2025 (5) TMI 28 - AT - Income Tax

Addition on account of capital introduced in the business - assessee explained that fresh capital was sourced from sale of residential house in village and gifts received from relatives - HELD THAT - In the absence of any documentary evidence to substantiate gifts the CIT(A) rejected submissions of the assessee and confirmed the remaining amount. The assessee has furnished a list of fifteen relatives before the AO who have allegedly given cash gifts to the assessee. AO has rejected the same as the said list neither contained the addresses of the donors nor confirmations were filed by the assessee from the persons making gifts. Before the Tribunal the situation is no different. The cash gifts from relatives is unsubstantiated. It is understandable that confirmations cannot be obtained from all relatives; however the assessee could have easily obtained confirmations from parents and siblings. The said addition cannot be deleted merely on bald unsubstantiated assertions. Hence find no reasons to interfere with findings of the CIT(A) on this issue. Thus ground no. 1 of appeal is dismissed. Rejection of books of accounts and estimation of business income at 8% of the total turnover - We find merit in the submissions of the assessee that the books cannot be rejected merely for the reason that the purchases are more than sales. The AO and CIT(A) while deciding the issue have lost sight of the fact that if purchases are more than sales than their must be some closing stock of either finished product or the raw material as the assessee is engaged in manufacturing activity. Neither the AO nor the CIT(A) have commented on availability of closing stock or has called for stock register. The assessee has declared GP of 8.7% and NP of 2.57% for the impugned assessment year which is higher than the GP 6.9% and NP 0.76% in the preceding assessment years. The business profits declared by the assessee are accepted. Thus the assessee succeeds on ground no. 2 of appeal.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(i) Whether the addition of Rs. 5,19,239/- on account of unexplained source of capital introduced in the business is justified, given the assessee's explanation of capital introduction from sale of immovable property and gifts from relatives.

(ii) Whether the rejection of the assessee's books of accounts and consequent estimation of profits at 8% of total turnover under section 145 of the Income Tax Act, 1961, is legally sustainable, particularly when the assessee has maintained regular books and declared profits higher than preceding years.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Addition on account of unexplained source of capital

Relevant legal framework and precedents: Under the Income Tax Act, unexplained cash credits or capital introductions can be added to income if the assessee fails to satisfactorily explain the source. The burden lies on the assessee to substantiate such capital introductions with credible evidence. Mere assertions without documentary proof or corroborative confirmations may not suffice.

Court's interpretation and reasoning: The assessee claimed fresh capital introduction of Rs. 27,05,000/-, comprising Rs. 24,00,000/- from sale of a residential house and Rs. 3,05,000/- as gifts from relatives. The Assessing Officer (AO) rejected the entire amount as unexplained due to lack of substantiation. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the source of funds from sale of immovable property but rejected the gifts portion due to absence of documentary evidence and confirmations from donors.

Key evidence and findings: The assessee furnished a list of fifteen relatives alleged to have given cash gifts but failed to produce confirmations or addresses of donors. The Tribunal noted that while it may be difficult to obtain confirmations from all relatives, obtaining such from close relatives like parents or siblings was feasible and not attempted.

Application of law to facts: The Tribunal held that the addition could not be deleted on mere unsubstantiated assertions. The failure to provide documentary evidence or confirmations rendered the gifts portion unexplained. The acceptance of the sale proceeds portion was appropriate as it was supported by evidence.

Treatment of competing arguments: The assessee argued that the gifts were genuine and listed relatives as donors. The department emphasized lack of corroboration and documentary proof. The Tribunal sided with the department, emphasizing the necessity of credible evidence to substantiate cash gifts.

Conclusions: The addition of Rs. 5,19,239/- on account of unexplained capital introduction from gifts was upheld. The portion relating to sale of immovable property was rightly accepted.

Issue (ii): Rejection of books of accounts and estimation of profits at 8% of turnover

Relevant legal framework and precedents: Section 145 of the Income Tax Act empowers the AO to reject books of accounts if they are not reliable or do not reflect the true income. Section 44AD provides for presumptive taxation for eligible businesses, but it applies only when books are not maintained or are unreliable. Profit estimation must be reasonable and based on sound evidence. The courts have held that books cannot be rejected merely on suspicion or minor discrepancies, especially when the assessee maintains regular accounts and declares profits consistent with or better than previous years.

Court's interpretation and reasoning: The AO and CIT(A) rejected the books primarily because purchases exceeded sales, which was considered suspicious. They estimated profits at 8% of turnover under section 145. The Tribunal disagreed with this approach, noting that higher purchases than sales in a manufacturing business may be explained by closing stock of raw materials or finished goods. Neither AO nor CIT(A) examined or called for stock registers or closing stock details.

Key evidence and findings: The assessee maintained regular books, including Balance Sheet and Profit and Loss account. The gross profit (GP) declared was 8.7%, and net profit (NP) 2.75%, both higher than the preceding year's GP of 6.19% and NP of 0.76%, indicating consistency and reliability of accounts.

Application of law to facts: The Tribunal held that rejection of books solely on the ground of purchases exceeding sales was not justified without further inquiry into stock or other relevant factors. Given the maintenance of regular books and consistent profit margins, the books should not have been rejected, and the income should not have been estimated presumptively under section 44AD.

Treatment of competing arguments: The department contended that absence of sale and purchase registers justified rejection. The assessee argued for acceptance of books based on consistency and proper maintenance. The Tribunal accepted the assessee's arguments, emphasizing the need for a holistic view rather than mechanical rejection.

Conclusions: The Tribunal allowed the ground challenging rejection of books and estimation of profits, directing acceptance of the declared profits as per books of accounts.

3. SIGNIFICANT HOLDINGS

"The books cannot be rejected merely for the reason that the purchases are more than sales. If purchases are more than sales, there must be some closing stock of either finished product or raw material as the assessee is engaged in manufacturing activity. Neither the AO nor the CIT(A) have commented on availability of closing stock or called for stock register."

"The cash gifts from relatives is unsubstantiated. It is understandable that confirmations cannot be obtained from all relatives; however, the assessee could have easily obtained confirmations from parents and siblings. The said addition cannot be deleted merely on bald unsubstantiated assertions."

Core principles established include the necessity of credible documentary evidence to substantiate unexplained capital introductions, especially gifts, and that books of accounts cannot be rejected on mere suspicion or without proper inquiry into relevant factors such as closing stock in manufacturing businesses. Profit estimation under presumptive provisions is not justified when regular books are maintained and profits declared are consistent or higher than previous years.

Final determinations:

(i) The addition of Rs. 5,19,239/- on account of unexplained capital introduction from gifts was upheld.

(ii) The rejection of books of accounts and estimation of profits at 8% of turnover was set aside; the declared profits as per books were accepted.

The appeal was partly allowed accordingly.

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