M/S STONE AGE PVT. LTD.,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2, JAIPUR

ORDER PER: R.C. SHARMA, A.M. This is an appeal filed by the assessee against the order of ld. CIT(A)-1, Jaipur dated 26/03/2018 for the A.Y. 2013-14 in the matter order passed U/s 143(3) of the Income Tax Act, 1961 (in short the Act).

3 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO Sq. Mtr. Sand Stone 3,000.00 3,000.00 - 0.00% (Cobble) in M.T. Sand Stone in 360.00 360.00 - 0.00% CFT Total 4,060.00 4,311.00 Value Material in 7,91,40,978.00 10,37,11,875.60 2,45,70,897.60 23.69% Sq. Mtr. Sand Stone 22,66,590.00 19,11,000.00 -3,55,590.00 -18.61% (Cobble) in M.T. Sand Stone in 4,83,069.60 5,36,760.00 53,690.40 10.00% CFT Total 8,18,90,637.60 10,61,59,635.60 2,42,68,998.00 15.09% From the table above, it is clear that there was practically no difference in the physical inventory taken by the survey team vis a vis inventory as per Books of Accounts. While replying to question no. 20 it was categorically stated by Sanjeev Agarwal that stock quantity is broadly tallied. Otherwise also the difference is of a very miniscule quantity. This much difference can be on account of error in taking inventory in a short period of time. Since addition was mainly on account of higher process cost as taken by the department, it was submitted during the course of survey itself, while replying to question no. 18, that company has following different processes: S. No. Process Name 1 Machine Cutting 2 Calibration Process 3 Tumbling Process 4 Honing / Polishing

4 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO 5 Sand Blasting 6 Flaming 7 Antiquing 8 Brushing and Slacing 9 Profile Work 10 Hand Crafting 11. Hand cutting

7 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO process cost worked out at Rs. 211 only. In the assessment order, the AO observed that, as on the date of survey, there was difference in the valuation of stock as there was difference in physical quantity as taken by survey team and as per the books of the assessee company as well as there was difference in threats of inventory taken by the survey team and assessee company. The details of the same are as under: As per Assessee As per Survey Particulars Qty Rate Qty Rate (Q 11) (Q 13) Amount (Q 21) (Q 21) Amount Material in MT 755.53 3,000 22,66,590.00 637.00 3,000 19,11,000.00 Material in CFT 1,341.86 360 4,83,069.60 1,491.00 360 5,36,760.00 700 (refer 951(refer Material note note in SqMtrs 1,13,058.54 below) 7,91,40,978.00 1,09,055.60 below) 10,37,11,875.60

8,18,90,637.60 Total [PB 41-52] 10,61,59,635.60 Difference 2,42,69,000 Note Particulars As per Assessee As per Survey Material Rate Average Purchase Cost 350.00 350.00 Freight 75.00 75.00 Wastage 64.00 64.00 Processing Cost 211.00 462.00 TOTAL 700.00 951.00

8 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO From perusal of table above it is evident that the difference in physical quantity was insignificant (difference of 3.67% in sq.mtr material and 1.44% in remaining material). The difference arose due to difference in processing cost taken by the department at Rs.462/- as compared to processing cost worked out at Rs. 211/- as per books of account, as on the date of survey. Even during the course of assessment proceedings, the assessee had furnished complete break up processing cost for the entire year under consideration and also for immediately preceding year, which was as under: Amount (In Rs.) Particulars F.Y. 2012-13 F.Y. 2011-12 Stores, Consumable materials 1,95,80,836 1,96,77,101 Electric, Power, Fuel & Water 54,77,544 52,46,588 Labour Processing 32,02,336 25,91,962 Repairs to Building 5,66,023 3,15,018 Repairs to Machinery 12,50,266 7,20,148 Total 3,00,77, 005 2,8550,817 Total Production 1,74,036. 87 2,64,362.40 Average Processing Cost 173 108 The AO has not pointed out any defect in the above working. The average cost of processing of Rs. 462 taken by the survey team, seen in above background was unjustified. During the course of assessment proceedings, the assessee had also placed on record export bills in respect of sale of finished goods valued by the department during survey and it was pointed out that exports were made at the rates which were 9 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO lower than the rate taken by the survey team. Details of such bills are as under: Date Invoice Rate in Exchange Rate in Rate taken by PB No. Bill Rate INR survey team 24/10/2012 194 14.74 52.25 770.17 951 84 31/10/2012 202 16.00 52.25 836.00 951 85 31/10/2012 208 16.00 52.25 836.00 951 86-87 16/11/2012 216 13.90 54.55 758.25 951 88-89 22/12/2012 246 14.35 54.30 779.21 951 90 29/12/2012 256 13.15 54.30 714.05 951 91 In view of the above export sales it is clear that the higher processing cost so taken by the survey team was incorrect. It is pertinent to mention here that in the Audited Financial Statements the yearend inventory which is continuation of the book inventory as on the date of survey has also been accepted by the AO and assessment was completed accordingly. If the A.O. was to rely on the higher valuation of inventory done by the survey team, he should have substituted the stock accordingly which he has not done. It means stock as per books of account have been taken as correct by the A.O. while framing the assessment.

