MODERN AGENCIES,JHANSI vs. ACIT CIRCLE-6, JHANSI

Per Dr.Mitha Lal Meena, AM: These cross appeals are filed by the assessee and the

Revenue against the order of the Ld. CIT(A) in respect of

Assessment Year 2010-11.

437and 438/Agr/2015:

(1) That on the facts & in the circumstances of the case & in law, the findings of the learned lower authorities that the assessee did not maintain the regular books of accounts and that the same were also not produced in the course of assessment proceedings are bad in law and opposed to facts, hence such findings be quashed and it be held that the assessee maintained the regular books of accounts and were also produced before the A.O. The findings of applicability of provisions of section 145(3) be also held as unlawful and unjustified. (2) That on the facts & in the circumstances of the case and in law, the contention of the assessee that in the stock inventory sheets prepared in survey, the survey officials did interpolations/tempering in the quantities mentioned in the said sheets at many places before delivering the copy of the same to the assessee be accepted and, therefore, it be held that the valuation based on such inventory sheets is bad in law and, therefore, the addition made at Rs. 10131744 on the basis of such interpolated and tempered inventory sheets is unjustified and unsustainable in law and, therefore, be deleted. (3) That on the facts & in the circumstances of the case and in law, the findings of the learned CIT(A) in para 5.3 of his order are injudicious, wrong and opposed to facts and material on record and that the contents of

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the assessee's letter dated 10.05.2010 have not been properly and judiciously adjudicated. (4) That on the facts & in the circumstances of the case and in law, the learned CIT(A) erred and not justified in not adjudication the issue with regard the interpolation/tempering in the inventory sheets done by the survey officials. The said issue be kindly adjudicated having regard to the explanation given and the evidences furnished before the learned lower authorities. (5) That on the facts & in the circumstances of the case and in law, the learned CIT(A) erred and not justified in not admitting the report of handwriting experts as furnished before him. The assessee contends that in the interest of substantial justice the said report of handwriting expert be kindly admitted for the adjudication of grounds relating to tempering/interpolation. (6) That on the facts & in the circumstances of the case and in law, the learned lower authorities erred and not justified in not judiciously adjudicating the contentions of the assessee that the inventory sheets contain the several arithmetical and calculation mistakes and warrants correction. The assessee contends that having regard to the explanation and details furnished before the learned lower authorities such arithmetical and calculation mistakes be kindly corrected. (7) That on the facts & in the circumstances of the case and in law, it be held that in the post survey period, the tax authorities did the revaluation of stock and on that basis, they worked out the excess value of stock at Rs: 3913263 which was accordingly surrendered by the assessee and, therefore, the additions made at Rs. 10131744, neither lawful nor justified and be kindly deleted. (8) That on the facts & in the circumstances of the case and in law, it be held that the book value of stock as per the account books on the survey date was

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Rs.4423558 and not Rs. 2272457 as adopted by the A.O. and, therefore, the adoption of book value stock by the A.O. be held as incorrect and wrong. (9) That on the facts & in the circumstances of the case and in law and without prejudice to the forgoing grounds even if it is held otherwise, then considering the realities of business and on judicious considerations, the learned lower authorities should have allowed the average rate of discount @ 7.5% on MRP valuation and also estimated value of dead stock @ 10% on the MRP valuation and also should have corrected the calculation & arithmetical mistakes as pointed out by the assessee before them and then to assess whether the assessee had excess value of book stock or not. 3. InITA No. 408 and 409/Agr/2015the Revenuehas raised the

following common grounds:

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pertaining to maintenance of books of account, valuation of closing

stock, claims of discount and dead stock, and therefore these

appeals are being adjudicated by this consolidated order. The

effective issuesidentified for adjudication are as under:

1) Maintenance of books of account. 2) Valuation of Closing stock on the date of survey for the purpose of computation of excess stock. 3) Claim of discount @ 7% on sales and dead stock @ 10%. 5. Briefly, the facts as per record, are being taken from ITA No.

438/Agra/2015, for the sake of convenience. The assessee is a

retail trader of paints and hardware goods and deriving income by

running retail sale of paints. A survey u/s 133A was conducted in

the premises of the assessee on 18.09.2009. The Assessing Officer (In short ‘the AO') stated that assessee has failed to produce the books of account either during the course of survey or

assessment proceeding. The AO concluded that in the absence of

regular books of account, reference is made to section 145(3) and

the assessment is framed in manner as given in the section 144

i.e.the Best Judgment Assessment,although the order was passed

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u/s section 143(3) of the Act. In conclusion, the AO vide par 3,

observed as follows:

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the AO,observed as follows: “…………After considering the rejoinder of the Ld. AR and discussion held with him in the hearing held on 18.09.2014, a letter A. No 82 / CIT (A) –II/Agra /ACIT - 6/Jhansi/13-14/990 dated 23.09.2014 has been written to the AO calling for his report on certain specific objection of the Ld. AR as mentioned in para 3 of my said letter dated 23.04.2014. For a ready reference, this letter is reproduced as under: Please refer your earlier remand report sent vide letter F. No. Remand Report/ DCIT/Circle-6 Jhansi /2014-15 dated 06.08.2014 on the above subject. After going through your remand report and having a discussion with the Authorized Representative (Ld. AR) of the assessee (appellant) on the date of hearing of appeal i.e. 18.09.2009, it has come to my notice that in the written submission filed by the Ld. AR vide his letter dated 25.07.2014, it has been mentioned in para 7 of the said submission that the AO has completely ignored the revaluation done at cost price after the survey by the survey officials and on the basis of said revaluation, the excess stock was worked out at Rs. 39, 13,263/- which was surrendered as income and shown in the Profit and Loss Account separately. The Ld. AR has shown the Trading and Profit and Loss Account filed by the assessee along with the return of income in which, Rs. 41, 86,404/- was shown as net Profit and the same was declared as returned income by the assessee. For your ready reference the said Trading and Profit and Loss Account is reproduced as under—

Trading & Profit and Loss A/c for the year ended on 31.03.2010 Particulars Amount Particulars Amount To open Stock 22,72,457.00 By Sales A/c 1,75,96,488.71

To purchases 1,54,25,759.76 By closing Stock 19,28,052.00 To Gross Profit 826.323.95 19,524.540.71 19524.540.71

To Accounting Charges 60,000.00 By Gross Profit 826.323.95 To Audit Fees 9,000.00 By Discount 528.597.68

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To Bank Charges 28,391.16 By Income Declared u/s 39,13,263.00 133A To Conveyance 20,420.00 To Depreciation 29,159.30 To Electricity Expenses 18,360.00 To General Expenses 13,350.00 To Goods Expenses 67,027.00 To Labour Expenses 40,200.00 To Legal Expenses 8,000.00 To Misc Expenses 378.40 To Printing & Stationery 14,804.00 To Rent 90,000.00 To Round off 30.87 To Salary 1,82,400.00 To Sales promotion 23,450.00 To Shop Expenses 21,149.49 To Telephone Expenses 19,405.00 Profit before 46,22,659.41 distribution to partner To Intt. To Partner 2,56,255.62 To Salary to Partner 1,80,000.00 To Net Profit 41,86,403.79 52,68,184.63 52,68,184.63

Working of the excess stock valued at cost as declared by the assessee on the basis of the excess quantity of material found during survey and declared in the above Profit & Loss Account at Rs. 39,13,263/- is shown to have been computed by the assessee (appellant) as under— Physical statement date of survey taken by department on MRP Rs. 1, 32, 03,797 Less: Cost price of goods of physical stock Rs. 83, 65,725 Trading Stock as on date of surveyRs. 44, 23,559 Rs.39, 42,166 Value taken on MRP in listRs. 2, 89,033 Less: Average reduction on MRP @ 10%Rs. 28,903 Final discloser amountRs. 39, 13,263

Working of trading stock as on the date of survey at Rs. 44, 23,559/- has been made by the assessee (appellant) after drawing a Profit and Loss Account taking into account the sales and purchases made from 01.04.2009 to 18.09.2009 (date of survey) on the basis of purchase and sale bills found on the date of survey and the same is shown by the Ld. AR as below: - Profit & Loss A/c

Particulars Particulars

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Opening Stock 2272457.00 Sales Account 6950963.05 Closing Stock 2272457.00 Sale 12.5% 4515313.48 Purchase Sale 12.5% Retail Accounts 8615427.97 (Add 3%) Purchase 12.5% 8351675.72 Sale 12.5% Retail 2102964.00 Purchase 12.5% (Add 3%) Sale 4% 229331.10 Purchase 4% 263752.25 Sale 4% (Add 1%) Purchase 4% (Add 1%) Sale 4% Retail 99754.47 Purchase Exempt Sale 4% Retail (Add 1%) Direct Expenses 11227.00 Sale Exempt 3600.00 Good Expenses 11227.00 Closing stock 4423559.00 Gross Profit C/o 475410.08 Closing stock 4423559.00 11374522.05 11374522.05

During discussion, it has been informed by the Ld. AR that all the purchase and sale bills are available in the impounded documents and hence, valuation of the stock can be done at cost by taking the cost price of the materials included in the inventory of stock prepared during survey and a provisional Profit and Loss Account can also be made to determine the closing stock available on the date of survey as worked out by the assessee as above.

The above method of computation for determining the value of stock at cost price has been adopted by the AO because he has given a finding in the assessment order that the assessee (appellant) did not produce the books of account during the course of assessment proceedings. This fact has been vehemently contested by the Ld. AR and it has been stated that the entire books are available, written up to the date of survey, in the impounded hard disk and it has also been stated finding of the AO discussed in the assessment order that books of account was not produced during the course of hearing of the assessment proceeding, is not correct as the entire books of account was produced before the AO. In this regard, he has argued that how it could have been possible to prepare the Profit and Loss Account and Balance Sheet along with the tax Audit Report in absence of books of account. It has also argued

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that even after considering the argument taken by the AO that the books of account was rejected by him, it is not correct on part of the AO to reply on the Profit and Loss Amount and Balance Sheet filed by the assessee (appellant) on the basis of same books of account that has been rejected by him and to adopt the GP rate for the purpose of computation of closing stock at cost from the same Profit and Loss Amount made on the basis of the books of account rejected by him. He has also pointed out that even after rejected of books of account, the income Rs. 41, 86,404/- declared by the assessee on the basis of same books of account has been accepted by the AO. By pointing out such anomaly in the decision of the AO with respect to rejection of books of account, the Ld. AR has emphasized that the books of account are very much in existence and the same were produced before the AO also and they are also available up to the date of survey in the impounded hard disk of the computer. Therefore, it has been requested that after viewing the data of impounded hard disk, it can be decided whether, the assessee (appellant) was regularly maintaining the books of account or not.

