By TIOL News Service

NEW DELHI, JUNE 16, 2016: THE issue is - Whether if the assessee could not explain the fall in gross profit on distress sale made to its sister concern, the AO has the authority to make addition on such account. YES is the answer.

Facts of the case

The assessee is a company. A survey operation was carried out at the premises of assessee. During the course of survey unaccounted stock of Rs.3,80,50,000/-, unexplained excess cash of Rs.9,50,000/-, unexplained repairs expenditure of Rs.40 lacs and unaccounted building expenses of Rs.70 lacs was found. Based on this the assessee surrendered an amount of Rs. 5 crores during the survey as his accounted income. Assessee credited miscellaneous income in the profit and loss account and debited profit and loss account by Unaccounted stock purchase of Rs 38050000/-, unexplained repairs expenditure of Rs 40 lakhs, debited building account with Rs and claimed depreciation thereon and also debited cash on hand by RS.9,50,000/-. Therefore on the disclosure of Rs 5 crores assessee has debited the expenses of Rs.3805000 on account of purchases, Rs 40 lakhs on account of Repairs expenditure. Assessee claimed depreciation on the building account capitalized of Rs 70 lakhs. AO asked the assessee to provide details of post survey and pre survey trading results of the assessee. Based on this information the AO noted that there was fall of 6% in the gross profit ratio from 30.29% to 24.29% from pre to post survey period. Before the AO the assessee explained that fall in gross profit is because of recession in the market and therefore there was distress sale of plain cloth. AO rejected the explanation of the assessee as according to him the distress sale of plain cloth to the holding company was just the book entries and not the actual sale and is done to reduce the effect of surrendered amount during the survey. Therefore he made an addition of 6% of sales of post survey period. The total addition made was Rs.12,05,150/-. The assessee preferred the appeal before CIT(A) who in turn deleted the addition to whole of the turnover to restrict it to sales made to sister concern of Rs.5022546/- and applied ratio 6% confirming the addition of Rs.301352/-.

Next ground was against the confirmation of disallowance of depreciation of Rs. 350,000/- on Rs.70 lacs voluntary admitted as income on account of addition made to the building account based on statement recorded of the Director of the company where in disclosure of Rs.5 crores as stated above has been made. Out of the above disclosure of Rs. 70 lacs has been disclosed on account of addition to building at 16/4, Mathura Road, Faridabad. On this addition assessee claimed depreciation @5%. However same was disallowed by AO applying provision of section 69C stating that any unexplained expenses which were deemed to be the income of the assessee shall not be allowed as deduction under any head of income. On appeal before the CIT(A) he also confirmed the decision of AO holding that provision of section 69C are clear and relying upon the decision of the Gujarat HC in case of Fakir Mohmed Haji Hsasan Vs. CIT 2003-TIOL-243-HC-AHM-IT (Gujarat).

Next ground of the appeal was against the confirmation of disallowance of Rs.40 lacs out of repairs and renovation expenditure which was voluntarily admitted by the assessee pertaining to expenses incurred on showroom during the year. This expenditure was disallowed by the AO holding that the provision of section 69C prohibits that. On appeal the CIT(A) has also confirmed the disallowance on account of repair and renovation upholding the applicability of section 69C and relying on the decision of Gujarat HC in the case of Fakir Mohmed Haji Hsasan Vs. CIT.

Having heard the matter, the Tribaunl held that,

++ we find no infirmity in the order of CIT(A) in confirming the addition to the extent of Rs.3,01,352/- on sale made to sister concern as the assessee could not explain the fall in gross profit on distress sale made by assessee to its sister concern. The plea of safeguarding itself from the clutches of slow down and of wastages is not supported by evidence. Merely disclosure of sales figures and sales tax return does not prove or disprove the gross profit declared by the assessee. The rates charged by the assessee on sale of goods to sister concern at no profit no loss but the sale them at cost is stated the commercial expediency of the assessee. However no commercial expediency was demonstrated before the lower authorizes. Further assessee has debited the whole of the unaccounted purchases to the profit and loss account of Rs 3,80,50,000/- and claimed it as deduction and AO has allowed it for the reasons best known to him. This fact is apparent from the details of purchases furnished by assessee at paper book page no 13. Therefore the main reason for lower gross profit is also the reasons of the debit of unaccounted purchases by the assessee to the profit and loss account. In the result we confirm the order of CIT (A) in confirming the addition of Rs.3,01,352/- on account of lower gross profit in post survey period on sale made to sister concern. Therefore ground No.1 is dismissed;

++ during the course of survey the assessee has disclosed Rs.5 crores out of which the addition to the building was stated to be of Rs.70 lacs. The moment the disclosure of Rs.5 crores is accepted then the investment in the building is also required to be accepted. The principle is that the statement of any person should be accepted or rejected in toto. In this statement the assessee has offered income of Rs.5 crore which has been taxed by the AO. Further the application of this income has not been accepted. Because of the reason that provision of section 69B does not contain identical provision as contained in section 69C. For the purposes of allowance of depreciation AO has not stated that any conditions mentioned in section 32 has not been met with. Neither AO has put any question to the assessee about the ownership of the assets, user of those assets and consequent allowance of deprecation thereon. In absence of this disallowance of depreciation cannot be made. According to us the CIT (A) and AO both erred in applying the provisions of section 69C on the issue of unaccounted investment in construction of building. The addition made is not on account of unexplained expenditure but it is an addition of amount of investment which is not fully disclosed in the books of account. The relevant addition has not been made u/s 69C but u/s 69B. In view of this the disallowance of depreciation of Rs. 350000 cannot be upheld. In the result we reverse the finding of the CIT(A) in disallowing the depreciation, hence ground No.2 of the appeal is allowed;

++ assessee has offered income of Rs. 5 crore by crediting this sum as other income and showed in schedule 12 of the profit and loss account. Simultaneously the assessee has debited Rs. 40 lacs in the profit and loss account under the head repair and maintenance expenditure at schedule 16. According to this assessee has agreed the income to credit of profit and loss account and simultaneously debited the expenditure to the profit and loss account and thus nullifying the amount of disclosure made by the assessee. Obviously the disclosure made by the assessee is on account of repairs of show room amounting to Rs. 40 lacs. That means the assessee has incurred an expenditure however it did not offer any explanation about the source of such expenditure then same is required to be added under the provision of section 69C. As the amount is covered by provision of section 69C obviously proviso mentioned therein is applicable which prohibits the allowance of any expenditure as deduction under any head of income which has been taxed u/s 69C. In view of this we confirm the action of the lower authorities in confirming the disallowance of Rs. 40 lacs as unexplained expenditure. In this result ground no. 3 & 4 of the appeal are dismissed. In the result appeal of the assessee is partly allowed.

(See 2016-TIOL-1071-ITAT-DEL)