SHRI BHARATKUMAR MAHADEVPRASAD SHAH,AHMEDABAD vs. DCIT, CIRCLE-5(3), AHMEDABAD

PER MAHAVIR PRASAD, JUDICIAL MEMBER

2 . A.Y. 2015-16 2. In this case, survey was conducted u/s 133A of the Act. During the course of survey a statement of oath u/s 133A was recorded of the proprietor Shri Bharatkumar Mahadevprasad Shah on 18.12.2014. In reply to question no. 29 it is stated that the excess stock of Rs. 76,30,290/- found during the course of survey has not been accounted for in the books of accounts and also it was admitted that, the same was his undisclosed income and also admitted to pay the necessary tax on it. However, on verification of return of income filed for the A.Y. 2015-16, it is seen that, the above income has not been disclosed in the return of income. Thereafter a show cause notice was issued to the assessee.

“During the course of survey u/s 133A of the Income Tax Act, 1961, the tax officials took inventory of mobile phones and accessories found lying at godown and showroom maintained by the assessee, as your assessee is the distributor of various brands of mobile phones and accessories vide "Annexure SF" of the survey panchnama, and valued the stock found lying at godown at "MRP less 10% gross profit" and stock found at showroom has been valued at "MRP less 2% gross profit" In view of the above method of valuation of stock adopted by the survey team the difference in the value of stock of Rs, 76,30,290/- is determined by the survey team,, abstract of relevant calculation of the survey team determining the difference in value of stock is as mentioned below: During the survey, the tax officials did not find any difference between the physical stock maintained by the assessee and the stock maintained in the books of account of the assessee i.e. no difference in physical quantity of goods lying In stock has founded by the survey team. The additional income identified by the tax officials on account of difference in valuation of stock is due to the method of valuation of stock adopted by the survey team as mentioned above. The by the survey team for valuation of stock is strongly disputed by the assessee as the same is in gross negligence of valuation method suggested by ICAI and the 3 . A.Y. 2015-16 Income computation and disclosure standard issued by Income Tax in respect of valuation of Inventory, which suggests that Inventory should be valued at “cost of market value whichever is lower" The assessee has been and valuing stock as per the accounting standard suggested by ICAI for valuing inventory, i.e. cost or market value whichever is lower, which is also evident from tax audit report submitted by the assessee alongwith the return of income file by the assessee for the previous year under consideration and for the previous years preceding the previous year under consideration copy of the same is enclosed herewith for your kind consideration vide Exhibit – 1 Similar practice of valuing stock has been adopted and maintained by the assessee during the year under consideration. During the course of survey, the assessee was asked about the profit margin earned by the assessee, to which the assessee had replied that the earns an average gross profit margin of 10% on cost in case of sales made in wholesale market segment and an gross pro fit margin of 296 on cost in case of sales made in retail market segment The survey team in order to arrive at the cost of the goods found tying in stock used the aforesaid information and deducted the aforesaid gross profit margin from the MRP printed on the boxes of the goods to determine the cost of goods found tying in-stock thereby determining under valuation of stock and insisting to offer the same as additional income. The survey 'team completely ignored the purchase cost of the goods which was evident from the purchase bills available with the assessee during the course of survey. It is customary and a recommended practice of every business to record the stock at the basic price /cost price / purchase price mentioned in the purchase hill excluding taxes, as taxes are accounted for separately. Similar practice of recording stock has been adopted by the assessee. The survey team in gross negligence of the aforesaid fact has gone ahead with valuing the goods at MRP less gross profit margin. In regards to the same we are enclosing herewith copy of purchase bills of the goods found in stock evidencing the purchase price of the goods for your kind consideration vide Exhibit-2. Further we would like to submit before your goodself that the manufacturers of mobile phones and related accessories do-not sell their products directly to the consumers, rather a distribution network is created by the mobile manufacturing companies to the products available to the consumers. The distribution network 4 . A.Y. 2015-16 created by the mobile manufacturing companies to sell their products to consumers is customarily called as channel safes. Under this network, .layers of distributors and are formed who earn their respective of margin, which is negotiated by the respective seller as per its negotiating capacity is taken care by the MRP fixed by the manufacturer for a particular product Your assessee is in the business of trading of m telecommunication instruments accessories as distributor of various brands of mobile telecommunication devices. The manufacturer of the branded mobile communication devices goods to your assessee in the capacity as of their respective braded mobile telecommunication equipments and accessories, and in turn your assesses further sells such goods to dealers and retailers who further sell such goods to small size traders and consumers. Thus in the process of movement of goods from manufacturer to consumer there are layers of big and small traders involved, whose share of margins are included in the MRP fixed by the manufacturer. The goods are sold by the mobile brand companies to the assessee at a price below the MRP as is evident from the purchase bills submitted before your goodself, your assessee in turn sell the goods in the wholesale and retail market segment by charging aforementioned average gross profit margin on cost / purchase price of the respective product and not on the MRP of the product printed on their package. In view of the aforesaid facts and circumstances of the case, the adoption of MRP of the product as the for determining the value of goods lying in-stock by deducting respective gross profit margin is not appropriate as your assessee is not buying or selling the goods at MRP, In regards to the same we are enclosing herewith copy of sale bills of the goods found tying in stock on the date of survey evidencing the price at which the aforesaid goods were sold for your kind consideration vide Exhibit-2. Further in addition to the shove we would like to submit before your goodself hat .MRP of the goods includes indirect taxes charged on the sale and purchase of goods, which are accounted for separately and not passed through profit and loss account, which is also a practice mandated by the accounting standards issued by ICAI and by Income Tax. The indirect tax rate, applicable on the mobile phones is 15% Similar practice is followed by the assessee in preparation of books of accounts which is evident from the financial statements submitted before your goodself along with return of income. Adopt ion of MRP by the 5 . A.Y. 2015-16 survey team as a base for determining value of goods lying in stock on the aforesaid fact as MRP includes the amount of indirect taxes, which needs to be adjusted accordingly. In view of the aforesaid facts and circumstances of the case your assessee retracts from the offer of additional income of Rs. 76,30,290/- made on account of difference in valuation of stock determined by survey team during survey u/s 133A of the Income Tax Act, 1961, as the said offer of additional income was made under pressure of tax officials to declare additional income and also to avoid further pressure of tax officials to buy peace of mind.”

