No Addition Is Permitted On Account Of Estimated Profit U/s 41(1) Simply Based On Assumptions: Punjab & Haryana High Court

The Punjab & Haryana High Court deleted the addition made by the AO u/s 41(1) of the Income tax Act on account of sale of copper wire, finding that the AO had made additions under the said provision simply on basis of presumption regarding the said sale, even after finding no stock in the premises.

A Division Bench of Justice Sanjeev Prakash Sharma and Justice Sudeepti Sharma observed that “A perusal of the assessement order and the explanation given by the assessee shows that the assessee explained each and every question put by the Assessing Officer. Further inspite of the fact that the Assessing Officer himself personally visited the factory premises along with the Inspector Sh. S.K.Gupta, and nothing was found to show that the assessee has tried to evade tax, the Assessing Officer on assumptions and presumptions made addition to the tune of Rs.2,15,150/- as profit”. (Para 17)

As per the brief facts of the case, the assessee had discarded copper wire cable wroth Rs.2,46,553/- and claimed under the head “Assets discarded during the year.” The AO noted that copper wire cable was purchased by assessee from 1955 to 1965 and that was over-head and underground wire and cables of copper covered with PVC or rubber. From the sales of discarded goods, the AO found that the assessee had not shown sale of copper wire in the year under consideration. When the assessee was confronted with this fact, the assessee submitted that under-ground wire lost its utility and the same is not normally recovered as the cost of labour charges for recovering under-ground wire was much higher than the value of scrap. Further such recovery of copper wire caused damage to the building and flooring. It was also the case of the assessee that scrap sold at Rs.4,29,754/- also included copper wire. However, the AO personally visited the factory premises of the assessee-company and found that there was no stock of copper wire in the godown. The AO noted that copper wire worth Rs.2,46,552/- purchased in early 50s cannot be thrown away as the value of the copper wire was high in the market. The AO therefore, held that assessee had estimated the discarded value of the copper wire and accordingly worked out the profit under Section 41(2).

The Bench observed in the assessment order that the assessee discarded copper wire cable worth Rs.2,46,553/- and this amount was claimed under the head 'Assests Discarded during the year'.

“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”, added the Bench.

Since from the details of the sale of discarded goods, sale of copper wire was not shown, therefore, the Bench noted that the assessee was required to show the sale of scrap of copper wire and he stated that after underground wire lose its utility, it is not normally recovered as the cost of labour charges for recovering under-ground wires is much higher than the value of the scrap, besides damage to building and flooring is also caused.

The Bench found that the assessee showed during the assessment proceedings that sale included all types of stores and copper wire also, and the company does not recover the copper out of old copper wire but the old wires are sold as scraps.

Hence, the High Court answered in favour of the assessee.

Counsel for Petitioner/ Assessee: Radhika Suri

Counsel for Respondent/ Revenue: Pridhi Jaswinder Sandhu

Case Title: M/s Shree Digvijaya Woollen Mills Ltd Verses Commissioner of Income-Tax

Case Number: ITR-3-2010 (O&M)

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