ARUN JAIN,NEW DELHI vs. ITO, WARD-47(5), NEW DELHI

This appeal filed by the assessee is directed against the order dated 29.08.2018 passed by ld. CIT(A)-16, New Delhi for the assessment year 2014-15 on the following grounds : “1. Because the action is being challenged on facts and law for making addition of Rs.39,50,000/- due to difference between opening stock of relevant year & closing stock of preceding financial year.

2. Because the action is being challenged on facts and law for making addition of Rs.39,50,000/- overlooking that both the years i.e. impugned year & preceding year books of accounts of assessee were audited u/s. 44AB of the Income Tax Act, 1961.

2. Learned counsel for the assessee submitted that the Assessing Officer was not correct in making addition of Rs.39,50,000/- due to difference between the opening stock of relevant year and closing stock of immediately preceding financial year. Ld. Counsel submitted that the addition has been made by the Assessing Officer and confirmed by the ld. CIT(A) by ignoring or overlooking the fact that for both the years, i.e., the year under consideration and immediately preceding year, books of accounts of the assessee were audited u/s. 44AB of the Income-tax Act, 1961 (for short ‘the Act’). Ld. Counsel submitted that at the very first instance when the Assessing Officer issued notice to the assessee, the assessee, in all fairness, submitted that the assessee has applied for loan from various banks in order to repay outstanding existing loans taken from SIDBI amounting to Rs.1.2 crores. The financial condition of the assessee was not as good as he could pay the entire loan from his own internal sources. Therefore, to comply with the documentary requirement of the banks to get the loan sanctioned, the closing stock figure shown in balance sheet as on 31.03.2013 was inflated and shown higher as the opening and closing stocks as on 01.04.2013 in order to get loan sanctioned as per suggestions and advice of the Chartered Accountant and other financial advisors. The ld. Counsel submitted that merely because some higher figure has been shown as opening and closing stock, the Assessing Officer cannot make addition in the hands of assessee treating the difference amount as unexplained investment u/s. 69 of the Act. Ld. Counsel submitted that before the ld. CIT(A), the assessee has submitted the detailed submissions which were not considered and appreciated in right perspective and the ld. CIT(A) dismissed the explanation as well as the appeal of the assessee at the threshold, which is not a correct and justified approach. Ld. Counsel submitted that it was a bona fide change in figure of opening and closing stocks and the same cannot be alleged as manipulation in accounts. Therefore, the addition may kindly be deleted.

3. Replying to the above, the ld. DR vehemently supported the assessment as well as first appellate order and submitted that the assessee has shown higher figure of opening and closing stocks and this had been done only to manipulate the figures of stocks. He further submitted that since the assessee has taken value of opening stock as on 01.04.2013 inflating the same by Rs.39,50,000/- in comparison to closing stock shown as on 31.03.2013, therefore, the Assessing Officer was right in taking adverse inference against the assessee and to make addition u/s. 69 of the Act.

4. Placing rejoinder to the above, ld. Counsel submitted that the main grievance of the Revenue Authorities is that the net profit shown by the assessee in comparison to immediately previous two years is less and this has been shown by the assessee by showing inflated value of opening and closing stocks without any consequential change in closing stock of F.Y. 2013-14. Therefore, the assessee has no objection if the net profit rate is inflated and brought to the harmony of immediately preceding year’s net profit rate. Ld. Counsel submitted that the assessee is a small businessman engaged in the business of trading of industrial adhesive and non- adhesive tapes and insulation material, therefore, the impugned addition based merely on the change of figures of opening and closing stocks in compelling circumstances, may kindly be deleted.

5. On careful consideration of the above rival submissions, first of all, I note that admittedly, rather undisputedly, there was a difference of Rs.39,50,000/- between the figures shown as closing stock as on 31.03.2013 and opening stock as on 01.04.2013, which provoked the Assessing Officer to make addition u/s. 69 of the Act. However, during the assessment proceedings, at the very first instance, the assessee explained the cause of said inflation of opening stock and submitted that the assessee wanted to take loans from banks to repay the loan amount taken from SIDBI and just to satisfy the bank officials, he made such inflation in the opening stock without any malfunction. Therefore, I am satisfied that the assessee at the very first instance, told truth to the Revenue Authorities without any agitation or resistance.

6. At the same time, from careful reading of the first appellate order, we observe that during the first appeal proceedings, the assessee submitted a detailed submission explaining the facts and circumstances and compelling situation to show higher figure of opening stock as on 01.04.2013. The assessee also submitted a chart there under showing GP and NP rates. On perusal of said submissions and the chart showing sales, GP and NP, I clearly observe that the net profit shown by the assessee is 1.44% of turnover which is lesser than the average NP rate of immediately preceding two years. I may point out that no addition has been made by the Assessing Officer on account of low NP rate, but he took up the amount of difference between the closing stock as on 31.03.2013 and opening stock as on 01.04.2013 to invoke the provisions of section 69 of the Act. In my humble understanding, merely because the assessee has shown higher figure of opening stock in comparison to the closing stock shown at the end of immediately preceding financial year, the Assessing Officer is not entitled to make any addition only on the basis of two figures without bringing out any adverse or positive material on record to show that the assessee actually made investment in the stock which was not shown as on 31.03.2013 including the closing stock but shown inclusive of opening stock as on 01.04.2013. However, I also note that the assessee has shown low NP rate in comparison to immediately preceding assessment year which raises a situation of leakage of revenue.

7. In the totality of facts and circumstances of the issue as noted above, I reach to a logical conclusion that the Assessing Officer was not correct and justified in making addition in the hands of assessee merely on the basis of difference in the two figures, i.e., closing stock as on 31.03.2013 and opening stock as on 01.04.2013. However, to cover all possible leakages of revenue, I am of the considered opinion that the addition is required to be made in the hands of assessee on account of low NP rate. Therefore, the Assessing Officer is directed to make addition in the hands of assessee taking NP rate of total sale turnover as 2% of sales/turnover. The Assessing Officer is directed to recalculate the addition accordingly.