6 . A.Y. 2015-16 7. So far valuation of stock is concerned, survey team has valued to stock as per books lying at godown at MRP less 10% Gross profit and stock found at show room has been valued at MRP less 2% of Gross profit. Nowhere, difference of quantity of the items was noticed by the survey team and on the basis of valuation, lower authorities made and confirmed addition of Rs. 76.30,290/-.

”A survey was conducted in the premises of the assessee-firm. One of the partners in his statement offered an additional income ofRs. 20 lakhs for the assessment year 2001-02 and Rs. 30 lakhs for the assessment year 2002-03 but the statement was retracted by the assessee stating that the partner from whom the statement was recorded during the survey operation under section 133A of the Income-tax Act, 1961, was new to the management and had agreed to an ad hoc addition. The Assessing Officer based on the admissions made by the assessee recomputed the assessment. The order was set aside by the Commissioner (Appeals) and this order was upheld by the Tribunal. On appeal to the. High Court, the High Court held that in view of the scope and ambit of the materials collected during the course of survey, the action under section 133A would not have any evidentiary value and that it could not be said solely on the basis of the statement given by one of the partners of the assessee-firm that the disclosed income was assessable as lawful income of the assessee. On appeal to the Supreme Court:”

7 . A.Y. 2015-16 9. Apart from that in the case of Pullangode Rubber Produce Company Ltd. Vs. State of Kerala 91 ITR 18 wherein it is held such admission is an extremely important piece of evidence but it cannot be said that it is a conclusive:

”Entries made by the assessee in the account books treating a portion of the general expenditure as expenses towards immature plants and capitalising such portion amount to an admission that the amount in question was laid out or expended for the cultivation, upkeep or maintenance of immature plants from which no agricultural income was derived during the previous year for the purpose of Explanation (2) to section 5 of the Kerala Agricultural Income-tax Act, 1950. Such admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It is open to the assessee 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 disclose the correct state of facts.”

8 . A.Y. 2015-16 11. In the result, appeal filed by the Assessee is allowed.

Order pronounced in Open Court on 09- 10- 2019