The Ld. AR has also argued that even the working of the closing stock at cost by the AO after reducing the value of stock worked out at MRP by the GP rate is not correct when all the purchase bills are available in the impounded document and on the basis of such purchase bills, the purchase price of the materials mentioned in the inventory of stock can be ascertained and the valuation of stock at cost can be worked out on the basis of such purchase price has done by the assessee (appellant) at Rs. 83, 65,725/- The Ld. AR pointed out that the working of value of stock by the AO on the basis of the GP rate is not correct because all the items shown in the purchase may not be available in the closing stock and hence, for determining the correct value of the closing stock, the valuation should always be done at purchase price. While working out the amount of Rs. 1, 01, 31,744/- added by the AO in the income of the assessee, he has deducted the amount of opening stock at Rs. 22, 72,457/- out of the total amount of the value of stock computed at cost at Rs. 1, 24, 04,201/- In this regard, the Ld. AR pointed out that the value of opening stock taken at Rs. 22, 72,457/- is an on 01.04.2009. Therefore, working of the AO to determine the excess stock on the date of survey by reducing the value of opening stock as on 01.04.2009 from the total value of stock computed on the date of survey is not correct. As per him, for the correct working, the value of stock as on the date of survey available in the books of account should have been deducted from to total value of stock computed at cost price on the date of survey. In his view, even if the books of account were not available with the AO, he could have drawn a provisional Profit & Loss Account on the basis of purchase and sale bills available in the impounded document instead of taking

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the value of stock on the first date of the relevant financial year as on 01.04.2009. In fact, that value of stock should have been reduced what was available on the date of survey i.e. 18.09.2009. Apart from above discrepancies in working of AO to determine excess value of stock at Rs. 1, 01, 31,744/- the Ld. AR has also pointed out that the assessee itself has worked out such excess value at Rs. 39, 13,263/- and declared as part of the returned income of Rs. 41, 86,404/- Since the AO has adopted the same returned income of Rs. 41, 86,404/- as initial income of the assessee and thereafter, he has added Rs. 1, 01, 31,744/- to determine the assessed income at Rs. 1, 43, 18148/-, there is a double addition of Rs. 39, 13,263/-.

(i) Please examine the contention raised by the Ld. AR about the double addition of Rs. 39, 13,263/-.

(ii) Please examine whether, purchase and sale bill up to the date of survey are available in the impounded document or not.

(iii) If the purchase bills are found available in the impounded document, it should be explained why these purchase bills were not considered for working of value of stock found during survey. The entire impounded documents should be produced before me for necessary examination on the date of next hearing.

(iv) After finding out whether purchase bills are available in the impounded documents, working of valuation of stock as on the date of survey at cost price determined by the assessee (appellant) at Rs. 83, 65,725/- should be checked and your comment should be offered on the valuation of stock found during survey, whether the above value has been correctly determined. If this value is not correct, you may work out the correct value of the stock on the date of survey by taking the cost price from purchase bills available in the impounded document.

(v) As regards to the value of stock available with the assessee (appellant) on the date of survey, please explain as to why this value of stock should be taken at Rs. 22, 72,457/- that pertains to the value of stock available as on 01.04.2009 but the date of survey is 18.09.2009. How it can be possible that the stock on 18.09.2009 would remain the same what was available on 01.04.2009. It can be possible only when no trading activity had taken place during the period 01.04.2009 to 18.09.2009 but looking to the trading result as available in the case record, the assessee (appellant) has been found to be regularly doing trading activities during

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the said period and as per the Ld. AR, corresponding purchase and sale bills are available in the impounded documents. On the basis of such purchase and sale bills, the assessee itself has prepared a provisional Profit & Loss Account in which, closing stock on the date of survey has been shown at Rs. 44, 23,559/- Therefore, you are required to find out from the impounded documents, whether purchase and sale bills are available or not on the basis of these purchase and sale bills, a provisional Profit & Loss Account of the assessee can be drawn as done by the assessee itself and then give your comment as to what could be the correct value of closing stock as worked out on the date of survey on the basis of impounded documents and whether, in order to work out the excess value of stock for making addition in the income of the assessee, the same value should be deducted instead of Rs. 22, 72,457/- from the value of stock determined at cost price on the date of survey.

(vi) In order to settle the dispute about the maintenance the books of account, the impounded hard disk should be examined in presence of the assessee (appellant) to find out whether the data relating to maintenance of books of account are available in the hard diskand these data are sameas recorded the books of account on the basis of which Profit & Loss Account & Balance Sheet was drawn and Tax Audit Report was prepared.

Your comment should also be offered as to after rejection of books of account, what was the basis for taking the same value of Profit and GP rate disclosed by the assessee in the profit & loss account prepared by it based on the same books of account that has been rejected in the assessment order.”

4.6 In compliance to my above directions, the AO submitted his remand report vide his letter F. No. Remand report / DCIT/Circle-6/Jhansi/2014-15/399 dated 07.11.2014 and the same is reproduced .as under. “As per your direction dated 23.09.2014, the assessee has called for along with books of accounts. In the presence of the firm Sri Mukesh Agarwal, the impounded CPU has open but no material / books of accounts have been found in this CPU. The books of account, sales bill and purchase bills etc. Which is impounded during the course of survey action. As per your requisition point wise reply is as under— 1. The assessee has shown Rs. 39, 13,263/- in his profit and loss account for A.Y.2010-11 but it cannot be concluded that the addition made in assessment order is double in respect of Rs. 39, 13,263/- because the assessing officer has calculated the income of the assessee on the basis of gross profit percentage and cast of purchase.

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So Cost of purchase or stock at cost = Stock at MRP- Gross Profit Cost of purchase or stock at cost = Rs. 1, 30, 14,585 (1-4.69/100) Value of stock at cost on the date of survey = Rs. 1, 24, 04,201/- b. Again, on the date of survey, Sri Mukesh Agarwal was asked the value of stock present in his books of accounts. Mukesh Agarwal in his statement submitted that stock present in his books was worth Rs. 30, 00, 000/- but it seen that in absence of the books of account the assessee could not substantiate this figure. So, this figure cannot be accepted. In absence of the books of accounts the opening stock of the assessee at Rs. 22, 72,457/- is taken as the stock of the assessee as per his books of accounts. c. From the discussion above, it is seen that value of actual stock present on the day of search is Rs. 1, 24, 04,201/- and stock as per books of account is Rs. 22, 72,457/- So, excess stock present to the tune of Rs. 1, 01, 31,744/- is

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nothing but unexplained investment of the firm and it is treated as such and added to the income of the assessee u/s 69B of the I.T. Act.” 6. As per direction, the impounded hard disk examined in the presence of partner Sri Mukesh Agarwal with help of computer expert but no data found in the hard disk. 4.7 After examination of above remand report of the AO, I have found that his report has not been submitted as per my direction given in my letter dated 23.02.1994. As regards the valuation stock at cost price, the AO was specifically asked to find out whether purchase bills are available in the impounded documents and if purchase bills are available, it should be explained why these purchase bills were not considered for working of valuation of stock found during survey. He has also been asked that after finding out whether purchase bills are available in the impounded documents, working of valuation of stock as on the date of survey at cost price determined by the assessee (appellant) at Rs. 83, 65,725/- should be checked and his comment should be offered on the valuation of the stock found during survey specifying, whether the above value has been correctly determined. He has also been asked to v verify whether the value of stock found on the date of survey determined by the assessee (appellant) at Rs. 83, 65,725/- is correct or not and if it is not correct, he may work out the correct value of the stock on the date of survey by taking the cost price from purchase bills available in the impounded documents. In reply to my above queries, the AO has confirmed that most of the purchase & sale bills are available in the impounded documents but instead of verifying the valuation of stock made by the assessee on cost price at Rs. 83, 65,725/- from the purchase bills found available in impounded documents, the AO has simply reported in a routine manner stating that during the course of survey proceeding, the stock was prepared in the presence of partner of the firm and the stock value was determined on the basis of product price and also mentioned that during the survey proceeding, no books of account was found and hence, stock value was determined on the basis of product price. The AO has neither verified the correctness of valuation of stock furnished by the assessee (appellant) claiming to have been done at cost price amounting to Rs. 83, 65,725/- nor he has made any attempt to furnish correct valuation of stock at cost price with reference to purchase bills found in the impounded documents and he has simply forwarded the impounded documents to my office which was called for with the purpose of verifying the correctness of valuation of stock by referring to purchase bills claimed to be available in the impounded documents.

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The AO has not followed my direction in furnishing of correct valuation of stock at cost price with reference to purchase bills available in impounded document and he has not even followed my another direction in which, he was required to work out the book value of stock on the date of survey after drawing a provisional Profit & Loss Account on the basis of purchase & sale bills. The assessee has made such provisional Profit & Loss Account taking into account the sales & purchase bills available for the period 01.04.2009 to 18.09.2009 (date of survey) and on the basis of such provisional Profit & Loss Account, the book value of closing stock has been worked out at Rs. 44, 23,559/- The Ld. AR has argued that for determining the excess value of stock on the date of survey, book value of stock worked out on the date of survey should be deducted from the total value (at cost price) of stock found on the date of survey instead of deducting opening value of stock of Rs. 22, 72,457/- as done by the AO. In view of above objection of the Ld. AR, the AO has been asked in my letter dated 23.09.2014 to find out from the impounded documents, whether purchase & sale bills are available or not and if they are available, a provisional Profit & Loss Account of the assessee should be drawn as done by the assessee on the basis of these purchase & sale bills and then, he should give his comments as to what could be the correct value of closing stock as worked out on the date of survey on the basis of impounded documents and whether, in order to work out the excessive value of stock for making addition in the income of the assessee, the same value should be deducted instead of Rs. 22, 72,457/- from the value of stock determined at cost price on the date of survey. In response to my above query, the AO in his report dated 07.11.2014 has just referred to working of valuation of stock on basis of Gross Profit percentage and deducting there from opening value of stock to arrive at the excess value of stock. Instead of determining the book value of stock on the date of survey by making a provisional Profit & Loss Account on the basis of purchase & sale bills available in the impounded documents, the AO has again reported in a routine manner that on the date of survey, Sh. Mukesh Agarwal was asked the value of stock present in his books of accounts and he submitted in his statement that stock present in his books was worth Rs. 30 lacs but it is seen that in absence of the books of accounts, the assessee could not substantiate this figure. Therefore, as submitted by the AO, the book value of stock stated to be at Rs. 30 lacs could not be accepted and hence, he justified taking the opening stock of the stock at Rs. 22, 72,457/- as stock of the assessee as per his books of accounts. Such report of the AO is beyond my comprehension. How it can be possible that the stock on 18.09.2009 would remain the same what was available as on 01.04.2009. It can be possible only when no trading activity would have taken place during the period 01.04.2009 to 18.09.2009 but looking to the trading result as available in the case record, I have found that the assessee (appellant) has been regularly doing trading activities during the same period and the assessee (appellant) had already drawn a

