TMI Blog1988 (3) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... account. An effort was made to reconcile the stock particulars with reference to the purchase vouchers and sale bills. From this information a chart was prepared which showed that the assessee was dealing in different varieties of materials like G.P. Sheets, H.S. Sheets, Iron Discs, C.R. Sheets cuttings and Iron cuttings. The total purchases of these items amounted in weight to 12,80,928 kg. As against this the sales disclosed were 10,81,520 kg. Some of the items purchased were not shown at all as sales. In some cases the sales were much more than the purchases, e.g., in the case of iron sheets, the purchases were 3,17,418 kg. while the sales were 5,65,309 kg., the excess of about 2,50,000 kg. In the case of C.R. Sheet cuttings, Iron cuttings, C.R. Strips, the purchases were 2,38,275 kg., 12,310 kg. and 1,95,159 kg. respectively but none of them were shown as sales. Like this identification of the purchases with sales was not furnished on the ground that it was not possible because what was sold was not in the same name as what was purchased. There was an opening stock of 7,07,355 kg. without details of inventory. Assuming that the entire stock was that of iron sheets and working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs. He further held that these purchases must be cash purchases and therefore the provisions of section 40A(3) of the Income-tax Act were also attracted. Thus a further addition of Rs. 10 lakhs was made u/s 40A(3) of the Income-tax Act for which also the Inspecting Asstt. Commissioner had permitted the Income-tax Officer to make the addition. 4. Thus a total addition of Rs. 19 lakhs was made besides two small other additions, which were not pressed at the time of hearing. 5. The Commissioner (A) on appeal confirmed both these additions. Relying upon the specific discrepancies mentioned by the Income-tax Officer in his order, the Commissioner (A) felt that the Income-tax Officer was justified in making the addition of Rs. 9 lakhs to the trading account. The addition made u/s 40A(3) was justified on the ground that when there was evidence to show that purchases were made in cash, to these purchases the provisions of section 40A(3) were attracted. These are in short the conclusions arrived at by the Commissioner (A) in the brief order that he had passed. 6. In further appeal filed against this order, the learned representative of the assessee Shri R. Ganeshan submitted that b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the situations obtaining under identical circumstances in the earlier years. It was further pointed out that since the addition of Rs. 4.50 lakhs was made to the closing stock of the assessment year 1980-81, that amount must be treated as the opening stock of the assessment year 1981-82 and if a trading account is reconstructed by including this sum of Rs. 4.50 lakhs both in the opening stock and the closing stock, the various discrepancies pointed out by the department in the quantity would disappear, which would show that the gross profit of Rs. 3,90,629 shown by the trading account was properly arrived at. It was further submitted that the gross profit shown by the assessee this year was 5.99 per cent which appeared favourable in comparison to the gross profit shown and accepted in the earlier years and therefore no inference adverse to the assessee should have been drawn. It was further pointed out that since there were no purchases made outside the accounts and those too in cash, the question of applying section 40A(3) of the Income-tax Act would not arise since this was only a supposition without any proof for it, no addition should have been made on that account. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantity particulars. The Income-tax Officer says that there was no reconciliation in terms of quantity even by taking all the items dealt with as a whole and not as separate items. The total quantity purchased as per the annexure given by the Income-tax Officer was 12,80,928 kg. The quantity in the opening stock was not available except the value. From the value we have got to deduce the quantity. For that purpose an average rate of Rs. 4.50 per kg. was adopted, which will give 1,57,190 kg. But in the statement prepared by the learned Departmental Representative the opening stock was arrived at 1,41,892 kg. This was on the basis that the value is at Rs. 5 per kg. Proceeding on the basis that the opening stock was 1,41,892 kg., the total quantity available with the assessee was 14,22,820 kg. As against this the sale accounted for was of 10,81,520 kg. The closing stock should therefore be 3,41,300 kg. As against this position, what the assessee showed was purchase of 11,61,396 kg. and a closing stock of 2,64,650 kg. The sale figure and the opening stock are the same in both the trading accounts. There is no denial of the fact that the purchase of 12,80,928 kg., as given in annexure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 77,87,000 to which must again be added the value of Rs. 4.50 lakhs, which would give a total of Rs. 82,37,000. From that figure of Rs. 82,37,000 if we deduct the figure of Rs. 77,87,000 the aggregate of opening stock and purchases the difference representing the gross profit would work out to Rs. 3,90,033. As against which the gross profit shown by the assessee was Rs. 3,90,629 and therefore there was no need for any addition. This argument is very attractive, inasmuch as, the gross profit shown by the books remained unaffected because the sum of Rs. 4.50 lakhs was added both to the opening and the closing stocks. The question is whether it is proper. Assuming that it is proper, still we have got to consider whether in terms of quantity the closing stock was properly accounted for. 9. Assuming in favour of the assessee that the amount of Rs. 4.50 lakhs added represented both quantity and value, in terms of quantity it would mean 90,000 kg. at the rate of Rs. 5 per kg. (though it is doubtful whether we can adopt the average rate of Rs. 5 per kg. since this amount represents the amount spread over from the assessment years 1976-77 to 1980-81 when the rates available in each asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no question of making any purchases outside the books, and those too by cash. The supposed addition by invoking the provisions of section 40A(3) does not, therefore, arise. That addition is totally unwarranted and unjustified too. Section 40A(3) has no application to the facts of this case because this is a case where the closing stock was undervalued but not a case of purchases having been made outside the accounts, to assume that such purchases were made in cash. Even otherwise, if there is proof to show that some purchases were made outside the accounts and if investment in those purchases is not proved, then the entire amount of investment has to be added as income from unexplained investments, in which case the question of invoking section 40A(3) would not arise. Section 40A(3) would apply to a case, where some expenditure was incurred and which was claimed as expenditure. In the case of unexplained investment the question of claiming it as expenditure can never arise. That addition must therefore go. It may also be noted that for the assessment year 1982-83 the Income-tax Officer accepted the position that the reconciliation of quantitative particulars of the assessee in ter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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