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Facts
The department appealed against the deletion of additions made by the Assessing Officer (AO) concerning undisclosed business profits, excess claim of indirect expenses, and excess physical stock. The additions were based on a survey conducted on the assessee's textile business.
Held
The Tribunal held that the CIT(A) was correct in deleting the additions. The AO's method of valuing stock by deducting a notional Gross Profit Ratio from the MRP was not sustainable. The assessee's method of valuing stock at the lower of cost or net realizable value was scientific. The AO also failed to point out specific defects in the books or reconcile differences.
Key Issues
Whether the deletion of additions made by the AO, relating to undisclosed business profits, excess indirect expenses, and excess physical stock, by the CIT(A) was justified. Whether the AO's methodology for stock valuation was correct.
Sections Cited
143(3), 260, 133A, 69C, 115BBE, 37, 32, 40(b), 145(3), 44AB
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Income Tax Appellate Tribunal, “B” BENCH, CHENNAI
Before: HON’BLE SHRI ABY T. VARKEY, JM & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
(िनधा'रण वष' / Assessment Year: 2018-19) DCIT M/s Maharaja Silks बनाम/ Central Circle -2, 117/2, Thanjai Salai, Vs. Trichy. Vijayapuram, Thiruvarur-610 001. �थायीलेखासं./जीआइआरसं./PAN/GIR No. ABFFM-0968-D (अपीलाथ�/Appellant) : (� थ� / Respondent) अपीलाथ� की ओर से/ Appellant by : Ms. Gouthami Manivasagam (JCIT) – Ld. Sr. DR � थ� की ओर से/Respondent by : Mr. R. Sivaraman (Advocate) – Ld. AR सुनवाई की तारीख/Date of Hearing : 06-05-2025 घोषणा की तारीख /Date of Pronouncement : 06-05-2025 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by department for Assessment Year (AY) 2018-19 arises out of the order of learned Commissioner of Income Tax (Appeals)-19, Chennai [CIT(A)] dated 29.07.2024 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) r.w.s 260 of the Act on 29.09.2022. The grounds taken by the revenue are as under: -
1. 1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.
2. The Ld. CIT (A) erred in not sustaining the addition of Rs.1,40,60,546/- made on account of undisclosed business profit; 2.1 The Ld. CIT (A) erred in observing that the AO had wrongly compared unaudited P&L account with the audited P&L account without appreciating the statutory position that the survey operation was conducted to examine stock position in unaudited books as on the date of survey and compare it with the audited books at the time of assessment; 2.2 The Ld. CIT (A) erred in relying on the observations of the Hon'ble Delhi High Court in CIT Vs. Paradise Holidays (2010) 325 ITR 13 (Delhi)' which are general in nature but, In the instant case, a survey was conducted and discrepancy in accounts was noticed; 2.3 The Ld. CIT (A) erred in not sustaining the addition to the extent of Rs.44,26,962/- (page no. 12 of asst. order) that was accepted by the assessee in response to show cause notice.
3. The Ld. CIT (A) erred in not sustaining the addition of Rs.96,33,602/- made on account of excess stock u/s.69C r.w.s. 115BBE; 3.1 The Ld. CIT (A) erred in observing that the AO had arrived at the excess stock by adopting a GP rate @ 21.53% which is only a notional figure and correct stock value has to be determined by adopting the GAAP and ICDS norms without appreciating the fact that it is the responsibility of the assessee to reconcile the stock as found at the time of survey with supporting bills and vouchers; 3.2 The Ld. CIT (A) erred in accepting the assessee's argument that the variation in stock value is due to allowing discounts at end of the season sales and clearing and promotional sales, without proof for the said claim; 4. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored. As is evident, the revenue is aggrieved by deletion of certain additions as made by Ld. AO in the assessment order.
