ASSISTANT COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE 1(1), CHENNAI vs. DORMAKABA INDIA PRIVATE LIMITED, KANCHEEPURAM

Decision: These grounds of appeal are general and consequential in nature and do not require any special adjudication. However, the issue raised by the appellant as per these grounds of appeal are being taken into account while deciding specific grounds of appeal. 6.2 Ground No.2 to 5. Decision: i) For the year under consideration, the appellant while filing the return of income had disclosed opening stock of raw materials under the head purchases. However, for the earlier year, the appellant had disclosed the opening stock and closing stock separately. ii) The AO while passing the order under section 143(3) had made addition to the income of the appellant amounting to Rs.13,05,50,357/- on account of difference in disclosure of closing stock of raw material of AY 2017-18 and disclosure of opening stock of raw material in AY 2018-19 and Rs.2,07,83,617/- as profit margin on account of difference in the value of stock. iii) During the course of appellate proceedings, the appellant submitted that such difference is on account of disclosure difference between the Return of income for the AY 2017-18 and the Audited Accounts for the AY 2018-

19. An extract of the submissions made by the appellant is given below: “The Company while filing the ROI for the AY 2017-18 presented its opening and closing stock of raw material and finished goods separately under "Part A-P and L- Profit and Loss Account for the financial year 2016-17". However, during the AY 2018-19, the Company had disclosed opening and closing stock of finished goods under "Part A-P and L- Profit and Loss Account for the Financial year 2017- 18" in ROI whereas opening stock of raw materials which had been grouped under raw material consumption (i.e. opening stock of raw material plus purchases minus closing stock of raw material) in the audited financial statements, had been disclosed under the head “Purchases” in the ROI of AY 2018-19.

Dormakaba India Pvt. Ltd. :- 5 -:

Particulars Amount (INR) Closing stock of raw material and finished goods disclosed in 300,631,582 ITR of AY 2017-18 Opening stock of raw material and finished goods disclosed in 170,081,225 ITR of AY 2018-19 Difference on account of disclosures (reported under the head 130,550,357 purchases in the ITR of AY 2018-19)

In this connection, the company wishes to state that the difference of INR 130,550,357 is on account of disclosure difference between the ROI for the AY 2017-18 and the ROI for the AY 2018-19. For your easy reference, we have tabulated the breakup of the aforesaid amount below: The breakup of purchases disclosed in ITR is tabulated below:

Year ended 31 March 2018 Particulars Remarks (Amount in INR) I. Cost material consumed This represents the difference in stock to the extent of 122,153,539 Opening stock of Raw 122,153,539 which is disclosed as purchases material (A) instead of opening stock of raw materials. Add: Purchases of raw 1,188,422,207 material (B) Less: closing stock of This has been disclosed as part of (140,155,746) Raw material (D) purchases in ROI. This consumption value has been disclosed as a part of purchases in Total Cost of materials the ROI. The relevant extract of consumed [I = (A)+(B)- 1,170,420,000 ROI has been enclosed in (D)] pg.no.230 to pg.no.231 of the paper book II. Purchases of Stock in trade Purchase of stock in 670,983,479 trade Total Purchases of The extract of audited financial 670,983,479 stock in trade (II) statements with purchase of stock Dormakaba India Pvt. Ltd. :- 6 -:

Year ended 31 March 2018 Particulars Remarks (Amount in INR) in trade (note 24) amounting to INR 670,983,479 has been provided as pg.no.230 to pg.no.231 of the paper book. This amount represents the Total of consumption of disclosure of purchases made in raw materials and ITR. Please refer Page No.19 of purchases (I+II) 1,841,403,479 ITR 6 of AY 2018-19 enclosed in (disclosed as pg.no.232 to pg.no.233 of paper ‘Purchases” in ITR6) book This represents the total value of Total purchases and consumption of raw materials and cost of materials 1,841,403,479 purchase of stock in trade consumed disclosed in provided in Note 23 and 24 of the financial statements financial statements. Difference between financials and ITR (K = Nil I-J)

As observed from the above table, the company submits that the amount of INR 130,550,357 has been disclosed as part of purchases in the ROI of AY 2018-19 and accordingly, there is no difference in the value of closing stock of AY 2017-18 and opening stock of AY 2018-19 and the amount of INR 130,550,357 has been properly accounted for and disclosed in the ROI as may be observed from the table provided. Therefore, it may be observed from the above that there is no unaccounted stock / unaccounted sale which warrants any adjustment.” iv. I have perused the financial statements of the appellant for AY 2017-18, AY 2018-19 and AY 2019-20. The opening and closing stock of raw materials and finished goods have between grouped together as “Cost of materials consumed” and “Changes in inventory of finished goods and stock in trade”. The appellant has demonstrated that the corresponding entries in the return of income match with the Audited Accounts. As seen from the above, there is only a disclosure difference in disclosing the opening stock of raw material in the ITR and there is no actual difference in amount between closing stock and opening stock of raw materials. The same was evidenced by the appellant in the above submission and with reference to ITR and Financial statement.