10 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO Vs. S. Khader Khan Son [2008] 300 1TR 157 (MAD.) in which it was held that:

"....From the foregoing discussion, the following examples have been culled out: (i) An admission is an extremely important piece of evidence but it cannot be said that it is conclusive and it is open to the person who made the admission to show that it is incorrect and the assessee should be given a proper opportunity to show that the books of account do not correctly disclose the correct state of facts, vide decision of the apex court in Pullangode Rubber Produce Co. Ltd. vs. State of Kerala & Another, 91- 1TR-18: (ii) In contradiction to the power under section 133A. section 132(4) of the Income Tax Act enables the authorized officer to examine a person on oath and any statement made by such person during such examination can also be used in evidence under the Income Tax Act. On the other hand, whatever statement is recorded under section 133A of the Income Tax Act is not given any evidentiary value obviously for the reason that the officer is not authorized to administer oath and to take any sworn statement which alone has evidentiary value as contemplated under law, vide Paul Mathews and Sons v. CIT [2003] 263 ITR 101 (Ker.); (iii) The expression "such other materials or Information as are available with the Assessing Officer" contained in section 158BB of the Income Tax Act, 1961 would include the materials gathered during the survey operation under section 133A, vide CIT v. G. K. Senniappan [2006] 284 1TR 220 (Mad.); (iv) The material or information found in the course of the survey proceedings could not be a basis for making any addition in the block assessment, vide decision of this court in T. C (A) No. 2620 of 2006 (between CIT v. S Ajit Kumar [2008] 300 ITR 152 (Mad); (v) Finally, the word "may" used in section 133A(3)(iii) of the Act, viz., "record the statement of any person which may be useful for, or relevant to, any proceeding under this Act", as already extracted

11 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO above, makes it clear that the materials collected and the statement recorded during the survey under section 133A are not conclusive piece of evidence by itself……. The views of the Madras High Court have been affirmed by the Hon'ble Supreme Court by dismissing the appeal filed by the Department. [S. Khader Khan Son [2012] 25 taxmann.com 413 (SC).

12 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO “5. That on the facts and circumstances of the case the Ld. CIT(A) is wrong, unjust and has erred in law in holding that there was excess stock of Rs. 30,96,058/- as on the date of survey u/s 133A which is to be treated as unexplained investment of assessee u/s 69 of the Act and there by confirming addition of Rs. 30,96,050/- in income of assessee as against addition of Rs. 32,47159/- made by A.O. as profit@ 17.20% on alleged shortage of stock of Rs. 1,88,78,833/-as on date of survey.” [CLC 113] Ld. Counsel of the assessee argued as under:

“..Without prejudice to above, it is submitted that addition on account of excess stock for valuation difference is to be allowed to the assessee firm in next year as opening stock which will reduce profits of next year. The assessment of assessee for A.Y. 2010-11 has been completed u/s 143 (3) wherein opening stock was taken by assessee as that was shown by him as closing stock in this A.Y. 2009-10. Thus no benefit of enhancement of closing stock was claimed or allowed in A.Y. 2010-11. This exercise is essentially revenue neutral between two years and/or in subsequent years. The Hon’ble Supreme Court in the case of CIT Vs. Excel Industries Ltd.(2013) 358 ITR 295 has held that addition in such revenue neutral exercise should not be made by department. Thus on both the counts, there is no justification to make addition for difference valuation of stock and Ld. CIT (A) is wrong and has erred in law in confirming addition of Rs. 30,96,050/- in the hands of assessee as unexplained excess stock found in course of survey which deserves to be deleted…”[CLC 120-121] Hon’ble ITAT after considering the arguments held as under:

“..13.1 Apropos Ground No. 5 of the assessee, we find merit in the arguments of the ld. counsel for the assessee that increase in valuation of the closing stock is to be allowed in next year as increase in opening stock in next year i.e. 2010-11. It has not been disputed that the assessee has not claimed any benefit by increase in valuation of stock in subsequent year. Hence, the addition becomes revenue neutral. Consequently, respectfully following the decision of Hon'ble Supreme Court in the case of CIT vs. Excel Industries Ltd. (2013) 358 ITR 295, the addition being tax neutral and the assessee having not derived any benefit, the addition is deleted…”[CLC 123]

13 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO In view of above, rejection of books of account and addition of Rs.2,42,69,000 is devoid of merits and, therefore, relief may please be allowed by accepting the books results and, thereby, deleting the addition made by AO and confirmed by ld. CIT(A).