The Ld. Sr. DR advanced arguments, oral as well as written and supported the order of Ld. AO. The Ld. AR also advanced arguments and referred to the findings of Ld. CIT(A) in the impugned order. Reliance has been placed on various case laws, the copies of which have been placed on record. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident firm is stated to be running a textile shop at Thiruvarur. The assessee was subjected to survey u/s 133A on 06.03.2018 based on which impugned assessment was framed against the assessee. The assessee filed return of income on 29.10.2018 admitting income of Rs.341.36 Lacs. The subject matter of present appeal before us is - (i) Addition of undisclosed business profits; (ii) Excess claim of indirect expenses; (iii) Addition of Excess Stock. These issues are adjudicated as under.
2. Addition of Shortfall in Net Profit 2.1 During survey, the Profit & Loss Account as extracted from tally software reflected net profit of Rs.565.98 Lacs. In recorded statement, the Managing Partner Shri V.A. Mohammad, in reply to question no.29, stated that since depreciation and other entries were not entered, the net profit recorded was incorrect. The Ld. AO noted that as against profit of Rs.565.98 Lacs as in 05.03.2018, the assessee reflected profit of Rs.332.84 Lacs. In other words, there was reduction in profit by Rs.233.14 Lacs in a span of 25 days. 2.2 The assessee furnished a Profit reconciliation statement which has been extracted at Page No.5 of the assessment order as under: - No. Particulars Amount (Rs.) Amount (Rs.) Net Profit As on 05.03.2018 5,65,98,598 Add: 1. Sales between 05.03.2018 to 31.03.2018 5,97,93,755 2. Other income between 05.03.2018 to 31.03.2018 -2,32,870 3. Depreciation expenses for the period from 01.04.2017 to 61,81,480 6,56,42,365 05.03.2018 Less: 4. Net Change in inventories between 05.03.2018 to 31.03.2018 1,43,32,451 5. Purchases between 05.03.2018 to 31.03.2018 4,65,63,833 6. Freight, Stonework, Unloading Charges and packing charges 10,20,458 between 05.03.2018 to 31.03.2018 7. Indirect Expenses incurred between 05.03.2018 to 1,51,78,929 31.03.2018 allowable u/s 37 8. Depreciation Expenses for the year ended 31.03.2018 73,60,764 allowable u/s 32 Partners’ remuneration allowable u/s 40(b) 45,00,000 8,89,56,435 Net Profit As on 31.03.2018 3,32,84,528 However, Ld. AO rejected the same, inter-alia, on the ground that stock available with the assessee as on 06.03.2018 for Rs.1004.30 Lacs as increased by purchases after that period for Rs.465.63 Lacs would be Rs.1470.03 Lacs. The assessee made sales of Rs.596.93 Lacs post survey. Based on average Gross Profit (GP) Rate of 21.53%, the cost value of the stock sold would be Rs.468.35 Lacs. If the same is reduced from Rs.1470.03 Lacs, the closing stock should have been Rs.1001.67 Lacs as against Rs.861.07 Lacs as reflected by the assessee in the financial statements which leave a gap of Rs.140.60 Lacs. Such huge reduction had no basis. Accordingly, the amount of Rs.140.06 Lacs was treated as undisclosed business profits. Aggrieved, the assessee preferred first appeal and assailed the impugned addition by way of elaborate written submissions which have been extracted in the impugned order. 2.3 The Ld. CIT(A), in para 6.2.6, noted that Ld. AO considered unaudited Profit & Loss Account as extracted from the tally software during the course of survey and compared the same with audited Profit & Loss Account. However, the books of the assessee were subjected to Tax Audit u/s 44AB and no discrepancies were found the in books of account. In fact, the books were not rejected u/s 145(3) of the Act. Reference was made to the decision of Hon’ble Delhi High Court in the case of CIT vs. Paradise Holidays (325 ITR 13) holding the onus was in revenue to show that either the books were incomplete or incorrect and the method of accounting as adopted by the assessee was such that profits of the assessee could not be deduced therefrom. In the present case, Ld. AO did not demonstrate any specific defects in the books of the assessee and did not render any such finding that the books did not give clear picture of the profit earned by the assessee. Accordingly, the impugned addition was deleted against which