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provisional Profit & Loss Account showing the book value of stock on the date of survey at Rs. 44, 23, 559/- which the AO was asked to verify. However, no comment has been offered by the AO on the correctness of book value of stock on the date of survey determined on the basis provisional Profit & Loss Account and he has mentioned about the value of stock told by the partner on the date of survey as being of Rs. 30 lacs, which was rejected by the AO in absence of books of accounts as reported by him in the remand report. In fact, the AO was never asked by me to verify correctness of book value of stock of Rs. 30 lacs told on the date of survey by the partner but he was asked to examine correctness of book value of stock determined on the date of survey at Rs. 44, 23,559/- on the basis of provisional Profit & Loss Account prepared by the assessee (appellant), which the AO has failed to examine and to offer comment on its correctness. Though, the remand report of the AO has not been found to be made as per my direction for the purpose of adjudicating upon the dispute raised before me on the correctness of stock taking and its valuation made on the date of survey resulting into an addition of Rs. 1, 01, 31,744/- in the impugned assessment order, I have decided to dispose of this appeal on the basis of examination of the impounded documents sent by the AO. Before proceeding further to examine the impounded documents to adjudicate upon the objections taken by the assessee (appellant) in the grounds of appeal, the above-mentioned remand report of the AO dated 07.11.2014 has been sent to the assessee (appellant) calling for its rejoinder. After sending of the above remand report of the AO, the assessee (appellant) vide its letter dated 25.11.2014, has taken one additional ground, challenging the finding of the AO about non-maintenance of regular books of accounts by the assessee. The additional ground taken by the assessee (appellant) in the letter dated 25.11.2014, filed before me on 02.12.2014 is reproduced as under: — 1. In the above appeal kindly permit the assessee to raise the following ground of appeal for the adjudication: - “That on the facts & in circumstances of the case and in law, the findings of learned AO that the assessee did not maintain the regular books of account and the provisions of section 145(3) are applicable, are neither lawful nor judicious and that the same are also opposed to facts, equity & law, hence such findings be quashed and it be held that the assessee maintained the regular books of accounts and the provision of section 145(3) are not applicable in its case.”

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of provision of section 145(3) and hence the above ground is being taken in the interest of substantial justice and to avoid any technicalities, the assessee submits that above ground is very material and relevant for the adjudication of the issue involved in this appeal hence the same be kindly admitted for adjudication in the interest of the justice. 3. The assessee refers the following decisions and submits that in view of the same its present application be kindly considered: - 1. The M.P. High court in the case of Steel Ingots (P) Ltd. Vs. CIT reported in 86 Taxman 440 (M.P.) held “That the eventual destination of every litigation is justice and as such technicality should not be permitted to prevail as a speed – breaker in the course of dispensation of justice. True it is that the question was not raised before the first appellate authority but it is equally true that the aforesaid question was one of law and had material bearing on the order of assessment and, therefore, the Tribunal should have permitted to the assessee to raise the aforesaid question despite the fact that it failed to raise the same before the first appellate authority.”

Held Sub-s. (5) of s. 250 clearly postulates that there is no inhibition against raising new grounds before the AAC. Such new grounds are required to be considered by the AAC unless he is satisfied that the same are due to wilful or unreasonable reasons. Sec.251 (1)(a) confers on the first appellate authority plenary power while hearing an appeal against the assessment order. It can confirm, reduce, enhance or annual the assessment, he may set aside the assessment and refer the case back to AO for making a fresh assessment in accordance with direction given by him. Thus, scheme of statute itself empowers the first appellate authority to allow the appellant before it to go in the hearing of the appeal into any ground not taken in the grounds of appeal and decide the same unless he is satisfied that failure to raise such grounds was willful or unreasonable, and where there is material or evidence before the AO to support such claim. Such claim even if not raised before the AO, if raised before the first appellate authority, he ought to consider and decide it if he is satisfied about the bona fides.

4.8 Before admitting the above additional ground, report of the AO has also been called for. The AO vide his letter F. No. Misc./DCIT/Circle-6/Jhansi/2014-15/922 dated 09.01.2015 submitted as under: - (a) Where the (AO) has refused to admit evidence, which ought to have been admitted; or (b) Where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the (AO); or (c) Where the appellant was prevented by sufficient cause from producing before the (AO) any evidence which is relevant to any ground of appeal; or

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(d) Where the (AO) has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal.

From the perusal of assessment record, it is noticed that the Assessing Officer has given proper and sufficient opportunity to assessee for producing any evidence. During assessment proceedings, neither AO has refuse to admit any evidence nor assessee has given any sufficient cause in his application dated 25.11.2014 for additional grounds. From the order sheet entries. It is also learned that the AO has given sufficient opportunity to the assessee. The case low is not applicable in his case. Therefore, it is kindly recorded that the additional grounds may not be admitted in view of above.

In this case of assessee, during survey action u/s 133A, no book of account is found. During assessment proceeding after giving various opportunities, the assessee has failed to produce books of accounts. During appellant proceeding as per direction of Ld. CIT(A)-II, Agra, the seized Hard disk, has open but no record was found in presence of assessee himself. Therefore, the AO has rightly rejected the books of accounts of the assessee. Therefore, it is requested that kindly up held the order of the AO.

4.9 In the above report, it appears that the AO has got confused with the criteria of admission of additional evidence as per rule 46A provided in Income Tax Rules 1962 and wrongly considered by him for admission of additional ground. Courts have held that there should not be any inhibition in admitting any new ground during the appeal unless the same is found willfull or unreasonable. The additional ground raised by the appellant before me challenging the finding of the finding of the AO of non-maintenance of books of accounts is only technical ground and this ground can be very well examined on the basis of material and facts available on record and hence, I do not agree with the AO for not admitting this ground. Therefore, additional ground challenging the finding of the AO of non-maintenance of books of accounts by the assessee has been admitted for adjudication by me.

4.10 Against the remand report of the AO dated 07.11.2014, as discuss by me in para no. 4.5 and 4.6, the Ld. AR has filed rejoinder vide his letter dated 10.02.2015 and the same reproduce as under: - “1 In the above appeal, the Ld. AO has filed second remand report which is dated 07.11.2014 and the copy of which has been served by your honour for submission of rejoinder further. The assessee submits that in this case, the first reply filed is dated 25.07.2014 which is in the form of the paper book. This reply for the sake of brevity would be referred in this submission as “FPB”. The second reply in the above appeal is in the

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respect of rejoinder & synopsis of the submission of the assessee and this dated 18.09.2014. In this submission, the same would be referred to as “SPB” 2. The issue wise comments & brief submission are as under— (I) Books of accounts (a) In this case, it has been alleged that no books of accounts were found in the course of survey conducted on 18.09.2009. It was also alleged that in the course of assessment proceedings also the assessee did not produce the books of account. In the second remand report, it is mentioned further that in the impounded hard disk, when operated by the present AO, no data has been found in the hard disk. (b) The assessee’s contentions are that it is not true that in the course of survey, no books of accounts were found. The assessee submits that the books of accounts are maintained in the computer. The auditor in the tax audit report had also mentioned the said fact. In the course of survey, Sri Mukesh Agarwal, Partner of the Firm in his statement dated 18.09.2009 said that books of accounts are in the computer which is in the premises itself but due to technical error, the printouts could not be made available and due to this reason in the survey, the entire computer system including hard disk was impounded and which is still under the possession of the department.

(c) The assessee submits further that this it is also not true that the books of accounts were not produced in the course of assessment proceedings. Kindly referred assessee’s explanation in para 5 of submission dated 25.07.2014 & in para (2) (ii) internal page 3 of submission dated 18.09.2014.

(d) The AO in his second remand report has said that impounded hard disk was examined in the presence of partner Mukesh Agarwal with the help of computer expert but no data was found in the hard disk. The assessee submits that this is also not true because after the survey. The then AO from the same hard disk provided the printouts of the entire data containing books of accounts, other documents etc. And on that basis the accounts were completed for the entire financial year, the auditors have also audited the said account and the return was filed accordingly, on the basis of audited final accounts. In the assessment also, the AO has accepted the audited profit & loss account and the balance sheet. The assessee has reasons to believe that the fact that the assessee has been provided accounting data in a open drive is also very much evident from the letter of AO to Addl. CIT Jhansi, which letter is dated 24.05.2010. This letter exists in the assessment records of the assessee. Further before giving the said data, the AO has served a letter to the assessee dated 29.09.2009 for taking the copies of records of the computer. In the course of secondround of remand

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report, assessee was also questioned on this issue, he then replied that from the same hard disk, the then AO Sri Nigam had provided soft in pen drive from the same hard disk and there is a reference to this fact on the file. The AO has not controverted the said statement of the assessee in his second remand report. It appears that after the first time operation of the computer, the hard disk might have corrupted. In the second remand report dated 07.11.2014, the AO mentions that “the books of accounts produced by the assessee has examined with impounded books of accounts sales bills & purchase bills etc. which is impounded during the course of survey action” and further mentions in para 2 that “most of the purchase and sale bills are available in the impounded documents”.

(e) In view of the above, the allegations on the issue of books of accounts are wholly opposed to facts, unlawful and injudicious.

