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Facts
During a survey for AY 2019-20, excess stock of Rs. 66,10,500/- was found at the assessee's premises, leading to an addition as unaccounted income under Section 143(3). The assessee contended the stock was dead/non-moving, and that statements relied upon were from a stranger, while his own reconciliation details were ignored by the lower authorities.
Held
The Tribunal observed that the assessee's reconciliation details were overlooked by the lower authorities. Therefore, to ensure natural justice, the matter pertaining to the excess stock addition (ITA No. 1414/Del/2023) was set aside to the Assessing Officer for fresh adjudication. Consequently, ITA No. 1413/Del/2023, an appeal against an order under Section 263 linked to the same assessment, was dismissed as infructuous.
Key Issues
Whether the addition for excess stock was justified when the assessee's explanations and reconciliation statements were not considered, and whether the matter requires fresh factual verification by the Assessing Officer.
Sections Cited
143(3), 44AD, 263
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “F” BENCH, DELHI
Before: MS. MADHUMITA ROY & SHRI KHETTRA MOHAN ROY
The instant appeal preferred by the assessee is directed against the different order dated 27.03.2023 & 31.03.2023 passed by the CIT(A)-23 & PCIT(Central), Delhi, arising out of the Assessment Order dated 23.02.2021 passed by ACIT, Central Circle-2, under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the Assessment Year 2019-20.
& 1414/Del/2023 Vikas Arora (AY: 2019-20)
“1. ON FACTS AND IN LAW AND CIRCUMSTANCES OFTHE CASE THE LEARNED ASSESSING OFFICER HAD ERRED IN LAW IN MAKING ADDITION OF RS. 66,10,500/- IN THE RETURNED INCOME OF THE APPELLANT IN THE BASES OF A STATEMENT OF STRANGER, UNAUTHORIZED PERSON NOT GIVEN BY HIM OF HIS OWN AND WHICH CANNOT BE SAID TOHAVE BEEN MADE OUT OF HIS FREE WILL .APPELLANT IS NOT BOUND BY THE ALLEGED STATEMENT OF SH. KRISHAN LAL ARORA WHO IS NOT FLUENT IN ENGLISH AND DOES NOT UNDERSTAND THE IMPLICATION OF ENGLISH WORDS,AND WHO IS STRANGER TO THE APPELALNT'S BUSINESS. NO EFFORTS WERE MADE TO RECORD THE STATEMENT OF THE APPELALNT OR TO KNOW THE CORRECTNESS OF THE SATTEMENT SO RECORDED OF HIS FATHER SH. KRISHAN LAL ARORA A STRANGER.APPELALNT IS NOT BOUND BY THE ALLEGED STATEMENT OF KRISHAN LAL ARORA WHICH IS PER SI FALSE AND CONTRARY TO THE FACT ON RECORD.
THAT AS ALLEGED IN THE ASSESSMENT ORDER APPELALNT NEVER ADMITTED HIS UNDISCLOSED INCOME ON ACCOUNT OF EXCESS STOCK FOUND DURING THE COURSE OF SURVEY PROCEEDINGS •APPELALNT WAS OUT OF STATION,AT THE TIME OF SURVEY PROCEEDINGS. AT STATEMENT OF THE STRANGER ,CANNOT BE SAID TO BE THE STATEMENT OF THE APPELANT HIMSELF. THE LEARNED ASSESSING OFFICER CONTRADICTED HOS OWN VERSION.
THAT ON FACTS AND CIRCUMSTANCES OF THE LEARNED ASSESSING OFFICER,IS NOT JUSTIFIED IN REJECTING THE EXPLANATION OF THE APPELALNT REGARDING STOCK.NO EFFORTS WERE MADE BY THE LEARNED ASSESSING OFFICER TO KNOW THE CORRECTNESS OF THE FACTS MENTIONED IN THE LETTER DATED 16/02/2021. IN THIS LETTER DETAILS OF DEAD/NON MOVING STOCK OF RS. 60,16,645/- AND DETAILS OF PURCHASERS.”
2. The excess stock found for Rs.66,10,500/- during the course of survey proceeding was added representing unaccounted income of the assessee.
3. The matter was carried to appeal the Ld. CIT(A) has dismissed the appeal by holding as follows:
“11. It is seen that the addition was made because as per the books of accounts the appellant had stock of Rs. 58,43,085/-, whereas actually the stock of Rs. 124,53,585/-was found from the premise of the appellant. Thus physically excess stock of Rs.66,10,500/- was found from the premise of the appellant and therefore the AO made addition on this account.
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In his reply, the appellant stated that there was dead/non-movable items at the time of survey whose value was Rs. 60,16,645/-. On the basis of the same, the appellant claims that the valuation of stock was higher.