the department is in further appeal before us. 2.4 From the facts, it emerges that the assessee is running a textile shop and it was subjected to survey u/s 133A on 06.03.2018. During survey, the unaudited Profit & Loss Account was captured from tally software. The assessee’s financial accounts at that point of time were incomplete. These financial statements reflected net profit of Rs.565.98 Lacs. The assessee has finally reflected profit of Rs.332.84 Lacs in the return of income. Since the final profit was shown to be lesser than what was found recorded at the time of survey proceedings, impugned addition has been made by Ld. AO in the hands of the assessee. However, the Managing Partner, in the recorded statement at the time of survey, had clearly stated that since depreciation and other entries were not entered, the net profit recorded was incorrect. To support these contentions, the assessee furnished Profit reconciliation statement during the course of assessment proceedings and the assessee duly reconciled the profits shown in unaudited financial statements on the date of survey and the final Profit as reflected by the assessee in the audited financial statements which duly incorporate the transactions which have happened between the date of survey and the close of this financial year. The assessee credited the financial statements by sales and other income and added back the depreciation which increased the profits. On the other hand, the assessee debited depreciation, indirect expenses, purchases and net change in inventories which reduced the profit. The profit as reflected in the audited financial statements has ultimately been offered to tax. The Ld. AO has computed impugned amount by reducing the stock value by average gross profit rate whereas the assessee values the stock at lower of cost or net realizable value. As rightly noted by Ld. CIT(A), Ld. AO fell in error in comparing unaudited Profit & Loss Account as extracted from the tally software during the course of survey with audited Profit & Loss Account. However, the books of the assessee were subjected to Tax Audit u/s 44AB and no discrepancies were found the in books of account. In fact, the books were not rejected u/s 145(3) of the Act. The Ld. AO did not point out any specific defect in the books of the assessee and did not render any such finding that the books did not give clear picture of the profit earned by the assessee. No fault has been found in the Profit reconciliation statement. The closing stock figure as arrived by survey team by reducing Gross Profit margins could not be held to be sustainable unless discrepancies were found in the quantitative details. There is no such finding. In our considered opinion, this issue has been clinched in correct perspective by Ld. CIT(A) which do not require any interference on our part. The corresponding grounds stands dismissed.
Excess Claim of Indirect Expenses 3.1 As per above tabulation, the assessee incurred indirect expenses of Rs.151.78 Lacs between 05.03.2018 to 31.03.2018 which was also not accepted by Ld. AO. The Ld. AO observed that the assessee claimed expenditure of Rs.125.36 Lacs but in the reconciliation statement, it reflected indirect expenses of Rs.151.78 Lacs Accordingly, the differential of the two i.e., Rs.26.42 Lacs was added as excess claim. 3.2 The Ld. CIT(A), in para 6.3.5, similarly noted that Ld. AO compared the unaudited Profit & Loss Account as extracted from the tally software during the course of survey with audited Profit & Loss Account. After the date of survey, there were numerous entries, both debit and credit, in various expenses accounts. The credits were on account of reversal of expenses. The Ld. AO did not point out any defect in the books of the assessee and the books were not rejected u/s 145(3) of the Act.
Therefore, this addition was also deleted against which the revenue is in further appeal before us. 3.3 We find that the adjudication of Ld. CIT(A) on this ground is on similar lines as done for earlier issue. It could be seen that there are numerous entries of debit and credit in expenses account and none of the expenditure has been doubted by Ld. AO. Therefore, this issue has correctly been adjudicated by Ld. CIT(A).