(ii) Interpolation / tempering in the inventory sheets The assessee’s allegation is that in the inventory sheets prepared (a) in the survey, the survey officials did the interpolations in the quantities found at many places just to arrive a higher valuation of stock. An affidavit giving the specific instance of the interpolations was also filed on the very next day of the survey and with reference to affidavit; statement of Mukesh Agarwal was also recorded. The assessee also supported his contention by filling a report of hand writing expert. The detailed submission on this issue has been given in para (1) in explanation dated 25.07.2014 and further submission were also made in explanation dated 18.09.2014. The assessee submits that the AO has not controverted so far the point-wise & item-wise submissions on the specific instances given in the issue. He has bye passed all such contentions / submission just referring a latter of the assessee dated 10.05.2010. The assessee submits that when on the issue of interpolation, he approached to the Commissioner of Income Tax, the survey officials come into action and sensing the gravity of the allegation. They called the assessee in the office somewhere in the month of March / April, 2010 and in the course of meeting a mutual understanding was arrived at that the department would revalue the stock on the basis of purchase price of the various goods and if on such re- valuation, some excess value is found, the assessee would make the surrender and pay the tax. The assessee also agreed to the said suggestions because he also did not want any protracted litigation on this issue and also agreed to pay the tax and in such situation, he would not press the allegation of interpolation made in the affidavit. The assessee submits that it is only after

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the said understanding, process of revaluation of the stock on cost price basis started with reference to the prices mentioned in the impounded purchases bills and the other documents etc. This exercise took about a month’s time and finally, a figure of Rs. 3913263/- was arrived at as the excess value of stock over the book stock. The entire working was done, sitting in the income tax office and on the said revaluation, tax worked out at Rs. 1039500/- which was paid upon the direction of the AO on 10.05.2010. The related papers which were made sitting in the income tax office itself with regards the working of revaluation of stock over book stock and the letter obtained in confirmation of payment of tax and surrendering of income are placed at and in this letter, the assessee mentioned that he has cooperated with the department and also furnishing a separate letter dated 10.05.2010 mentioning that the assessee is closing the issue on the allegation but he never said that the allegations made in the affidavit are false. The assessee further submits that on the same date another letter dated 10.05.2010 was obtained by the department from the assessee on the same issue. The assessee thus submits that a letter which is at page no. 64 & 65 of FPB, should not be read is isolation and it has to be read along with all other documents which are at page no. 57 to 63 of FPB. The assessee submits that the letter dated 10.05.2010 was given because the AO amended the valuation and revalued the same at the cost and arrived finally the excess value of stock mentioned above and the assessee on such promise / mutual understanding paid the tax but unfortunately in the assessment the AO has ignored all such things, promise / understanding and completely ignored the revaluation and more so did not refer in the assessment order itself and made the additions on the basis of initial interpolated / tempered inventory sheets, hence, the assessee in such circumstances submits that his allegation still stands and requires adjudication by your honour. The assessee submits before your honour that if the matter is adjudicated on the basis of the revalued stock, then he agrees not to press the allegation made in the affidavit, but if it is not so then kindly adjudicate the assessee’s allegation made in his affidavit as to the interpolations and tempering in the inventory sheets. (b) It may be submitted that in the course of second remand report, the AO has recorded the statement of the assessee on 28.10.2014 in which the assessee had stated that the income was disclosed on the basis of revaluation which was done by the department and therefore, he repeatedly referred the same amended list. The AO has not controverted this statement of the assessee, therefore, the contention

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of the assessee be accepted that after the survey, revaluation was done. (c) In the course of last hearing just by way of illustration, the assessee has furnished before you and demonstrated that the tempering is prima facie evident. The assessee is enclosing herewith the copy of Allahabad High Court decision in the case of CIT Vs. Shri Ram Pher dated 01.10.2010 in Income Tax appeal No. 218/2005. In the said decision, it has been held that if there are allegations of interpolation then it was incumbent the appellant authority to consider each & every item with regard to which the assessee raised objections. The principles laid down in this decision are fully applicable in the case of assessee. In para (4)(ii) of SPB internal page 6 & 7, the assesses has cited few apparent interpolations and submitted that by these alone few tempering examples, value has been enhanced injudiciously by Rs. 19, 82434/-. (c) The assessee also draws your attention to the inventory sheets, it may be seen that the total of inventory sheet from page no. 1 to 10 is Rs. 67, 72,647/- whereas, total of next two pages i.e. inventory sheet no. 11 & 12 is Rs. 62, 41,938/- this as a clear reflection of the tempering / interpolation and also supported by the report of hand writing expert and the carbon copies of the sheets. (iii) Wrong adoption of book value of stock on survey date (a) In the course of revaluation, the AO worked out stock on survey date at Rs. 44, 23,559/-. The assessee had also in the course of assessment proceedings furnished trading account prepared after survey date showing book stock also upto survey date along with letter dated 13.03.2013. The AO has also accepted the said account in the assessment, thus he is not justified in not considering the said fact and ignored the same. The assessee’s explanation is in para 4(v) of SPB internal page 7. The assessee further submits that from total value of Rs. 1, 24, 04,201/- as per AO’s computation, a sum of Rs. 44, 23558/- requires reduction.

(iv) Not gibing the credit of surrendered income (a) The surrendered income Rs. 39, 13,263/- has been shown separately in the profit & loss account but the AO has not given the credit of the same and made the addition. The assessee submits that as explained in para 4(iii) of SPB internal page 7. This is a double addition. Therefore, from the total addition of Rs. 1, 01, 31,744/- a sum of Rs. 39, 13,263/- requires reduction.

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(v) Calculation & arithmetical mistakes in the inventory sheets (a) In the course of assessment, the assessee has pointed out several arithmetical & calculation mistakes in his letter dated 05.12.2012. However, in the course of assessment, the AO said that he has no time to go through each and every item and therefore, directed the assessee to give details of calculation mistakes for more than Rs. 50, 000/- and therefore, in compliance to such directions, the assessee has furnished details of those items of mistakes vide letter dated 11.03.2013. The aggregate of such arithmetical / calculation mistakes for items above Rs. 50,000/- alone constitutes Rs. 33, 77,205/-. The Assesses also explained this fact in his submission SPB para 4(iv) and submitted that from the total addition of Rs. 1, 01, 31,744/- an amount of Rs. 33, 77,205/- warrants reduction. It may be relevant to mention herein that the existence of such mistakes in the inventory sheets has neither been controverted by the AO who made the assessment nor the AO who submitted the remand report two times. 3. The assessee submits that the synopsis of submission had already been made in letter dated 18.09.2014 and therefore, the appeal may decide accordingly.” 4.11 In the hearing held on 18.03.2015, Inspector of the AO appeared along with the impounded documents. However, the AO could not attend the hearing in which impounded documents have been examined. This hearing has also been attended by the authorized representatives, Sh. R.N. Gupta, F.C.A. and Sh. V.K. Agarwal, F.C.A. on behalf of the assessee (appellant) firm. In this hearing, impounded documents have been examined with reference to all the objections raised before me in appeal in respect of stock inventory prepared during survey and valuation of such stock inventory on the basis of which impugned addition of Rs.1, 01 31,744/- has been made. During this hearing, all the grounds taken in appeal have been decided as discussed in subsequent paragraph. 5.1 Before giving my decision on the grounds taken in appeal challenging the correctness of stock taking done during the course of survey operation, valuation of stock and impugned addition made on such stock taking, I have first decided the additional ground taken in appeal challenging the finding of the AO about non-maintenance of books of accounts by the assessee. In this regard, the appellant has contended in the maintain the regular books of accounts and provisions of sections 145(3) are applicable, are neither lawful

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nor judicious and the same are also oppose to facts, equity and law. In this regard, in this submission dated 10.02.2015, the Ld. AR submitted that the books of accounts of the assessee was being maintained in computer and the same was available in the hard disk impounded by the survey team. This assertion was made by the Ld. AR in his first written submission dated 25.07.2014 also, and therefore, I directed the AO to examine the hard disk to find out the availability of books of accounts. On my direction, as reported by the AO in his remand report dated 07.11.2014, he opened the hard disk in the presence of partner of the firm, Sh. Mukesh Agarwal but no material/books of accounts have been found in the hard disk/CPU. Thought, the AO admitted in his remand report that books of account were produced by the assessee (appellant) during remand stage and the same have been examined with the impounded books of account, sale bills and purchase bills etc, these books of account were not produce before the AO during the assessment proceeding. I have examined the assessment record carefully and I found that despite asking the assessment (appellant) repeatedly to produce of books of account were not produce. The AO has discussed in details in para no. 1& para no. 2 of the assessment order giving details of various opportunities provided to the assessee (appellant) to produce the books of account but the same have not been produced. Though, it was claimed before the survey party that books of accounts of the assessee (appellant) were available in the hard disk of the computer, the same have not been made available to the survey party for examination. Therefore, valuation of stock on the date of survey was made by the survey party on the basis of MRP. As the books of account were not made available to the AO during the assessment proceeding, the AO had no option but to complete the assessment in absence of books of accounts after considering the material collected during survey. Therefore, I find that the AO has correctly rejected the books of accounts u/s 145(3) claimed to be available in the hard disk of the computer as it was not possible to verify the correctness of such books of accounts available in the hard disk of the computer because the same could not be retrieved from hard disk of the computer. Now, on my direction when verification was made during the remand stage, no such books of account have been found in the hard disk of the computer. For non-availability of books of accounts in the hard disk of the computer, the explanation of the Ld. AR is now that the hard disk might have got corrupted. This plea of the Ld. AR cannot be accepted because the facts remain that during the course of assessment proceedings, no books of account of the assessee (appellant) was made available to the AO. Therefore, I do not agree with the contention of the appellant raised in the additional ground about the AO not being

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correct in giving his findings about non-maintenance or regular books of account by the assessee and wrongly invoking provisions of sections 145(3). Therefore, the additional ground raised by the appellant has been dismissed. 5.3 After referring to the above letter to the assessee (appellant) filed before the AO and also available in assessment record, the matter relating to objection of the assessee (appellant) raised in grounds of appeal challenging the correctness of quantities of items recorded in stock inventory has been discussed with the Ld. AR in the hearing held on 18.03.2015, and it has been decided that the dispute on quantities mentioned in stock inventory prepared during survey is settles and further no adjudication on this issue is required to be made during appeal. In view of the dispute on quantities mentioned in stock inventory is found to be settled, the question of admitting any fresh evidence in form of report of a handwriting expert does not arise, especially when no such report was furnished during the assessment proceedings even when an affidavit was file disputing the quantities mentioned in stock inventory. Therefore, no reasonable cause has been found for not obtaining such report of handwriting expert furnishing before the AO during assessment proceeding. Therefore, report of the handwriting expert furnished by the Ld. AR during the appeal proceeding in support of objection raised on the correctness of quantities recorded in stock inventory, has not been admitted by me as additional evidence and in fact, no such additional evidence is required to be admitted when this dispute has already settled in view of letter dated 10.05.2010 of the assessee, filed before the AO as mentioned above.” 7. The counsel for the assessee reiterated the submissions

made before the Ld. CIT(A). In order to support its contentions, the

counsel filed written synopsis (Volume 1-3), paper book (Pgs. 1-

173) and Paper Book II, Pgs. 174-274, which are placed on

record. The relevant part of synopsis is extracted hereunder for

ready reference:

In the matter ofM/s Modern Agencies; JhokanBagh, Jhansi (U.P), AY 2010-11 Volume-1:

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assessment U/s 144’. Interestingly even after invoking Section 144, the AO did not reject the returned income and tax audit report as filed by the assessee. In the absence of Books of Accounts there has to be a best judgment assessment U/s 144. The AO did not estimate the profit but considered the profit / income disclosed by the assessee in its ITR. The allegation of not maintaining books of accounts and then passing assessment under U/s 143 (3) is contradictory in itself. Further in spite of invoking section 144, the AO made the assessment U/s 143(3) without mentioning of section 144. In the absence of books and framing of normal scrutiny assessment U/s 143(3) are self-contradicting. The audited accounts with tax audit report U/s 44AB was filed by the assessee and relied upon by the AO as he considered the figure of ‘Turnover’ ‘Expenses’ from the audited P&L Account and GP rate from tax audit report only. The P&L A/c and tax audit report have been drawn from the books of accounts only. This proves that assessee was maintaining books of accounts. Copies of Ledger accounts of expenses, creditorsand debtors were submitted before AO which are a part of books of accounts only. Books of accounts were also produced before AO during assessment proceedingsvide letter to A.O dated 05/04/2011 (page 62-63 of PB) c. It is important to draw attention to the paras 2 and 3 of the assessment order wherein the AO only mentions that books were not available at the time of survey but he did not point out explicitly that books were not available during assessment proceedings. This further testifies that the assessee did produce books before the AO during assessment proceedings. The appellant prays your honour to hold that assessee was maintain books of accounts

Volume-2: 2. Valuation of Closing Stock Valuation: The assessee is an authorized dealer of Paint and Hardware goods manufactured by companies like Asian Paints/Berger/Fevicol etc. and deals mostly in branded items. The survey team prepared the physical Inventory sheets on the date of survey and valued the stock at MRP. The MRP is the maximum retail price which is printed on the CAN/Cartons /Boxes.Most of the items of the assessee bears MRP.

