AO is under obligation to give reasons for not accepting explanations u/s 69

Under Section 69, AO is under obligation to give reasons for not accepting explanations given by the assessee – ITAT

In a recent judgment, ITAT Lucknow has held that under section 69 if the explanation furnished by the assessee not found to be satisfactory, the AO is under obligation to give reasons for not accepting the explanations offered

ABCAUS Case Law Citation:
ABCAUS 4163 (2024) (07) ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming addition u/s 69 made on the account of excess stock found during the course of search.

A search and seizure operation under section 132(1) of the Income Tax Act, 1961 (the Act) was conducted on a Group of cases. Simultaneously, a search and seizure operation was also carried out on the assessee firm at its three units at different locations.

The assessee-firm was engaged in manufacturing of Pan Masala. The raw materials used for manufacturing Pan Masala are Supari, Kattha tobacco, Lime, Flavour, Menthol, Cardamom, Glycerin, etc. During the course of search, some discrepancy was found in the physical stock taking carried out at one unit of the assessee and in this regard, in the statement recorded under section 132(4) of the Act the partner of the assessee firm, in response to the specific question raised, explained that the excess stock was purchased in cash.

However, the Assessing Officer (AO) added the difference in stock to the income of the assessee as unexplained investment under section 69 of the Act observing that the partner of the assessee accepted the difference in stock were purchase outside books of account and payments are made in cash.

Before the Tribunal the assessee submitted that since the difference had duly been explained, no addition in this regard was required and hence the addition be deleted.

The Tribunal observed that as per section 69 of the Act, where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

The Tribunal further noted that if the explanation furnished by the assessee not found to be satisfactory, the AO is under obligation to give reasons for not accepting the explanations offered by the assessee. Under Section 69 of the Act, the primary onus casts upon the assessee to make plausible explanation, and in case the explanation is given by the assessee

and it is not accepted, the onus shifts on the Department to prove that the explanation offered by the assessee is either wrong or not sufficient to explain the impugned transaction by bringing further material evidence on record.

The Tribunal also observed that in the instant case, the Assessing Officer without controverting the explanation so furnished by the partner of the assessee-firm, made the addition arbitrarily and on ad hoc manner which cannot be sustained.

Accordingly, the Tribunal ordered that addition made be deleted. 

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