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Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH, AHMEDABAD
Per Pramod Kumar, AM:
By way of this appeal, the assessee appellant has challenged correctness of learned CIT(A)’s order dated 05.09.2015 in the matter of assessment under section 143(3) of the Income-tax Act, 1961 for the assessment year 2011-12.
Grievance raised by the appellant is as follows:-
“The Ld. CIT Appeals-12 Ahmedabad has erred in law and on facts in passing appellate order dated 05.09.2015 for AY 2011-12 in the case of appellant by confirming addition of Rs.10,00,000/- out of Rs.48,55,907/- on account of gross profit on an presumption basis.”
Briefly stated, the relevant material facts are as follows. The assessee was subjected to survey proceedings under section 133A of the Act, and, during the course of survey, the assessee accepted unaccounted excess stock of Rs.48,59,907. However, in the income tax return filed by the assessee, income was shown at Rs.48,66,194 and no separate income was offered in respect of the aforesaid disclosure. When Assessing Officer probed the matter further, it was, inter alia, submitted that there was no difference in quantity of stock, that no incriminating
ITA No. 139/Ahd/2016 Sampura Moorti Art Vs. DCIT Assessment year: 2011-12 Page 2 of 5 material was found in survey so as to suggest the unaccounted sales, that no unaccounted purchases are found during survey, that the partner has referred to the expression “total cost” which includes direct and indirect costs, that search party had not asked about assessee’s computation of cost, that “since there was quantitative tally at the time of search, the disclosure obtained from one of the partners of the assessee firm is illegal and not justified” and that the disclosure was, in effect, wrongly made. It was also submitted that, even though it was stated by the partner during survey, the tag price was double the cost, it may not be true in all cases because GP cannot always be 50%, “in some cases, it maybe 100% or even 200%”. In substance, the assessee submitted that returned income should be accepted without any separate adjustment for unaccounted stock. The Assessing Officer rejected these contentions by, inter alia, observing as follows:-
“2.4 From the above statement it is seen that the main partner of the assessee firm himself has valued the stock and his valuation is taken by the survey team as correct valuation. Main feature of the statement given by Shri Rajesh Sompura are: a) Shri Rajesh Sompura is the main person who looks after the day to day activity of the firm. This fact is evident from his answer to question no 11 of his statement dated 21.04.2013. b) Vide answer to question no 14 Shri Rajesh Sompura has stated the book value of the stock. Shri Rajesh Sompura has stated that as per books the stock of the assessee firm stands at 57,61,043/-. c) Vide his answer to question no 17 and 18 he has agreed to the fact that excess stock has been found in the case of the assessee firm. As per the valuation total value of the stock found during the course of search as per their tag price stands at 2,12,33,901/-, Shri Rajesh Sompura himself has stated that the tag prices of all the articles are valued at 200% of the total purchase cost. Therefore, as per his own valuation, stock of Rs.1,15,22.086/- was found during the course of survey. Vide his answer to question no 17 & 18 he has stated that excess stock found during the course of survey of Rs 48.55.907/- is his unaccounted income for A.V. 2010-11. 2.5 In the instant case it is important to note that the assessee does not maintain item-wise stock register which is also evident from the Schedule-8 (Notes forming part of account) of the audit report. The relevant extract is reproduced as under: “c) Inventories: Keeping in view of the nature of items and dealing in different models of various sizes in moorties, Assessee contends that it is practically not possible for them to maintain & submit each model wise quantity records for our verification. Therefore, Stock is physically verified and valued at average cost by the Assessee firm at the end of the year and is taken as certified by assessee firm." 2.6 It is evident from the note forming the accounts the assessee does not maintain stock register on day to day basis giving the item vise details the
ITA No. 139/Ahd/2016 Sampura Moorti Art Vs. DCIT Assessment year: 2011-12 Page 3 of 5 same is neither furnished during the course of survey proceedings and assessment proceedings. However, in order to give the assessee further opportunity the assessee is once again asked to reconcile the stock found during the course of survey with the stock reflected in books of accounts. The assessee was also asked to give the details about the disclosure of Rs.48,55,907/- and state where it is reflected in its books of account. The assessee has not furnished any details/explanation for the query raised vide order sheet dated 11.3.2014. Therefore, it is evident that the assessee does not have any explanation and the disclosure amount of Rs. 48,55,907/- has not been offered as his income while filing its return of income.” 4. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without complete success. Learned CIT(A) restricted the disallowance to Rs.10,00,000/- on the basis of his following reasoning:-