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The survey team prepared the inventory sheets, convenientlytaking the visible MRP rates printed on the Individual items and valued the inventory at Rs. 1,30,14,585/-. The AO adopting the same valuation for the purposes of assessment, deducted GP @ 4.69% to arrive the cost price and framed assessment with a net value of stock Rs. 1,24,04,201/- The Ld. CIT(A) concurred with the stand of the AO (vide internal page 3 of the AO order & internal page 42 para 5.4 of the CIT (A) order). The assessee objected to the MRP based valuation of closing stock and requested to value it at cost. The adoption of this methodology for arriving cost of stock is the sole cause of trouble for the assessee. The assessee has been insisting that the stock be valued at purchase price based on the invoices / bills of its suppliers. The change in the method of valuation of closing stock (as done by Ld. AO) is not only unscientific and crude but also patently wrong in this case for the reason that: 3.1 There is a wide gap between the MRP and Sales prices realized by the assessee. The sale price is much lower to MRP and the gap ranges between 15 % to 40%, depending on the item and brand. The higher the category of brand, the lower is the gap but still even in such cases, a gap of 15-25% is a norm in paint industry. The Sale price of the assessee is not equivalent to the MRP printed on the items.As such in case GP based valuation is to be adopted, than GP should be deducted from the realisable sale price of the goods, to derive cost. 3.2 It is a business reality and a widely practiced approach to sell the items like Paints, Hardware at much lower than the MRP Prices.There is always a wide variation between MRP and actual Sales Price 3.3 The MRP is inscribed by the manufacturer of the itemon which the assessee has not any control, itonly restricts the assessee not to sell an item above the MRP but at the same time,it does not force the sellerto sell his products at lower than MRP. 3.4 The sale is recorded in the books on the basis of actual amount of the sale invoice / bill / Cash Memo.MRP is not mentioned on the dealer’s sale bill. The GP is calculated based on the sales, so if the department wanted to adopt the sale price route to value stock, then it should have first valued the stock at dealer’s selling price and then to reduce GP to arrive at cost of stock. 3.5 The Stock should have been valued at the purchase price when the purchase bill was available with the A.O. The A.O could have easily verified as he has access

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and in his possession of the purchase and sale bills of the assessee. Reference is invited to the directions for submitting Remand Report to AO by CIT (A) (vide para 4.iii & 4.iv on page 26 of the CIT (A) order). The AO confirmed to CIT (A) on the availability of purchase & sale bills in the impounded material (vide point 2 on page 28 of the CIT (A) order). The CIT (A) in his order, himself said in strong words, on the failure of the AO to value stock at purchase cost price (vide point 4.7 on page 29-30 and of the CIT (A) order). 3.6 The valuation of inventory at purchase cost is Rs. 83,65,725/- (vide list at page 64-70of the PB)computed by the assessee and also verified by theAO respectively. 3.7 The appellant assessee has been consistently following the accounting principle of valuing the stock at cost or market price whichever is lower. The accounting policy is also mentioned in the tax audit report and audited accounts. 3.8 It is a well-established Accounting Policy that all stock in trade is to be valued at Cost or Net Realisable Value, whichever is lower. The AS-2 pronounced by ICAI supports the view. In the case of ChainrupSampatram V. CIT[24 ITR 481 (SC)] the apex court confirmed that closing stock is to be valued at cost or market price whichever is less. It held that “This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever the lower is, and it is now generally accepted as an established rule of commercial practice and accountancy.” 3.9 The appellant is attaching herewith a copy of the latest dealers’ gross price list and its corresponding MRP list published by the Asian Paints Ltd that justifies the wide difference between MRP and dealer price. 3.10 The appellant invites reference to Section 145A (a) (ii) that provides for the inclusion of taxes, duties paid on goods, for the purpose of valuation. This obviously means that taxes are to be added to the purchase cost. Hence stock is to be valued at purchase cost and all incidental expenses to bring stock to the present position / location. The section reads as under:

Method of accounting in certain cases. 145A. Notwithstanding anything to the contrary contained in section 145,— (a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be— (i) in accordance with the method of accounting regularly employed by the

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assessee; and (ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

Explanation.—For the purposes of this section*, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment; (b) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.] 3.1 The Hon'ble Supreme Court in the case of CIT vs. Bilahari Investment P. Ltd. 299 ITR 1 (SC) held as follows: "Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method." In the instant case, the department has not found any distortion in the earlier adopted method of valuation of stock, hence the action of the AO is wrong. 3.2 It is emphasized here that the valuation of stock is very important and the Supreme Court of India long back in the case of CIT v. British Paints India Limited 188 ITR 44 opined that the importance of the stock valuation is to find out the correct determination of the profits or loss of the business enterprise. The appellant submits that the valuation of the stock since was based on erroneous method of valuation and therefore, the addition made on the basis of such valuation is neither justified nor lawful, so to be quashed. Volume-3: 1. The appellant is a retail trader of Paint and hardware goods at Jhansi. It has been in business for the past several years and regularly filing its ITR. 2. A survey U/s 133A was conducted on 18.09.2009 (relevant to AY 2010-11). 3. The only finding of the survey team was Excess Stock. The objection of the assessee is on the method of valuation. The survey team valued physical inventory at MRP and AO valued same at MRP less GP. The assessee contends that inventory should be valued at purchase price. 4. The Assessee also objected on the quantity of stock recorded by the survey team in preparation of their list of physical inventory. Besides the mistakes of addition

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and multiplication in the inventory list prepared by survey team, there were cases of increasing the quantities of various items by affixing / prefixing ‘0’ or ‘1’. The assessee obtained Hand Writing Expert Report that confirms the alteration. 5. The AO completed assessment holing assessee was not maintain regular books of accounts and framed assessment in the manner as given in section 144 i.e. ‘Best Judgment Assessment’ The AO made addition for excess stock based on the inventory valuation done by survey team. The assessee was maintaining books of accounts. Extracts from the same in the form of ledger accounts of parties, expenses were filed before AO. Audited accounts and Tax Audit Report was also filed. The AO had not rejected them. 6. There is another issue of dead stock. The assessee pleaded that in the trade of paints and hardware, the stock items becomes bad & obsolete due to efflux of time, damage and change of style. Since there was no separate listing of Dead Stock in the godown, the assessee requested to consider the quantum of dead stock at 10% of the total inventory. The CIT (A) gave a part relief by restricting the percentage to 7.5%. 7. The gist of calculations made for deriving value of excess stock is given in the table on last page. Now the assessee is before this Hon’ble Tribunal and prays for reliefon the following issues:

The action of the lower authorities is patently wrong resulted in mismatch of accounting principles and incomparable results.

Besides above argument of the appellant, it is also emphasized that there is a marked difference between the MRP and actual sale price of paints related

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products. So MRP has no significance as far as the valuation of inventory is concerned.

The Survey team and the AO did not take cognizance of the assessee’s affidavit filed on the very next day of the survey.

The report of the hand writing expert testifies the alterations but the report was ignored by the authorities.

The AO did not make any efforts to cross check the quantity and value stated in the stock statement with the purchase bills / ledger accounts which were available in the records of AO (copies of purchase bills were seized by survey team and copies of ledger accounts were furnished by assessee during assessment proceedings).

Modern Agencies-Working sheet for calculation of excess inventory as on date of survey AY 2010-11 Prayer before ITAT Excess stock calculation AO CIT (A) Situation A Situation B

Physical Stock on 18.9.09 @ MRP 130,14,585 130,14,585 - -

GP @ 4.69% reduced by AO 6,10,384 6,10,384 - -

Cost arrived at 124,04,201 124,04,201 84,43,266 59,02,331

Relief for Dead Stock @ 7.5% - 9,30,315 6,33,245 4,42,675

Net Value of Physical Stock 124,04,201 114,73,886 78,10,021 54,59,656 Closing Stock on date of Survey 18.9.09 (as per Books of the assessee) 22,72,457* 42,62,921 42,62,921 42,62,921

Net Value of Excess Stock 101,31,744 72,10,965 35,47,100 11,96,735

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Amount surrendered by MA in its ITR - 39,13,363 39,13,363 39,13,363 - - Net Addition for Excess stock 101,31,744 32,97,602 3,66,263 27,16,628

* The Value of Opening Stock (01.04.2009) (as per Books of the assessee was 22,72,757/-. Same was considered by AO as closing stock on date of survey.

7.1 The ld. Counsel submitted that the assessee has maintained

the regular books of account and produced the same in the course

of assessment proceeding before the AO;that the finding of the Ld.

CIT(A) is perverse per sea, he has not drawn any inference on

facts reported in the remand report that most of the purchase bills

and sales bills etc. were available in the impounded material and

hencethe inferences drawn by the CIT(A) without interfering the

facts on record is not based in the eyes of law; that the stock

inventory sheets prepared in the course of survey, were

interpolated and tempered at many places in quantities and value

as evident from the affidavit filed by the assessee on the very next

day of survey (APB, Pgs, 25 to 29) with specific allegation of

interpolated and tempered in quantities and value of stock and

counting of dead stock in particular before delivering the copy of

the same to the assessee, thereby valuation based on such

inventory sheet and the addition made at Rs.1,01,31,744/- on the

34 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

basis of such interpolated and tempered inventory sheet at market

rate price (MRP) is unjustified.

