rightly made/upheld the addition to the said extent in the hands of the assessee. Thus the Ground of appeal No. 2 raised by the assessee is dismissed in terms of my aforesaid observations. Excess stock found on survey u/s. 133A only on the basis of survey statement recorded on oath - A.Y. 2011-12 - Incorrect figure of opening stock - HELD THAT - We find substance in the claim of the Ld. AR that the lower authorities were not justified in taking the figure of the opening stock i.e. on 01.04.2010 at Rs. 75, 16, 539/- as against the value of closing stock of Rs. 1, 09, 82, 356/- (supra) reflected in the audited account of the assessee on 31.03.2010. Nothing has been brought to our notice which would reveal that the closing stock of Rs. 1, 09, 82, 356/- (supra) on 31.03.2010 as disclosed in the audited financial statements of the assessee for the immediately preceding year i.e F.Y 2009-10 was incorrect and thus was not to be acted upon. We thus in terms of our aforesaid observations direct the A.O. to recast the aforesaid tentative trading account that was compiled in the course of the survey proceeding on 03.03.2011 and accordingly rework out the value of the closing stock on 03.03.2011. Incorrect amount of purchase - As the Ld. AR had failed to substantiate his said claim on the basis of documentary evidence therefore we finding no infirmity in the view taken by the lower authorities uphold the same to the extent they had rejected the same on the said count. Applying of GP rate 24.14% as against actual/correct GP rate of 5.8% - We are principally not in agreement with the aforesaid methodology adopted for compiling of the tentative trading account on the date of survey i.e 03.03.2011 i.e by applying of an ad-hoc GP rate to the sales (recorded) of the assessee upto the date of survey and taking the closing stock as the balancing figure. The aforesaid methodology in our considered view militates against the basic principles of accountancy. Apart from that as the GP rate of the assessee for the immediately preceding year i.e. relevant to A.Y. 2010-11 was 5.83% Page 228 of APB and that for the year under consideration was 5.80% Page 56 of APB therefore on the said count itself we find substance in the claim of the Ld. AR that there could be no justification for adoption of GP rate at 24.14% while preparing the tentative trading account on the date of survey i.e. on 03.03.2011. We thus in terms of our aforesaid observations direct the A.O. to adopt GP rate of 5.8% i.e for the year under consideration while recasting the trading account on the date of survey i.e on 03.03.2011. Indirect income wrongly credited in the trading account - It is though the claim of the Ld. AR that the indirect income of Rs. 11, 33, 994/- was wrongly credited in the tentative trading account that was prepared by the survey officials on the basis of incomplete books of account of the assessee on 03.03.2011 however as the assessee had not only failed to substantiate her aforesaid claim but also had herself held the said income as direct income therefore we are unable to accept the said claim. We thus direct the A.O. to give effect to our aforesaid findings. Thus the Ground of appeal No. 1 raised by the assessee is partly allowed in terms of our aforesaid observations. Disclosure as made by the assessee towards excess cash found in the course of the survey conducted on 03.03.2011 u/s. 133A - We are of the considered view that as the assessee had failed to come forth with any plausible explanation as regards the said variance therefore no infirmity could be related to the orders of the lower authorities who had rightly made/upheld the addition to the said extent in the hands of the assessee. Thus the Ground of appeal No. 2 raised by the assessee is dismissed in terms of my aforesaid observations.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in these consolidated appeals arising from survey proceedings under Section 133A of the Income-tax Act, 1961, and subsequent assessments under Section 143(3) for Assessment Year 2011-12 are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Reliance on statements recorded under Section 133A for additions on excess stock and cash Legal framework and precedents: Section 133A empowers the tax authorities to conduct survey and record statements but does not empower them to record sworn statements. The Hon'ble Supreme Court in CIT v. S. Khader Khan & Son (2013) 352 ITR 480 (SC) held that statements recorded during survey proceedings under Section 133A cannot be treated as conclusive evidence for additions as the officer is not empowered to examine on oath. Similarly, the Kerala High Court in Paul Mathews & Sons v. CIT (2003) 263 ITR 101 (Ker.) held that statements recorded under Section 133A lack evidentiary value as they are not sworn statements. Court's interpretation and reasoning: The Tribunal agreed with these precedents and held that additions solely based on statements recorded under Section 133A cannot stand, especially when the assessee retracts such statements and furnishes audited reconciled accounts. The Tribunal emphasized that a heavy onus lies on the department to produce independent documentary evidence to support additions if the statement is retracted. Application of law to facts: In both appeals, the assessee had initially disclosed excess stock and cash during the survey but later retracted these disclosures, submitting reconciled audited