The above argument of the appellant is examined. The so-called dead stock was in possession of the appellant in his business premise at the time of survey in the shop. Apparently, the stock which the appellant is calling as dead stock was available for sale in the business premise of the appellant. The right over such stock was not transferred by the appellant. Further what happened to the so-called dead stock has not been stated by the appellant. The appellant has also not stated as to why a portion of stock suddenly was treated as dead stock after the survey whereas it was not so in the books of accounts maintained by him.
It is cardinal principle of taxation that no one can make profit out of himself. The logical corollary to this cardinal principle is that no one can make loss out of himself. One cannot earn either the profit or incur loss out of doing business with himself. By treating the stock in possession of the appellant as dead stock, the appellant is actually claiming loss out of himself because the right over the goods remained with the appellant himself.
In the law, only profits actually earned are taxable and losses actually incurred are allowable. In order to incur a loss, there has to be a transaction involving two people. In the case of the appellant, as the stock is lying with him, establishes that these were not sold to anyone else. In other words, there was no transaction in respect of dead stock that has resulted into any loss to the appellant. As the stock was in possession of the appellant, therefore the loss on valuation is only in the nature of notional loss. The loss can actually be incurred if and only if the stock were to be transferred/sold. As the stock found was in possession of the appellant, therefore the loss is loss out of appellant himself.
16.The appellant wants that the actual value of stock of Rs. 60,16,645/- be taken at Rs. NIL/- and therefore no addition be made on account of the value of stock. Till the time, the stock is in possession of the appellant and ready for sale, the valuation loss is actually in the nature of provision for diminution of valuation of stock. Further any provision for diminution of value of asset is not allowable as deduction.
The loss on account of valuation loss is thus in the nature of provision for diminution in the value of asset as stock gets reflected in the asset side of the balance sheet. There is requirement of passing separate entry for valuation loss. However, the appellant has created valuation loss without passing any entry in the books of accounts as he has reduced the value of the closing stock by Rs. 66,10,500/-. Thus, it is a case of manipulation of the books of accounts.
The appellant in the return has stated that he maintains books of accounts on mercantile basis and the stock is valued on cost or market price whichever is lower. The method applicable is First In First Out(FIFO). The stock found is & 1414/Del/2023 Vikas Arora (AY: 2019-20) presumed to be the last purchases and therefore the stock was valued at cost as per law at the time of survey. Market price is the last selling price and these are to be found from the sale register which apparently has not been furnished. Therefore, the plea of the appellant in respect of allowance of deduction on account of so-called dead stock is not acceptable and allowable.
Another argument of the appellant was that there were certain bills received after 26.03.2019 totalling to Rs. 15,02,428/-. The appellant has not furnished any evidence or any details of receipt of stock or payment of money in respect of the claim of Rs. 15,02,428/-, Therefore, the argument cannot be accepted.
One of the arguments taken by the appellant was that he filed return of Income after computing profit u/s 44AD of the act disclosing total income at the rate of 8% of the turnover. On perusal of the return of income it is seen that the appellant filed original return of income on 27.09.2019 wherein the total turnover was disclosed at Rs. 196,15,562/- and total profit was computed at Rs.23,41,484/-. In the original return, the income was not computed on the basis of presumptive taxation. The accounts were prepared and the same was uploaded on the system.
Subsequently, the original return of income was revised. However, the returned income and the turnover remained exactly the same but the benefit of presumptive taxation was taken. Thus, the appellant had actually maintained his books of accounts based on which original return was prepared and filed. It is impossible that the turnover and the net profit after applying presumptive sections could be the exact and the same. Apparently, the accounts of the appellant are not reliable document and the same was proved during the course of survey when there was excess stock found from the premise of the appellant.
In fact, for the AY 2017-18 and 18-19, the accounts were prepared and the appellant filed his return of income on the basis of such P&L account profits. The appellant did not opt for presumptive taxation for the AY 2017-18 and 18- 19.
The stock disclosed in the return of income by the appellant is as under:
17-18 18-19 19-20 Opening Stock 47,60,000 26,81,950 49,55,047 Purchases 1,87,56,078 2,21,24,794 1,96,15,562 Sale 2,50,98,508 2,37,66,293 1,96,15,562 Closing Stock 26,81,950 49,55,047 1,00,86,868
The survey was conducted on 26.03.2019 and on 31.03.2019 the appellant has stated his stock at Rs. 100,86,868/- whereas the stock as per books of accounts on 26.03.2018 was only Rs. 58,43,085/-. The appellant has not been able to explain almost the 90% increase in the value of stock in the four days & 1414/Del/2023 Vikas Arora (AY: 2019-20) after survey. Apparently, the appellant have manipulated its accounts to manage taxable income.