7.2 The assessee objected to the finding of Ld. CIT(A) given in

para 5.3 of his order are being injudicious, wrong and opposed to

the facts and material on record as the contents of the assessee

letter dated 10.05.2010 have not been judiciously adjudicated; that

the ld. CIT(A) was neither justified in not adjudicating the issue

with regards to the interpolation/tempering in the inventory sheet

done by survey official with reference to the explanation given in

the evidences furnished before the learned lower authorities norhe

was justified in adjudicating the contention of the assessee as

regards to inventory sheet containing several arithmetical and

calculation mistakes and that he has erred in not admitting the

report of the hand writing expert relating to tempering an

interpolation furnished before him in the interest of substantial

justice and therefore, the ld. CIT(A) has not appreciated the facts

in right and prospective manner.

7.3 He further submitted that the assessee was maintaining

books of accounts on computer; that it was due to some technical

glitches, the data could not be accessed by the survey team;

35 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

thatduring the assessment proceedings, the books of account, copy of tax audit report, list of debtors and creditors were produced before the AOvide letter dated 05.04.2011 (PBP,62-63); and that the books were produced again before AO, during remand proceedings (as directed by CIT(A)) a reference of the same is given in the order of CIT (A) at page 39 ofits order that reads as under:

“…. Though the AO admitted in his remand report that books of

accounts were produced by the assessee (appellant) during remand

stage and the same have been examined with the impounded books of

account, sale bills and purchase bills etc., these books were not produced before the AO during assessment proceedings”

The above referred documents- letter of the assessee dated 05.04.2011, availability of audited accounts with tax audit report and the remand report reference in CIT (A) order - amply proves that the assessee was maintaining books of accounts.

7.4 On the issue of non-maintenance of regular books of accounts, the AO referred to Section 145(3) for making assessment U/s 144 – ‘Best Judgment Assessment’.The assesseesubmitted that section 145 is on ‘Method of Accounting’

36 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

and not on ‘Non-maintenance of books of accounts’; that the method of accounting relates to standardization, pattern, system, principles on the basis of which accounts are maintained and obviously can’t be applied where the books of accounts are kept and that in the event of Non-maintenance of books of accounts’, the provisions of section 44AA are attracted. Without inviting the reference to section 44AA, the AO’s conclusion for making ‘best judgment assessment U/s 144’ without rejecting the returned income and tax audit report filed by the assessee is self- contradictory.

7.5. We understand that in the absence of Books of Account there has to be a best judgment assessment U/s 144and the AO is required to estimate the incomeof the assessee based on past history or comparable case of same trade whereashe had considered the income disclosed by the assessee in its ITR and audit report; and thus, the allegation of not maintaining books of accounts on the one hand and then passing assessment under U/s 143 (3) on the other hand is contradictory finding in itself. Meaning thereby invoking section 144 of the Act by inviting reference to Section 145(3), in the absence of books,and the AO

37 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

passing normal scrutiny assessment U/s 143(3) are contrary

observation of the AO.

7.6 The counsel while referring to the paras 2 and 3 of the

assessment order explained that the AO mentioned that books

were not available at the time of survey but he did not point out

explicitly that books were not available during the assessment

proceedings which further testifies that the assessee did produce

books before the AO during assessment proceedings; thatthe

audited accounts with tax audit report U/s 44AB was filed by the

assessee and relied upon by the AO as he considered the figure of ‘Turnover’ and ‘Expenses’ from the audited P&L Account and GP rate from tax audit report only; thatthe P&L A/c and tax audit

report have been drawn from the books of accounts only and thus

it is proved that assessee was maintaining books of accounts. He

pleads that assessee was maintaining books of accounts.

relevant material available on record. The AO has rejected the

books of accounts u/s 145(3) which wereclaimed to be available in

the hard disk of the computer during the course of survey u/s

38 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

133A,however,such books of account available in the hard disk of

the computer could be retrieved from hard disk of the computer.

On the directionof the CIT(A),However, the books of account were

produced by the assessee during remand stage and the same

have been examined with the impounded books of account, sale

bills and purchase bills etc.The ld. counsel for the assessee

contended that during the assessment proceedings, the books of

account, copy of tax audit report, list of debtors and creditors were

produced before the AOvide letter dated 05.04.2011 (PBP,62-63);

and that the books were produced again before AO, during

remand proceedings, a reference is given at page 39 of the

impugned order. The explanation of the ld. counsel as regards to

non-availability of books of accounts in the hard disk of the

computer, was that the hard disk might have got corruptedcannot

be denied because it was seized and impounded by the survey

team on the very same day and was lying in the custody of the

department along with other impounded material such as books of

accounts, purchase and sales bills etc., as admitted in the remand

report dated 07.11.2014. We find that in spite of invoking and

mentioning section 144, on observing non-maintenance of books

of account, the AO has passed normal scrutiny assessment U/s

39 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

143(3) which is self-contradicting.Therefore, the plea of the Ld. AR

cannot be denied because the factsmentioned by the lower

authoritiesthat during the course of assessment proceedings, no

books of account of the assessee was made available to the AO

are not found correct. Thus,the Ld. CIT(A) was not justified in law

and on fact by disagreeing with the contention of the appellant

raised on wrongly invoking provisions of sections 145(3)by the

while accepting trading results i.e. audit report, balance

sheet,Gross Turn Over, Trading A/c, Profit and loss A/c, GP rate

etc.

audit report as filed by the assessee is illegal and bad in law. The

AO did not estimate the profit but considered the profit / income

disclosed by the assessee in its ITR. The allegation of not

maintaining books of accounts, and then passing regular

assessment under U/s 143 (3) is contradictory in itself.In spite of

invoking section 144 without reference to 44AA and the AO

passing the assessment U/s 143(3) without mentioning of section

40 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

144,in circumstances of alleged absence of books and framing of

normal scrutiny assessment U/s 143(3) are self-contradicting.

Ledger accounts of expenses, creditor and debtors which are

forming part of books of accounts were also produced before AO

during assessment proceeding vide letter to A.O dated 05/04/2011

(page 62-63 of PB).It is seen that the audited accounts with tax

audit report U/s 44AB filed by the assessee was relied upon by the AO in considering the figure of ‘Turnover’, ‘Expenses’ and GP rate from the audited P&L Account and tax audit report only which

have been drawn from the books of accounts only. This amply

proves that assessee was maintaining books of accounts.

substance in the submission of the assessee on the issue of

maintenance of books of account. The finding of the AO in

rejecting books of account by invoking provisions of sections

145(3) without taking reference to section 44AA while taking

recourse to best judgement assessment u/s 144 of the Act and

finally passing regular assessment is self-contradictory and bad in law. The ld. CIT(A)’s casual observation of non-production of

41 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

books of accounts during the course of assessment proceeding without appreciating the facts of the case and assessee’s submission and remand report cannot be approved.

maintained proper books of accounts, trading results and audited

report u/s 44AB of the same books of A/c has neither been

disputed nor controverted by the AO, the Ld. CIT(A) or the LD. DR.

Therefore, we hold that the assessee has maintained proper

books of account and as such, reversing theorder of the Ld. CIT(A)

on the issue, all the ground pertaining to this issue are allowed.

date of survey for the purpose of computation of excess stock.

observed as under:

“5.4 As regards the valuation of stock, the Ld. AR has produced before me a valuation of inventory of stock at Rs. 83, 65,725/- claimed to have been made at cost price. However, from the impounded documents, he could not show the specific purchase bills of each item on the basis of which, the purchase price mentioned in the valuation report was taken. Therefore, valuation of stock inventory made by the assessee (appellant) at Rs.83, 65,725/- claimed to have been prepared at cost price could not be established. Therefore, it has been held by me that the above valuation of stock made by the assessee (appellant) cannot be accepted. In absence of details and relevant purchase bills for valuation of stock to be made at cost price not being available, it has been decided to compute the valuation of

42 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

stock at cost price by taking the valuation of stock done at MRP during the course of survey operation and thereafter, suitable deduction should be provided by talking the gross profit rate as done by the AO in the assessment order and also some discount should be given for availability of dead stock. The Ld. AR claimed that dead stock should be taken at the rate of 10% but after discussion, it has been decided to provide deduction at the rate of 10% but after discussion, it has been decided to provided deduction at the at the rate of 7.5%.The Ld. AR has also claimed that paints are sold at less than MRP and therefore, a further deduction of 7.5% should be provided to arrive at the correct figure of the value of stock. However, no evidence could be produced to show that the assessee was giving discount @ 7.5% on MRP while selling paints in market. Therefore, no such deduction on account of discount claimed to be provided by the assessee to its customers is to be allowed. In view of my above decision, the AO is directed to work out the value of stock at cost price by taking the valuation of stock done at MRP during survey and then reducing from this stock valuation the value computed at gross profit rate and further deducting 7.5% of remaining value to account for availability of any dead stock with the assessee (appellant) on the date of survey. 5.5 For computing the excess stock found on the date of survey, book value of stock computed at stock on the date of survey is required to be deducted from the value of stock compute at cost price in the manner as held by me in previous para, instead of deducting opening stock value taken by the AO at Rs. 22, 72,457/- . The assessee (appellant) has worked out the book value of stock on the date of survey at Rs.44,23,559/- on the basic of provisional Profit & Loss Account prepared on the basic of purchase & sale bulls pertaining to the period 01.04.2009 to 18.09.2009. The AO was given various opportunities during remand stage to verify the correctness of such book value of stock worked out by the assessee (appellant) on the basic of sale & purchase bills available in impounded documents. However, no such verification was made by the AO during remand stage, therefore, the AO is now directed that for computing the excess value of stock on the date of survey, he shall compute the book value of stock on the date of survey after making a provisional Profit & Loss Account on the basic of purchase & sale bulls available in the impounded documents for the period 01.04.2009 to 18.09.2009 and the same shall be deducted from the value of stock computed on cost price instead of deducting from the value of stock computed value of Rs.22,72,457/- and it has been done in the assessment order.

