2002 (11) TMI 245 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 10,94,740 on account of estimated net profit at 10% on sales disclosed in the books of account.
2. Addition of Rs. 2,21,183 on account of profit on alleged unaccounted sales of Rs. 9,61,669.
3. Addition on account of sale of scrap outside the books of account.
4. Addition of Rs. 1,04,420 on account of alleged discrepancy (shortage) in the closing stock.
5. Protective basis additions related to the sale of scrap and stock discrepancy.

Detailed Analysis:

1. Addition of Rs. 10,94,740 on Account of Estimated Net Profit:
The Assessing Officer (AO) computed the undisclosed income for AY 1995-96 by applying a net profit rate of 10% on sales of Rs. 1,09,47,397, resulting in Rs. 10,94,740. The AO justified this by referring to the statement of the Director, who mentioned a Gross Profit (GP) rate of 23%. However, the Tribunal found that Chapter XIV-B of the Income-tax Act, which deals with block assessments, does not permit the application of section 145 for estimating income. It was held that undisclosed income should be computed based on material found during the search. Since the sales were recorded in the books, the addition was deleted. The dissenting opinion argued that section 158BH allows for the application of all provisions of the Act, including section 145, and supported the addition based on the Director's admission of under-invoicing.

2. Addition of Rs. 2,21,183 on Account of Profit on Alleged Unaccounted Sales:
The AO added Rs. 2,21,183 for AY 1996-97 based on unaccounted sales of Rs. 9,61,669 to M/s. BPR Texprint, which were not recorded in the sales register. The Tribunal found that the sales were recorded in computerized records, excise duty was paid, and payment was received through cheque, indicating no undisclosed income. The dissenting opinion supported the addition, citing the Director's admission of receiving "on money" and corroborative evidence from loose papers seized during the search.

3. Addition on Account of Sale of Scrap Outside the Books of Account:
The AO made an addition on a protective basis for the sale of scrap outside the books. The Tribunal found no evidence of such sales during the search and survey operations and noted that the sister concern had admitted to not properly accounting for scrap sales. Since no material evidence was found against the assessee-company, the addition was deleted.

4. Addition of Rs. 1,04,420 on Account of Alleged Discrepancy in Closing Stock:
The AO added Rs. 1,04,420 based on a discrepancy in the closing stock, assuming it was sold outside the books. The Tribunal found that the discrepancy could be due to pilferage or wastage and that no material evidence was provided to prove sales outside the books. The addition was deleted.

5. Protective Basis Additions Related to Sale of Scrap and Stock Discrepancy:
The Tribunal deleted the protective basis additions for the sale of scrap and stock discrepancy, citing the same reasons for the deletion of the substantive additions.

Separate Judgments:
The Tribunal's decision was not unanimous. The Judicial Member dissented, supporting the additions based on the applicability of section 145 and the corroborative evidence from the statements and seized documents. The matter was referred to the Third Member, who agreed with the Accountant Member, leading to the deletion of the additions.

Conclusion:
The appeal was allowed, and the additions made by the AO for both AY 1995-96 and 1996-97 were deleted. The Tribunal emphasized that undisclosed income in a block assessment must be based on material found during the search and not on estimates or assumptions.