Cash surrendered during survey and added to WIP can not be disallowed u/s 68 as income was already declared in Trading account and it was a balancing entry-ITAT
The appellant assessee had filed the instant appeal against the order of the CIT(A) contending that the Authorities below erred in arbitrarily denying the increase in closing stock claimed by the assessee without giving an opportunity of hearing or issuing any show cause notice in this regard or rejecting the audited books of account.
ABCAUS Case Law Citation:
ABCAUS 2315 (2018) (05) ITAT
Important Case Laws Cited/relied upon by the parties:
CIT vs Pashupati Nath Agro Food Products Pvt Ltd.
M/s Kim Pharma (P) Ltd. Vs. CIT
CIT, Trichur, vs. M/s Kerala Sponge Iron Ltd.
M/s Liberty Plywood P. Ltd. Vs. ACIT
The appellant assessee was a private limited company engaged in the business of Construction Activity and Real Estate Development. A survey under section 133A of the Income Tax Act, 1961 (the Act) was conducted at its business premises, wherein, the survey party found and impounded certain incriminating documents.
One such impounded document was a ledger, and as per details recorded therein, it was found that the assessee had received cash advances amounting to Rs. eight crores approx from various persons during the relevant financial year. On examination, it was found that the assessee had received such amounts by doing transactions outside its books of account, as these were not recorded in the assessee’s regular books of account.
The assessee was confronted with and asked to explain the said cash receipt as per the notations appearing in the said ledger. The assessee was further asked to explain whether the amounts were recorded in the books of account. However, the assessee could not furnish any explanation about the non-inclusion of such amounts in its regular books of account, and besides, the assessee also expressed its inability to provide the necessary details as to the identity and addresses of persons against whose names the assessee had recorded the cash receipts.
The assessee, through its Director came forward and surrendered the said sum as its unexplained/ undisclosed income for the relevant year. A statement of one of the directors of the assessee company, was recorded, in which, he admitted and confessed the said amount as the assessee company’s undisclosed income and, therefore, he made the surrender.
Subsequently, the assessee company field its return of income which included the surrendered income. Out of the surrendered income, Rs. 8 Crore was introduced in the books as increase in work in progress (closing stock) and Rs. 2, crores approx was disclosed as cash balance introduced in Cash Book.
During the assessment stage, the AO, after considering the assessee’s replies/explanation, framed the assessment as per the income returned by the assessee. However, the AO noticed that the assessee had surrendered the amount of Rs. 8 crores approx on the basis of unrecorded amounts received from vatious persons, however, the assessee, while showing the surrendered amount, had apportioned and taken it into its closing stock value, increasing it by Rs. 6 Cr. Thus the income as declared by the assessee on basis of such disclosure was treated by the AO as the assessee’s undisclosed income u/s 68 of the Act and added towards the assessee’s income.
The AO observed that the treatment of inflating its closing stock was not as per, or in consonance with its admission, vide which, the assessee company’s Director had surrendered the amount of Rs. 8 crores therefore, there was no reason that the assessee, by way of giving a unilateral treatment in its accounts, could inflate its closing stock value and in the process, get doubly benefitted, one for the income on account of cash receipts which was caught by the survey party, and another for the inflating the closing stock value. It was also observed that besides, it was against the actual findings which were noticed during the course of survey, and at the same time, in being against the documentary evidences in the shape of valuation submitted by the assessee from its own registered valuer. Thus the AO, while framing the assessment, denied the benefit of closing stock for the the relevant assessment year and the opening stock for the succeeding assessment year to the assessee in respect of Rs. 6 Crore on the ground that it was never stated in the statement recorded that there was any investment which was made in the value of building construction under progress as shown by the assessee.
The CIT(A) dismissed the assessee’s appeal.
The Tribunal observed that as per the provisions of the Companies Act, 1956, the financial statements of a company are to be prepared as per the provisions of the Companies Act, which require that all the incomes and expenditures are duly shown in the said Audited financial statements of the company, which is the requirement of Schedule-VI of the Companies Act.
It was observed that as contended, while adhering to the said statutory requirement of the Companies Act, the assessee had duly shown the amount of Rs. 6 Crore in its trading account, as amount voluntary offered to tax and a corresponding debit entry of the same had been shown as amount invested in the project in the form of work in progress and the balance amount of Rs. 2 crores had been shown as other income in the Profit and Loss Account which was represented by cash. However, the AO had taken the statement as partly correct and has accepted the income of Rs. 2 crores represented by cash and has disowned that very statement in part by not accepting the investment of Rs. 6 Crore in the Project.
The ITAT opined that once the AO had accepted the income component which was not duly recorded in the books of account till the date of survey, then how the AO could disallow the other balancing part of the same income which was the investment in the Project. The Assessing Officer could not have two yard-sticks to assess the income of the assessee. The statements and facts have to be accepted in totality and not in piece-meal as suits the Assessing Officer.
According to the Tribunal, the assessee had followed the provisions of the Companies Act and that was why both the entries of income were on the credit side and in the debit side, the balancing entries for the same in cash account and in work done account have been passed.
The Tribunal noted that as claimed the assessee was in the construction business, the unaccounted amount which was surrendered was obviously on account of construction activity and, therefore, the same was shown in the trading account as investment in Project on the form of WIP and, accordingly, taken to the closing stock as arising out of the surrender shown in the Trading Account.
The ITAT noted that the assessee fully co-operated with the department and no retraction of the amount offered for tax of Rs. 8 cores was made by the assessee and it paid the due amount of tax on the same. In the light of the above facts, when the assessee has fully shown the income in its Trading Profit & Loss A/c and the AO had accepted the books of account, without rejecting them, the amount represented by investment in work done in the Project, of Rs. 6 Crore, cannot be rejected. The assessee sought introduction of the surrendered amount in the books of account.
The Tribunal observed that had the amount of Rs. 6 crores been not invested in work in progress, as claimed by the assessee, the cash to this extent would, obviously, have been found during the survey. No such cash was found during survey. Had the assessee possessed full particulars of the amount as advanced from the customers and the amount invested in the Project, then there would have been no occasion to bring to tax this income.
The Tribunal observed that the AO had not rejected the books of account and has not found any discrepancy therein. The assessee had complied with all the queries raised during the course of assessment stage and further substantiated the investment for work done by submitting the certificate of registered architect, which had not been found to be false by the AO. Further no specific show cause notice was given before denying the benefit of Rs. 6 crore in work-in-progress. The Tribunal also observed that the assessee had submitted to the survey party had asked no question with regard to investment done and further, before the AO, in the assessment proceedings, it was clearly mentioned by the assesse that the advances received have been invested in the project under consideration during the period itself, as per the AO’s order.
The ITAT observed that the CIT(A) had relied upon the amount of investment in project as per the certificate of the architect of the company, however, the said certificate was with respect to only part of the project and not on the entire project.
Further the Tribunal opined that AO had accepted the books of account of the assesse, and without rejecting them or issuing any show cause notice, has reduced the closing stock by estimation which cannot be done, as has been held by the Jurisdictional High Court.
Also it was observed that the AO had also passed the order u/s 143(3) for succeeding assessment year allowing the full credit of the opening stock of work in progress in respect of the Project to the assesse and nothing adverse had been pointed out.
The Tribunal held that the assessee was justified and directed the increase in clsoing stock claimed by the assessee at Rs.6 crore is to be allowed.
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