43 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

5.6 As regard to provide set off of Rs.39.13.263/- surrendered by the assessee (appellant) while filing the return of income after survey by computing excess value of stock on his shown, I have verified the Profit & Loss Account of the assessee (appellant) filed along the return of income in which, the amount of Rs.39, 13,263/- has been created as income declared u/s 133A. Computation of this amount has been given by the Ld. AR in his written submission dated 25.07.2014 showing that this amount has been arrived after computing excess value of stock on the basic of stock inventory prepared during survey and the same was surrendered before the AO as it is available in the assessment record on page no.439. Therefore, it is clear that the amount of Rs.39.13.263/- declared by the assessee in its Profit & Loss Account on the basic of survey in section 133A has been arrived at on account of computation of excess value of stock found during survey. Therefore, this amount of Rs.13.13.263/- should be deducted from the excess value of stock computed by the AO as per my direction in para no. 5.4 and balance amount should be added in the income of the assessee.” 16. The counsel for the assessee while reiterating the

submissions made before the authorities below contended that the

assessee is an authorized dealer of Paint and Hardware goods

manufactured by companies like Asian Paints/Berger/Fevicol etc.;

thatthe survey team, on the date of survey, prepared the physical

Inventory and valued the stock at MRP, the maximum retail price

which is printed and visible on the individual items and valued the stock inventory at Rs. 1,30,14,585/- and that despite assessee’s objection the AO adopted the same valuation for the purposes of

assessmentto arrive at the cost price by deducting GP @ 4.69%

shown in the income tax return and framed assessment with a net

value of stock Rs. 1,24,04,201/- which the Ld. CIT(A)

44 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

confirmedvide para 5.4, page 42 of the impugned order against

the law and the set principles of accountancy.

cost price while objecting to the valuation based on MRP

contending that -

a) The assessee has been consistently following the method of

valuation of stock at cost price/purchase price based on the

invoices /bills of its suppliers.

b) The change in the method of valuation of closing stock by

Ld. AO is not only unscientific and crude but also patently

wrong in the case of the assessee for the reason that:

1) There is a wide gap between the MRP and Sales

prices realized by the assessee. The sale price is

much lower to MRP and the gap ranges between 15 %

to 40%, depending on the item and brand. The higher

the category of brand, the lower is the gap but still

even in such cases, a gap of 15-25% is a norm in paint

industry. The Sale price of the assessee is not

equivalent to the MRP printed on the items. As such in

case GP based valuation is to be adopted, then GP

45 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

should be deducted from the realisable sale price of

the goods, to derive cost.

2) It is a business reality and a widely practiced approach

to sell the items like Paints, Hardware at much lower

than the MRP Prices.There is always a wide variation

between MRP and actual Sales Price

3) The MRP is inscribed by the manufacturer of the item

on which the assessee has not any control, it only

restricts the assessee not to sell an item above the

MRP but at the same time, it does not force the seller

to sell his products at lower than MRP.

4) The sale is recorded in the books on the basis of

actual amount of the sale invoice / bill / Cash Memo.MRP is not mentioned on the dealer’s sale bill. The GP is calculated based on the sales, so if the

department wanted to adopt the sale price route to

value stock, then it should have first valued the stock at dealer’s selling price and then to reduce GP to arrive at cost of stock.

5) The Stock should have been valued at the purchase

price when the purchase bill was available with the

46 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

A.O. The A.O could have easily verified as he has

access and in his possession of the purchase and sale

bills of the assessee. Reference is invited to the

directions for submitting Remand Report to AO by CIT

(A) (vide para 4.iii & 4.iv on page 26 of the CIT (A)

order). The AO confirmed to CIT (A) on the availability

of purchase & sale bills in the impounded material

(vide point 2 on page 28 of the CIT (A) order). The CIT

(A) in his order, himself said in strong words, on the

failure of the AO to value stock at purchase cost price

(vide point 4.7 on page 29-30 and of the CIT (A)

order).

6) The valuation of inventory at purchase cost is Rs.

83,65,725/- (APB, page 64-70)computed by the

assessee and also verified by theAO respectively.

7) The appellant assessee has been consistently

following the accounting principle of valuing the stock

at cost or market price whichever is lower. The

accounting policy is also mentioned in the tax audit

report and audited accounts.

47 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

8) It is a well-established Accounting Policy that all stock in trade is to be valued at Cost or Net Realisable Value, whichever is lower. The AS-2 pronounced by ICAI supports the view. In the case of ChainrupSampatram V. CIT[24 ITR 481 (SC)] the apex court confirmed that closing stock is to be valued at cost or market price whichever is less. It held that “This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever the lower is, and it is now generally accepted as an established rule of commercial practice and accountancy.” 9) The appellant is attaching herewith a copy of the latest dealers’ gross price list and its corresponding MRP list published by the Asian Paints Ltd that justifies the wide difference between MRP and dealer price. 18. The ld. Counsel invites reference to Section 145A (a) (ii) that provides for the inclusion of taxes, duties paid on goods, for the purpose of valuation. This obviously means that taxes are to be added to the purchase cost. Hence stock is to be valued at

48 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

purchase cost and all incidental expenses to bring stock to the present position / location. The section reads as under: Method of accounting in certain cases. 145A. Notwithstanding anything to the contrary contained in section 145,—

(a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be—

(i) in accordance with the method of accounting regularly employed by the assessee; and

(ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

Explanation.—For the purposes of this section*, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such

49 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

payment;

(b) interest received by an assessee on compensation or on

enhanced compensation, as the case may be, shall be

deemed to be the income of the year in which it is

received.] The assessee rely on theHon’ble Supreme Court in the 19.

case of CIT vs. Bilahari Investment P. Ltd. 299 ITR 1 (SC)

where it was held that:"Every assessee is entitled to arrange its

affairs and follow the method of accounting, which the Department

has earlier accepted. It is only in those cases where the

Department records a finding that the method adopted by the

assessee results in distortion of profits that the Department can

insist on substitution of the existing method."

distortion in the earlier adopted method of valuation of stock,

hence the action of the AO was wrong.

is very important factor for determination of correct profit of the

assessee and the Supreme Court of India long back in the case of

CIT v. British Paints India Limited 188 ITR 44 opined that the

importance of the stock valuation is to find out the correct

50 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

determination of the profits or loss of the business

enterprise. Therefore, the valuation of the stock since was based

on erroneous method of valuation is neither justified nor lawful, so

to be quashed.

objected to the valuation of stock inventory at Rs. 83, 65,725/-

claimed at cost price, by the assessee.

seen that the AO and the CIT(A) had not objected to the copies of

account of creditors/debtors, expenses, Audited accounts and Tax

Audit Report filed during the course of assessment, remand report and appellate proceeding before them. The assessee’s sole objection is regarding the method of valuation of closing stock as

on 18/09/2009, the date of survey u/s 133A and computing the

value of excess closing stock. The assessee contended that

inventory should be valued for working of excess stockat purchase

price i.e. cost price as against MRP less GP used for valuation by

the authorities below.

contentions raised by the assessee that theinventory of stock

should be valued at cost price and not at MRP less GP; that the

51 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

accounting standard AS-2 issued by the ICAI too states that the

inventory be valued at cost or net realisable value; that the

assessee has ever since been adopting the accepted principle of valuing its inventory i.e. ‘cost or net realisable value and that the opening stock as on 1.4.2009 was also valued at cost and while

ignoringthe aforesaid contention, the AO valued the closing stock

at MRP, therefore, the action of the lower authorities is patently

wrong resulted in mismatch of accepted accounting principles and

incomparable results, and as such against the set principles of

accountancy and judicial pronouncement.

52 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

ITAT Excess stock calculation AO CIT(A)

Physical Stock on 18.9.09 130,14,585 130,14,585 - @ MRP

GP @ 4.69% reduced by 6,10,384 6,10,384 - AO

Cost arrived at 124,04,201 124,04,201 84,43,266 Relief for Dead Stock @ 7.5% - 9,30,315 6,33,245 Net Value of Physical Stock 124,04,201 114,73,886 78,10,021 Closing Stock on date of Survey 18.9.09 (as per 22,72,457* 42,62,921 42,62,921 Books of the assessee) Net Value of Excess Stock 101,31,744 72,10,965 35,47,100 Amount surrendered by MA in its ITR - 39,13,363 39,13,363 Net Addition for Excess - stock 101,31,744 32,97,602 3,66,263

computation of excess stock without making any reference either

to the impounded documents or the audited statements and

trading accounts furnished by the assessee and the same was repeated by the ld. CIT (A). It is as evident from the ld CIT(A)’s

direction issued to the AO for drafting provisional Trading, profit

and loss A/c from the impounded purchase, sales bills, expenses

53 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

vouchers to work out the book value of the stock as per books and

excess stock on date of survey i.e. 18.09.2010, when the AO did

not comply and forwarded the entire impounded documents, the

CIT(A) ought to have carry out the exercise instead of shifting the

accountability on the AO in arbitrary and mechanical manner to do

verification and allow the claim of the assessee which amount to

denial of justice of the legitimate claims of the assessee. Thus, the

AO and the CIT(A) has not only delayed justice to the assessee

but denied justice to the assessee in terms of delayed justice is no

justice as per law.

01.04.2009 at Rs.22,72,757/-. It is fact on record as noted by

CIT(A) that there was trading activities during the period from

01.04.2009 to 18.09.2010 as there being live business of the

assessee which was comprehended on the basis of the

impounded purchase bills, sales bills and expense vouchers for

the period relevant. The authorities below ought to have

considered the same for computing the book value and excess

value of stock to controvertthe claim of the assessee, by way of

54 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

either drafting a provision Trading and profit and loss Account

instead of shifting accountability on each other and instead

ofcausing unnecessary and unwarranted harassment to the

assessee for none of his default.

purchase and sale bills are available in the impounded

documentwhichwere produced before the Ld. CIT(A), being

retained and personally examined by him in view of valuation of

physical stock inventory prepared by survey team as being not

satisfied with the remand report furnished in compliance to his

directions by the AO on the rejoinder filed by the assessee. The

relevant part of the remand report is reproduced as follows: “4.6 In compliance to my above directions, the AO submitted his remand report vide his letter F. No. Remand report / DCIT/Circle-6/Jhansi/2014-15/399 dated 07.11.2014 and the same is reproduced .as under. “As per your direction dated 23.09.2014, the assessee has called for along with books of accounts. In the presence of the firm Sri Mukesh Agarwal, the impounded CPU has open but no material / books of accounts have been found in this CPU. The books of account, sales bill and purchase bills etc. Which is impounded during the course of survey action. As per your requisition point wise reply is as under— 1. The assessee has shown Rs. 39, 13,263/- in his profit and loss account for A.Y.2010-11 but it cannot be concluded that the addition made in assessment order is double in respect of Rs. 39, 13,263/- because the assessing officer has calculated the income of the assessee on the basis of gross profit percentage and cast of purchase.

