Profit Assumptions On Estimate Account U/S 41(1) Can’t Be Allowed, Punjab & Haryana HC Order

The addition made by the AO u/s 41(1) of the Income-tax Act on account of the sale of copper wire is been removed by the Punjab & Haryana High Court, learning that the AO incurred the additions beneath the stated provisions on the grounds of the presumption for the stated sale, post discovering no stock in the premises.

A Division Bench of Justice Sanjeev Prakash Sharma and Justice Sudeepti Sharma noted that “A perusal of the assessment order and the reason that the taxpayer furnished depicted that the taxpayer explained every question put by the Assessing Officer. Even though the Assessing Officer himself personally visited the factory premises including with Inspector Sh. S.K. Gupta and nothing was discovered to show that the taxpayer attempted to evade tax, the Assessing Officer on assumptions and presumptions made an addition to the tune of Rs.2,15,150/- as profit”. (Para 17)

Under the case, the taxpayer had discarded a copper wire cable of Rs.2,46,553 and claimed under the head “Assets discarded during the year.” The assessee from 1955 to 1965 bought the copper wire cable and that was over-head and underground wire and cables of copper covered with PVC or rubber, AO noted.

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The AO from the discarded goods sales discovered that the taxpayer does not reveal the sale of copper wire in the year beneath consideration. With the aspect when the taxpayer encountered, it furnished that based on the foundation the wire lost its utility, and it is not normally recovered since the labour charge cost to recover the underground wire was more compared to the scrap value.

These recoveries of copper wire caused damage to the building and flooring. It was indeed the matter of the taxpayer that scrap sold at Rs 4,29,754 indeed comprises the copper wire. AO personally visited the factory premises of the assessee company and discovered that there was no stock of copper wire in the godown.

The AO remarked that copper wire worth Rs.2,46,552 bought in the early 50s cannot be thrown away since in the market the value of the copper wire was high. The Assessing Officer (AO) ruled that the taxpayer had calculated the discarded value of the copper wire and therefore worked out the profit u/s 41(2).

In the assessment order, the taxpayer discarded a copper wire cable of Rs.2,46,553, and this amount was claimed beneath the head Assets Discarded during the year, the bench noted.

“It was stated by the assessee that discarded copper wire was taken to the old store account and all the sales were shown in the profit and loss account”, the Bench stated.

No declaration of the information of the sale of the discarded goods, or the sale of copper wire was there, hence the Bench stated that the taxpayer needed to specify the sale of a scrap of copper wire and he stated that after underground wire loses its utility, it is not recovered as the cost of labour charges for recovering under-ground wires is more compared to the scrap, apart from damage to building and flooring is also caused.

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At the time of assessment proceedings bench noted that the taxpayer had represented that sale along with all sorts of stores and copper wire, and the company does not recover the copper out of old copper wire however the old wires are sold as scraps.