Without rejecting books of account, it was not proper to make addition u/s 69

Without rejecting books of account, it was not proper to make addition towards unexplained investment u/s 69 of the Act  

ABCAUS Case Law Citation:
ABCAUS 2982 (2019) (06) ITAT

Important Case Laws Cited/relied upon by the parties:
Smt. P.K. Noorjahan’s (237 ITR 570) w

The instant appeal was filed by the assessee against the order of the CIT(A) in confirming addition as unexplained investment u/s 69 of the Income Tax Act, 1961 (the Act).

The Assessing Officer calculated the difference between the stock as per books of accounts and the stock as per inspection report of the commercial Tax Department. After giving deduction of expenses incurred up to the date of inspection the AO assessed the balance as unexplained investment u/s. 69 of the Act.

According to the CIT(A), the said difference was too large to be ignored even if the assessee‘s plea that valuation by the Commercial Tax Department was rough estimate could be considered.

Therefore, the CIT(A) was of the view that any stock found during physical inspection over and above the stock as per books of accounts lead to only one conclusion that the extra stock or the excess stock was out of regular books of the assessee for which the assessee had no satisfactory explanation.

The CIT(A) rejected the assessee’s argument that if an addition Is made u/s 69, the same will go to increase the expenses and reduce the profit as the excess stock found during inspection would have never been entered in the books of account till the date of inspection and there was no material on record which can prove that the same was entered after the date of inspection, therefore, it was clear that the same was utilized out of books of account and no effect will be there on firm’s declared profit.

Before the Tribunal, the assessee submitted that the Assessing Officer had accepted the Books of Accounts and accepted returned income. However, the Assessing Officer referred to a shop inspection conducted by the Assistant Commissioner, Commercial Taxes after one month of commencing production. The Assessing Officer also referred to a difference worked out by the Commercial Tax Officer in the stock and work-in-progress. This Work-in-progress was valued on an adhoc basis by the Commercial Tax Officer at the time of inspection on an estimate basis without referring to the quantity or the rate. He referred to the gross profit estimated and included in Work in progress.

It was submitted that relying on the inspection figures prepared on estimate basis, by the Commercial Tax Officer, the Assessing Officer in the impugned order came to the conclusion that the difference between the inspection figures and what the assessee accounted in the Book of Accounts, indicated suppression of investment in purchase and stock upto that date.

It was submitted that the Assessing Officer invoked Section 69 and estimated the investment u/s 69 without any basis whatsoever and made addition u/s 69.

The Tribunal observed that the Assessing Officer had not rejected the books of account of the assessee and he had considered the profit returned by the assessee. Thereafter, he made addition u/s 69 of the Act on account of valuation of workin-progress by the Assistant Commissioner of Commercial Taxes (ACCT) at the time of inspection in the business premises of the assessee.

It was noted that the ACCT had estimated the valuation of work-in-progress without mentioning the quantity or rate of the individual item. It was a rough estimate. The Assessing Officer arrived at the difference between the valuation of work-in-progress done by the ACCT and what was accounted in the books of accounts.

The Tribunal opined that to estimate this difference, first of all the Assessing Officer had to reject the books of account of the assessee. Without rejecting the books of account, it was not proper to make addition towards unexplained investment u/s 69 of the Act.

The Tribunal observed that the ACCT had not at all pointed out the method of valuation of work-in-progress. Without determining the method of valuation of work-in-progress, it was not possible to sustain the addition.

In other words, prima facie, the Assessing Officer had to reject the books of account of the assessee and thereafter, he had to estimate the unexplained investment in work-in-progress in the relevant assessment year by following the market price or cost which was lower which the Assessing Officer had failed to do so.

Accordingly, the Tribunal deleted the addition made u/s 69 of the Act.

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