"..Learned counsel for the appellant vehemently submitted that the CIT(A) as well as the Tribunal committed serious error of law by ignoring the fact that the alleged retraction of the assesses was led in evidence .during the course of the hearing before the Assessing Officer but since that was after delay of more than two years, therefore, such retraction statement has no value and should have been rejected. .... it was the duty of the Assessing Officer to collect more evidence in support of the fact that there was undisclosed income of Rs. 7 lakhs in the hands of the assessee. These reasons had been considered by the CIT(A) as well as by the ITAT 14 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO and therefore, their findings about the taxable income of the assessee has been given in the facts of the case. In view of the above reasons, we do not find any merit in this appeal, which is, accordingly, dismissed.

14.1 Ld. CIT(A), further, in Para viii at page 22, stated that marketing person cannot quote wrong figure of processing cost when he was selling the products of the assessee company. In this regard it is submitted that the cost of products in which assessee company is dealing is not static and it changes depending upon the order. A marketing person cannot know the nitty-gritties and intricacies of the costing model of any product. Further, we observe that the director whose statements were recorded initially stated the processing cost to be Rs.211 and, thereafter, under pressure he stated a higher processing cost to be Rs.462.

17 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO 14.2 Ld. CIT(A) while going through the annual average of processing cost i.e., Rs.173, observed that the total quantity manufactured i.e., 1,74,036.87 was total of quantities in different units of measurement. We observe that admittedly the total was calculated taking into account quantity in square meter as well as in metric tonne. Since, the inventory in metric tonne was raw material on which no processing was done, the assessee company should have totaled only the inventory which was in square meters.

14.3 Further, ld. CIT(A) in Para (ix) Page 23 stated that while working out the average processing cost of Rs.173 the assessee company have not taken Yield Percentage into consideration. In this regard we observe that even if the average yearly processing cost is revised taking into consideration the observations as stated above, then also the average yearly processing cost will be Rs.208.29 which is very close to the average given by the assessee company i.e., 211. Details of correct revised average yearly processing cost are as under: Particulars Amount Total manufacturing cost [PB92] 3,00,77,005.00 Total quantity produced [Note 1] 1,44,400.45 Average yearly processing cost 208.29

Note – 1 [CIT(A) Page 23]

18 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO Qtymfred. (after Yield Particulars Units considering yield % %) All type of building stones[PB 90] Sq. Mtrs. 1,39,844.70 80.93 All type of building stones[PB 90] Sq. Mtrs. 4,555.75 100 TOTAL 1,44,400.45 The assessee company during the appellate proceedings produced few invoices on sample basis before ld. CIT(A), these invoices clearly depict that the products which were sold underwent various processes like hand cut, calibration, etc. Thus, the contention of ld. CIT(A) at Para (x) of Page 23 is devoid of merits. 14.4 Ld. CIT(A) at para (xi) on page 24 considered the fact that value of stock as stated by the assessee company, as on the date of survey, included an amount on account of processing of handicraft items. Ld. CIT(A) opined that such processes have high percentage of processing charges in comparison to other processes. Here we found that the average of 211 was computed after taking into account the designing process of handicraft items. Thus, higher average of 462 is baseless. In the instant case, the sole basis for rejection of Books of Account is the unsubstantiated allegation of excess stock as on the particular date of survey. No defect in the yearend inventory valuation has been pointed out by the AO.

19 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO 15. From the record we found that addition was made on the basis of statement of Director. However, later on the director retracted his statements. The assessee company with the help of complete working established that the statements at the time of survey with regard to processing cost was wrong. However, A.O. could not point out any defect or discrepancy in factual working so submitted and which were duly supported by audited accounts. The A.O. solely relied only on the statements to make the additions and had no other evidence. Thus there is no merit for the addition made on account of processing rate difference in so far as all processes as envisaged by the department were not carried out on all the finished goods and only the process required by the customers were so carried out. Therefore, actual process cost as arrived in books of account is to be taken for valuation of stock.

20 ITA 690/JP/2018_ M/s Stone Age Pvt. Ltd. Vs. ITO 17. It is clear from the above chart that even if the tentative quantity taken by the department with the rates as per books of account is taken total stock works out at Rs. 7,87,86,680/- as against the stock as per books of account at Rs. 8,18,90,637/-. Thus, there is shortage of stock as on the date of survey amounting to Rs. 31,03,957/- which can be considered as having been sold but not recorded in the books of account on the date of survey. At the most, the department can add GP earned on such shortage of stock, in so far as the A.O. has not doubted that all the purchases had been recorded in the books of account. Once the purchases is found to be accounted for, addition can be made with respect to G.P. earned on such shortage of stock. The G.P. during the year is 7.48%. Applying the same to the shortage of stock amounting to Rs. 31,03,957/- gives a profit of Rs. 2,32,175/-. Accordingly, we uphold the addition of Rs. 2,32,175/-. The A.O. is directed accordingly.