Excess Physical Stock 4.1 The physical stock as on the date of survey i.e., 06.03.2018 was valued at Rs.1395.97 Lacs based on MRP. After deducting average GP rate of 21.53% (average of last three year in assessee and its group concerns), Ld. AO arrived at stock value at cost for Rs.1095.41 Lacs as against books stock of Rs.999.08 Lacs leaving a gap of Rs.96.33 Lacs. In reply, the managing partner stated that stock was taken at MRP rate and the sale discount was not taken into account. The GST portion was also not factored in the same. Further, the adoption of average GP rate was also incorrect. During assessment proceedings, the assessee stated that it was maintaining proper inventory records in electronic mode and sales were fully accounted therein. The inventory was valued at generally accounting principle which is lower of cost price or net realizable value. The value of stock was arrived on scientific basis and the adoption of method which was based on estimation was not justified. The attention was drawn to the fact that there was no discrepancy in the quantity and no excess physical stock was found during survey. However, not convinced, Ld. AO added the amount of Rs.96.33 Lacs u/s 69C. 4.2 The Ld. CIT, in para 6.4.5 of the impugned order, noted that survey stock value was determined by reducing the Gross Profit based on a notional Gross Profit Ratio (GPR) of 21.53%, derived from the average Gross Profit of the last three years from the value of stock determined on the basis of MRP (Maximum Retail Price) Selling Price. The stock figure during the survey was taken at MRP, and the three-year average GP was used to derive the cost price. However, no quantitative discrepancy in stock was found during the survey which would indicate that there was no unaccounted stock or purchases. The assessee filed his return of income based upon the audited books of accounts and financials. The survey stock was arrived at by reducing profit element @ 21.53% from MRP of the goods. Clearly, the excess stock determined by the survey team was only a notional figure. As against this, the correct stock value was to be determined by using Generally Accepted Accounting Principles (GAAP) and Income Computation and Disclosure Standards (ICDS) and not on notional basis. The survey value was only a hypothetical figure. The survey team did not take physical stock and valued the same on the basis of lower of cost price or net realizable value. In textile business, the value of stock would depend upon the quality of stock and the periodicity of its retention with the seller. When a particular stock had not been sold out over a period of time, it loses its value and strength. The unsold clothing is often marked down to attract buyers as an end-of-season sales, clearance events or by special discount promotions etc. Further, the remaining unsold clothing over a period of two to three year require to be deeply discounted in liquidation sales to clear out old inventory. The unsold stock which is not disposed-off. at all, is lastly donated. In such an event, such stock is to be depreciated to ‘nil’ value. In the case of the assessee, survey team chose to take the physical value of the stock at Maximum Retail Price and determined the value of stock without considering the class of the clothing available at the textile showroom instead of the cost price or the market value, whichever is less. The Ld. AO, on one hand, accepted the closing stock as declared in the audited books of accounts but, on the other hand, relied upon the notional value of closing stock taken on MRP. No addition could be made from hypothetical figures. The assessee filed its return of income on the basis of the audited financials which was accepted by the Ld. AO. The value of closing stock was accepted by Ld. AO and there were no adverse findings, in this regard. Therefore, the addition so made on the basis of hypothetical figures could not be sustained and hence, deleted. Aggrieved, the department is in further appeal before us. 4.3 It is quite clear from the factual matrix that the survey stock has not been valued on scientific basis. No discrepancy in physical stock has been pointed out rather the impugned addition arises out of erroneous methodology of stock valuation. The survey stock has merely been valued by deducting average GP from MRP value of the stock. The same do not consider the GST component, discounts and obsolete inventories. On the other hand, the assessee has valued its stock on the basis of lower of cost price or net realizable value which is scientific method of valuation of closing stock. The impugned addition as made by comparing the two stocks which are based on different valuation methodology could not be sustained in law when no physical discrepancy has been noted in the stock during survey. As rightly held by Ld. CIT(A), this addition is merely based on hypothetical figures and hence, rightly been deleted. We order so.
Conclusion 5. The appeal stands dismissed. Order pronounced on 06th May, 2025.