It is held that the appellant had in its possession undisclosed closing stock to the extent of Rs. 66,10,500/- as on the date of survey. Such undisclosed stock takes the character of income in the hands of the appellant. Therefore, he was liable to pay taxes on the undisclosed income arising out of closing stock. In view of the above discussion, the action of the AO in making addition of Rs. 66,10,500/- on account of excess stock is upheld.”
4. Before us the Ld. AR submitted that he has submitted details reconciliation of stock on 16.02.2021 containing the paper book 219 to 221. However, the same has been ignored by both the parties while framing the order.
We find that the factual verification was not done at all in the submission of the assessee brushed aside. For the sake of natural justice and fair play we deem it fit to set aside the matter back to the jurisdictional AO to readjudicate the matter. The appeal of the assessee is allowed for statistical purpose.
The following grounds were raised:
“1. ON FACTS AND IN LAW AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT (APPEALS)AND THE LEARNED ASSESSING OFFICER HAS ERRED IN MAKING ADDITION OF RS. 66,10,500/- ON THE BASES OF STATEMENT OF THIRD PERSON WHO IS NEITHER THE OWNER NOR LOOKING AFTER THE BUSINESS AND NEITHER HAS ANY KNOWLEDGE OF THE BUSINESS AND IS STRANGER TO THE ASSESSEE BUSINESS. APPELLANT CANNOT BE BOUND BY THE STATEMENT OF THE PERSON WHO IS STRANGER TO THE BUSINESS AND HAS NO KNOWLEDGE OF THE BUSINESS OF THE ASSESSEE.
2. ON FACTS AND IN LAW THE APPELLANT NEVER ADMITTED UNDISCLOSED INCOME ON ACCOUNT OF EXCESS STOCK AS COMPUTED BY THE INCOME TAX DEPARTMENT AS THE APPELALNT WAS OUT OF STATION AND SURVEY WAS CONDUCTED IN HIS & 1414/Del/2023 Vikas Arora (AY: 2019-20)
ABSENCE AT THE PREMSIES AND THE DEPARTMENT RELIED ON THE STATEMENT OF THE PERSON WHO WAS A STRANGER TO THE BUSINESS OF THE ASSESSEE AND NEVER EVEN CARED TO RECORD THE STATEMENT OF THE APPELALNTWHO IS THE OWNER OF THE BUSINESS.
3. ON FACTS AND IN LAW THEADDITION MADE ON THE BASES OF SURRENDER STATEMENT OF THE STRANGER TO BUSINESS CANNOT BE SAID TO BE THE STATEMENT OF THE APPELANT AND HE CANNOT BE BOUND BY IT AND NO ADDITION CAN BE MADE OUT OF IT.
4. ON FACTS AND IN LAW THE INCOME TAX DEPARTMENT HAS CALCULATED THE VALUE OF UNDISCLOSED EXCESS STOCK ON THE BASES OF ESTIMATED COST PRICE AND NOT AS PER ADOPTED AND RECOGNISED VALUATION METHOD OF COST OR NRV (MARKET PRICE) WHICHEVER IS LOWER.
5. ON FACTS AND IN LAW THE LEARNED ASSESSING OFFICER AND CIT (APPEALS) IS UNJUSTIFIED IN NOT ACCEPTING THE PLEA REAGRDING VALUATION OF DEAD MOVING/NON MOVING STOCK AND REPLY DATED 16/02/2021 REGARDING DEAD MOVING/NON MOVING OF RS. 6016645/- AND STOCK KEPT FOR WHICH INVOICES WERE STILL PENDING.
ON FACTS ANDIN LAW THE INCOME TAX DEPARTMENT DID NOT CARED TO TAKE STATEMENT OF THE ASSESSEE AND RELIED ON THE STATEMENT OF THE THIRD PERSON AND ADMITTED EXCESS ADDTION ON ACCOUNT OF STOCK FROM A STRANGER WHICH DOES NOT KNOW ANYTHING ABOUT THE BUSINESS OF THE APPELLANT.
ON FACTS AND IN LAW THE LEARNED INCOME TAX DEPARTMENT DID NOT APPRECIATED THAT THE APPELANT WAS FILING INCOME TAX RETURNS IUNDER SECTION 44AD.
ON FACTS AND IN LAW THE DEPOSIT OF TAX IN TIME DOES NOT HOLD THAT THE TAX PAID IS ADMITTED TAX.
ON FACTS AND IN LAW THE APPELALNT MAY CRAVE TOADD, ALTER, DELETE OR MODIFY ANY OF THE GROUNDS OF APPEAL ON OR BEFORE THE DATE OF HEARING.”
This appeal against the order under Section 263 is arising out of the assessment order passed under Section 143(3). In we have already set aside the assessment order back to jurisdiction AO for fresh adjudication. Since, the assessment order has been quashed, the appeal against the order passed under Section 263 has become infructuous. Accordingly, the same is dismissed in limine.
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