accounts. The AO made additions based on the original statements without independent corroborative evidence. The Tribunal found this approach flawed and held that the AO was obliged to support additions with independent documentary evidence, which was lacking. Treatment of competing arguments: The Revenue argued that the assessee's retraction was an afterthought and the initial disclosure was voluntary and hence additions were justified. The Tribunal noted that while the retraction lacked supporting reasons, the AO's failure to produce independent evidence to support the additions was fatal to the Revenue's case. Conclusion: Additions cannot be sustained solely on the basis of statements recorded under Section 133A when retracted by the assessee, without independent documentary evidence. Issue 2: Valuation of excess stock found during survey and correctness of methodology adopted by survey officials Legal framework and precedents: Valuation of stock must be based on accepted accounting principles and factual correctness. The Tribunal referred to the Punjab & Haryana High Court decision in CIT v. Bhalla Brothers (1981) 10 Tax Law Review 45 (P&H), which held that applying a uniform gross profit (GP) rate arbitrarily for valuation is fallacious and not acceptable. Court's interpretation and reasoning: The Tribunal found the method adopted by survey officials to value closing stock on 03.03.2011 by applying a GP rate of 24.14% on sales and taking closing stock as a balancing figure was incorrect and against accounting principles. The assessee's GP rate was around 5.8% for the relevant period, which should have been applied. Key evidence and findings: The Tribunal examined the audited trading accounts for the relevant period and preceding year, which showed the correct opening stock and GP rate. It found that the survey officials had adopted an incorrect opening stock figure of Rs. 75,16,539/- instead of Rs. 1,09,82,356/- as per audited accounts. The Tribunal held that the opening stock figure from audited accounts could not be ignored. Application of law to facts: The Tribunal directed the AO to recast the tentative trading account prepared during survey using the correct opening stock and GP rate of 5.8%, thereby recalculating the closing stock value. Treatment of competing arguments: The assessee claimed unrecorded purchases and incorrect inclusion of indirect income in the survey trading account. The Tribunal rejected the claim of unrecorded purchases due to lack of documentary evidence but did not accept the claim that indirect income was wrongly credited, as the assessee herself treated it as direct income. Conclusion: The valuation of excess stock as determined by survey officials was incorrect due to wrong opening stock and GP rate. The AO was directed to recast the valuation accordingly. The claim of unrecorded purchases was rejected. Issue 3: Additions on account of excess cash found during survey Legal framework and precedents: Additions on account of unexplained cash found during survey require the assessee to explain the discrepancy satisfactorily. Mere retraction of statement or adjustments without documentary proof cannot be accepted. Court's interpretation and reasoning: The Tribunal noted that the assessee failed to provide any plausible or documentary evidence to explain the excess cash found during survey. The AO rightly rejected the adjustments made post-survey as unsupported. Application of law to facts: In both appeals, the assessee had disclosed excess cash during survey but later retracted and made adjustments without proof. The Tribunal upheld the additions made by the AO on excess cash as the assessee failed to discharge the onus to explain the discrepancy. Treatment of competing arguments: The assessee argued reconciliation and adjustments post-survey, but the Tribunal found these to be afterthoughts without substantiation. Conclusion: Additions on account of excess cash were rightly upheld due to lack of satisfactory explanation and documentary evidence from the assessee. Issue 4: Acceptance of books of account and returned income by AO under Section 145(3) Legal framework and precedents: Section 145(3) empowers AO to reject books of account if not maintained properly or not reflecting true income. Acceptance of books implies acceptance of reconciliation and explanations. Court's interpretation and reasoning: In the first appeal, the AO did not reject the books of account under Section 145(3) but accepted the returned income based on audited reconciled accounts. The Tribunal observed that this acceptance implied acceptance of the assessee's reconciliation and explanations. Application of law to facts: Despite acceptance of books and returned income, the AO made additions based on survey statements. The Tribunal found this inconsistent and held that additions could not be sustained without independent evidence. Conclusion: Acceptance of books and return income by AO negates the basis for additions solely on survey statements. Issue 5: Legality of assessment order passed by non-jurisdictional AO (additional ground withdrawn) The assessee raised a ground challenging the jurisdiction of the AO who passed the assessment order. However, this ground was withdrawn at the hearing and hence not considered. 3. SIGNIFICANT HOLDINGS The Tribunal made the following significant holdings:
Final determinations:
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