55 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

The ld. CIT(A) has affirmed the AO’s confirmation that most 29.

of the purchase and sale bills are available in the impounded

documents.He had noted that instead of verifying the valuation of

stock made by the assessee on cost price at Rs. 83, 65,725/- from

the purchase bills found available in impounded documents, the

AO send a remand report in routine manner and that the AO has

neither verified the correctness of valuation of stock furnished by

the assessee which is claimed to have been done at cost price

amounting to Rs. 83, 65,725/- nor he has made any attempt to

furnish correct valuation of stock at cost price with reference to

purchase bills found in the impounded documents rather he has simply forwarded the impounded documents to the CIT(A)’s office which were called for with the purpose of verifying the correctness

of valuation of stock by referring to purchase bills claimed to be

available in the impounded documents.

direction in furnishing of correct valuation of stock at cost price

56 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

with reference to purchase bills available in impounded document nor he has followed CIT(A)’s another direction in which, he was required to work out the book value of stock on the date of survey

after drawing a provisional Profit & Loss Account on the basis of

purchase & sale bills; that the assessee has made such

provisional Profit & Loss Account taking into account the sales

&purchase bills available for the period 01.04.2009 to 18.09.2009

(date of survey) and on the basis of such provisional Profit & Loss

Account, the book value of closing stock has been worked out at

Rs. 44, 23,559/-;that in order to determine the excess value of

stock on the date of survey, book value of stock worked out on the

date of survey should be deducted from the total value (at cost

price) of stock found on the date of survey instead of deducting

opening value of stock of Rs. 22, 72,457/- as done by the AO as

per argument of the Counsel for the assessee.

29.09.2014 required the AO to find out from the impounded

documents, whether purchase & sale bills are available or not and

if they are available, a provisional Profit & Loss Account of the

assessee should be drawn as done by the assessee on the basis

of these purchase & sale bills and then, he should give his

57 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

comments as to what could be the correct value of closing stock

as worked out on the date of survey on the basis of impounded

documents and whether, in order to work out the excessive value

of stock for making addition in the income of the assessee, the

same value should be deducted instead of Rs. 22, 72,457/- from

the value of stock determined at cost price on the date of survey.

Rs. 30 lacs could not be accepted as per statement of one of the

partner Shri. Mukesh Agrawal recorded during survey and, he has

justified taking the opening stock as on 01.04.2009of Rs.

22,72,457/- as stock of the assessee as per his books of

accountson 18.09.2009. Such report of the AO was treated by the

CIT(A) beyond comprehension stating that how it can be possible

that the stock on 18.09.2009 would remain the same what was

available as on 01.04.2009. It can be possible only when no

trading activity would have taken place during the period

01.04.2009 to 18.09.2009 but looking to the trading result as

available in the case record, he found that the assessee

(appellant) has been regularly doing trading activities during the

same period and the assessee had already drawn a provisional

Profit & Loss Account showing the book value of stock on the date

58 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

of survey at Rs. 44, 23,559/- which the AO was asked to verify.

However, no comment has been offered by the AO on the

correctness of book value of stock on the date of survey

determined on the basis provisional Profit & Loss Account and he

has mentioned about the value of stock told by the partner on the

date of survey as being of Rs. 30 lacs, which was rejected by the

AO in absence of books of accounts as reported by him in the

remand report. In fact, the AO was never asked by me to verify

correctness of book value of stock of Rs. 30 lacs,stated on the

date of survey by the partner but he was asked to examine

correctness of book value and physical stock value as on the date

of survey at Rs.44,23,559/- and Rs.83,65,725/- respectively, as

per the provisional Profit & Loss Account prepared by the

assessee (appellant), which the AO has failed to examine and to

offer comment on its correctness.

report of the AO has not been found to be made for the purpose of

adjudicating upon the dispute raised before him on the correctness

of stock taking and its valuation made on the date of survey

resulting into an addition of Rs. 1,01,31,744/- in the impugned

assessment order and therefore he had decided to dispose of

59 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

assessee objection on the basis of examination of the impounded documents sent by the AO. However, the ld. CIT(A) had made “however, general observation that from the impounded

documents, he could not show the specific purchase bills of each item on the basis of which, the purchase price mentioned in the

valuation report was taken. Therefore, valuation of stock inventory

made by the assessee (appellant) at Rs.83, 65,725/- claimed to have been prepared at cost price could not be established.” 34. It is admitted fact on record that most of the purchase and

sales bills and other documents were impounded were in the custody of the department and same were forwarded to the

ld.CIT(A) for his examination and verification of the correctness of

stock taking and its valuation made by the assessee at Rs.83,65,725/- claimed to have been prepared at cost price on the date of survey. The same set of impounded purchase bills, sales

bills etc.were available with the AO at the time of assessment and

remand report besides audited statement of accounts. In fact, he was required to work out the book value of stock on the date of survey after drawing a provisional Profit & Loss Account on the

basis of impounded purchase & sale bills as directed by the CIT(A) too at the time of calling for the remand report on the rejoinder of

60 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

the assessee in order to verify the correctness of the provisional

Profit & Loss Account filed by the assessee, taking into account for

the period 01.04.2009 to 18.09.2009 (date of survey) and on the

basis of such provisional Profit & Loss Account, the book value of

closing stock has been worked out at Rs. 44, 23,559/-. In order to

determine the excess value of stock on the date of survey, book

value of stock so worked out on the date of survey should be

deducted from the total value (at cost price) of stock found on the

date of survey instead of deducting opening value of stock of Rs.

22, 72,457/- as done by the AO as per argument rightly taken by

the Counsel for the assessee.

document for examination on the lines he desired it to be done

from the AO. When the AO has not done the necessary exercise,

the ld. CIT(A) had an opportunity to examine the entire impounded

set of documents including purchase bills as forwarded by the AO.

He ought to have drafted a provisional Profit & Loss Account as

desired from the AO, on the lines of that filed by the assessee,

taking into accountpurchase bills, sales bills, expenses and other

documentsect. for the period 01.04.2009 to 18.09.2009 (date of

survey) and on the basis of such provisional Profit & Loss Account,

61 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

could have challenged the book value of closing stock worked out

by the assessee at Rs. 44,23,559/-and excess stock at Rs. Rs.83,

65,725/- at cost price on the date of survey instead of directing AO

to verify the claim of the assessee with the impounded documents

on the lines of direction issued while calling for the remand report

is again not justified. The CIT(A) ought to have pointed out any

discrepancy in the valuation made by the assessee in the book

value of closing stock at Rs.44, 23,559/- and excess stock

inventory at Rs.83,65,725/-either by way of pointing out specific

purchase bills or any document from the impounded material in

terms of date, value, quality or quantity or by drawing trading, profit

& loss account on the lines file by the assessee as above.

However, the ld. CIT(A) had made general observation that “however, from the impounded documents, he could not show the specific purchase bills of each item on the basis of which, the

purchase price mentioned in the valuation report was taken.

Therefore, valuation of stock inventory made by the assessee

(appellant) at Rs.83,65,725/- claimed to have been prepared at

cost price could not be established. Such general observation

without support of specific documentary evidence has no judicious

value in the eyes of law and cannot be approved.

62 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

In the case of “ChainrupSampatram V. CIT” [24 ITR 481 36. (SC)] theapex court confirmed that closing stock is to be valued at cost or market price whichever is less. It held that “This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever the lower is, and it is now generally accepted as an established rule of commercial practice and accountancy.” TheHon’ble Supreme Court in the case of ‘CIT vs. Bilahari 37. Investment P. Ltd.’(Supra), held that: "Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profits that the Department can insist on substitution of the existing method." 38. In the instant case, the department has not found any distortion in the earlier adopted method of valuation of stock, hence the action of the AO andsubsequent confirmation by the CIT(A) was wrong. 39. In the above view and the factual matrix of the case, weaccept the grievance of the assessee as justified. The AO is directed to consider value of excess stock computed by the

63 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

assessee at Rs.84,43,266,on the basis of purchase price/cost price as per the physical stock inventory as on the date of survey i.e. 18.09.2009. He is further directed to allow set off of income

surrender by assessee in income tax return against excess stock u/s 133A, book value of the stock and the dead stock at

Rs.39,13,363/-; Rs Rs.42,62,921/- and Rs.6,33,245/-

respectively,subject to return income of the assessee. The order of the ld. CIT(A) is reversed and according the grounds pertaining to the issue of valuation of stock at cost price is allowed in favour of

assessee. The nextand last common issue pertains to assessee’s 40. claims of dead stock @ 10% where the department’s objection is that the Ld. CIT(A) has erred in law and on facts in allowing deduction of 7.5% on account of claim of dead stock ignoring the facts that,neither any such claim was made by the assessee at the

time of recording of his statement during survey nor any evidence

has been produced before the CIT(A) and that in past, the assessee has never claimed any dead stocks in its return of income.

64 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

“5.4 ………The Ld. AR claimed that dead stock should be taken at the rate of 10% but after discussion, it has been decided to provide deduction at the rate of 10% but after discussion, it has been decided to provided deduction at the at the rate of 7.5%.The Ld. AR has also claimed that paints are sold at less than MRP and therefore, a further deduction of 7.5% should be provided to arrive at the correct figure of the value of stock. However, no evidence could be produced to show that the assessee was giving discount @ 7.5% on MRP while selling paints in market. Therefore, no such deduction on account of discount claimed to be provided by the assessee to its customers is to be allowed.”

Vide CBDT circular dated 11th July 2018, the income tax 42.

department has announced its policy decision not to file, or press,

the appeals, before this Tribunal, against the appellate orders

favourable to the assessee in the cases in which overall tax effect,

including surchargebut excluding interest, is Rs 20,00,000 or less.

In the light of the above discussions, and in the light of the CBDT Circular dated 11th July 2018, these revenue appeals,InITA No.

408 and 409/Agr/2015 for assessment 2010-11,since, involving

tax effectless than Rs 20 lakhs, are dismissed as withdrawn.

the date of survey since being accepted at cost price as above, the assessee’s ground as regards to the claim of discount on sale of goods become infructuous.

65 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

In ITA No. 438/Agr/2015, the facts and circumstances of the

case are exactly similar to that in ITA No. 437/Agr/2015 except the

figures in book value and excess stock computed by the assessee

as per cost price. Therefore, our observation and finding in ITA No.

438/Agr/2015 are squarely applicable to the facts in ITA No.

437/Agr/2015in mutatis mutandis. Accordingly, the assessee is granted part relief and the revenue’s grounds are rejected.

allowed and those of Revenue are dismissed.

(Order pronounced, in the open Court on 09/10/2018)

Sd/- Sd/- (A. D. JAIN) (DR. MITHA LAL MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 09/10/2018 Aks - Doc

Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant Registrar Income Tax Appellate Tribunal Agra Bench, Agra

66 ITA No. 408 and 409/AGR/2015 ITA No. 437 and 438/AGR/2015 Assessment Year: 2010-11

Date 1. Draft dictated / (DNS) 24.09.2018 PS 2. Draft placed before author 04.10.2018 PS 3. Draft proposed & placed before the second JM/AM member 4. Draft discussed/approved by Second Member. JM/AM 5. Approved Draft comes to the Sr.PS/PS PS/PS 6. Kept for pronouncement on PS 7. File sent to the Bench Clerk PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.