Dormakaba India Pvt. Ltd. :- 7 -: v. As the closing stock of the earlier year had already been grouped as opening stock under the head Purchases for the subject year and had been considered while computing income, further addition of the difference on account of stock mismatch would lead to double taxation of the same. vi. Taking into account the facts, circumstances, the explanations furnished by the appellant, I am inclined to accept the contentions of the appellant that total income and expenses reported in the Return of income are as per audited financial statements and hence mere disclosure difference in the return of income would not impact the net profit or taxable income. Mere disclosure difference in closing and opening stock of raw material cannot be added as unaccounted stock/ unaccounted sales and thereby addition on account of profit @ 15.29% is also not warranted. Thus, the additions made by the AO on account of difference in stock values need to be deleted. vii. In view of the above detailed discussion, the AO is directed to delete the addition of Rs.13,05,50,357/- made on account of reconciliation and grouping differences of stock and raw materials. Consequentially, the addition of Rs.2,07,83,617/- made to the said difference by applying the profit percentage of 15.29% is not in order and is hereby deleted. Accordingly, ground nos.2,4 and 5 are Allowed. Ground no 3 is regarding the contention that the AO has not given sufficient opportunity. As a number of opportunities have been granted to the appellant during assessment and these appellate proceedings, Ground no 3 is dismissed as infructuous.

Dormakaba India Pvt. Ltd. :- 8 -: 6. We have heard the rival submissions and perused the record and paper book filed by the assessee. The assessee, Dormakaba India Private Limited, is engaged in the manufacturing and wholesale trading of automatic doors, operators, glass fittings and accessories. The assessee filed its return of income for AY 2018-19 declaring income of Rs.60,14,25,250/-. The case was selected for scrutiny u/s 143(2). During assessment, the Assessing Officer (AO) noted a difference of Rs.130,550,357/- between closing stock of raw material & finished goods as per AY 2017-18 ITR and opening stock of AY 2018-19 ITR and treated such difference as unaccounted sales. He further applied a gross-profit rate of 15.29% and made an additional addition of Rs.2,07,83,617/-.

Dormakaba India Pvt. Ltd. :- 9 -: 8. Our adjudication:

It is an admitted fact that the assessee has consistently followed the same system of accounting. The figures in audited financial statements for AY 2017-18, AY 2018-19 and AY 2019-20 correctly record opening and closing stock. In AY 2018- 19 ITR, raw material consumption was disclosed under “Purchases”, which necessarily included opening stock of raw material. The “difference” is purely a disclosure difference between two ITR schedules, not an actual difference in books. Total purchases, raw material consumption, stock in trade and closing stock as per the ITR exactly match the audited financials. Thus, the AO's observation does not point out any inflation, suppression, or non-recording of stock, but only a variation in placement of figures in the ITR schedule. We also find that there is no adverse finding in audit report. The AO himself acknowledges that physical verification of stock was conducted and there was no adverse remark on stock valuation, and the minor differences reported in audit were not even remotely close to the alleged Rs.13 crores. Hence, the AO’s conclusion that the difference represented unaccounted sales is without factual foundation. Further, once the assessee had already included the opening stock of raw material by grouping it under purchases, any further addition of the same amount as “unaccounted stock/sales” would result in double taxation, which the ld.CIT(A) correctly noted. The AO applied a gross-profit rate of 15.29% on the alleged difference. Since the primary addition itself is unsustainable, the consequential profit addition automatically collapses. It is a well-settled that mere disclosure differences, or regrouping of entries between schedules, without any impact on Dormakaba India Pvt. Ltd. :- 10 -: profit or taxable income, cannot give rise to additions unless the AO proves that such regrouping reflects suppression or inflation of income. The Revenue has not brought any material to rebut the assessee's reconciliation or to show that stock was misstated in books. Hence, on careful consideration, we find no infirmity in the detailed and reasoned findings of the Ld. CIT(A). The AO has made the additions solely on the basis of a mechanical comparison of ITR schedules, without identifying any discrepancy in books, financials or audit report. We therefore, uphold the order of the ld. CIT(A).