“7. I have given a very careful consideration to the facts narrated by the Id. Assessing Officer in his assessment order and the submissions made by the ld. Authorised Representative. I have also perused written submissions filed by the assessee and also perused the statement u/s. 133A(3)(iii) dtd. 21-4- 2010. I find that the partner Shri Rajesh Sompura, in fact admitted unaccounted stock of Rs.48,55,907/- u/s.133A which was reconfirmed by him in his statement u/s. 131. The method of arriving at the cost price by the Authorised Officer at 50% of the tag price is artificial and is not supported by evidences though admitted and agreed to by the partner during the course of action u/s. 133A. I find myself in agreement with the Id. Authorised Representative that the unaccounted income disclosed during the course of survey need not necessarily be separately included in the computation of income because if at the end of the year, physical stock at cost price is taken, then the sales and the closing stock together is bound to take care of the disclosure on accounted stock by way of enhanced gross profit. As per the figures of the gross profit working given for the year under reference compared to the preceding year, there is substantial rise in the sales, closing stock and gross profit. Moreover, the Id. Assessing Officer except observing that the disclosure has not been honoured by the assessee by way of separate inclusion in the statement of income, has not doubted the working/computation of closing stock, purchases or sales, or overall reliability of books of accounts, in any manner and has also not rejected the books of accounts. I therefore, agree with the Id. Authorised Representative that notwithstanding the fact that an amount of disclosure of Rs.48,55,907/- has not been separately offered for taxation in the statement of income by the assessee, the gross profit of Rs.124.90 lakhs in comparison to the preceding year gross profit of Rs.42.73 lakhs shows substantial higher disclosure of income for the year under reference. Moreover, I also find merit in the submission of the Id. AR that the excess stock found during the course of action u/s. 133A was not with respect to the unaccounted items of stock but was merely on account of artificial method of valuation and of inventorising the stock, adopted by the authorized officer and agreed to by the assessee. Therefore, there is nothing wrong if the amount of disclosure made during the course of survey is offered by following the method adopted by the assessee. Whether any additional income discovered during the course of survey has been offered for tax or not, in the methodology adopted by the assessee, can
ITA No. 139/Ahd/2016 Sampura Moorti Art Vs. DCIT Assessment year: 2011-12 Page 4 of 5 be verified only by comparing the book results, namely, GP rate, absolute GP and turnover with the corresponding figures of preceding years. 8. It can be seen from the gross profit and turnover chart submitted by the assessee on page 3 of his written submission dtd. 28-8-2015 that the gross profit has indeed shown a quantum jump of Rs.82 lakhs and GP rate has increased by almost 15% and net profit has increased by more than Rs.41 lacs compared to the preceding year. The assessee has also submitted that if the average GP rate of the preceding years is applied to the turnover during the year under reference, the G.P. @ 40% on a turnover of Rs.220 lakhs should come to Rs.88 lakhs. The G.P. shown in the accounts is Rs. 124 lakhs. This clearly indicates that disclosure made during the course of action u/s 133A is subsumed in the trading results shown by the appellant. Therefore, it has rightly been submitted by the Id. AR that the Ld. AO's insistence on separate disclosure in the statement of income is not tenable, and it is therefore held that no addition is sustainable merely on the basis of non-inclusion of amount of excess stock disclosed during 133A in the computation of income. The Ld. AO, if not satisfied with the resultant trading results of the assessee, should make enquiries with suppliers or verify direct expenses to identify the defects, if any, in books of account and establish, by positive, cogent and credible evidences, the fact that the "excess stock" in fact has not been included in the audited accounts by way of sales/closing stock. In the absence of such material on record, the Ld. AO's action of adding the amount of disclosure made u/s 133A(3)(iii), merely on the basis of such disclosure and without any material brought on record to rebut the explanation of the assessee is held not sustainable in law. 9. However, I do not agree with the submission of the Ld. AR that no addition at all need be made or sustained. This is for the simple reason that if the explanation offered by the assessee (that profit offered includes disclosure) is factually correct, then the disclosure, as a necessary consequence, must normally show up as enhanced GP. Going by the table available in the assessee's written submissions the average GP rate for preceding three years is 40.24%, and applying the same rate for the current year, the GP for the year under reference comes to Rs, 88,9l,248/-. The fact that the GP actually earned and disclosed by the assessee at Rs.1,24,90,696/ is far higher than the past cumulative average though does positively indicate the merit in Ld AR's overall submissions, the incremental component of Rs.35,99,447/- (1,24,90,696 - 88,91,248) does not match with the unaccounted stock of Rs. 48,55,907 admitted during survey proceedings. Therefore, though I am conscious of the fact that pure arithmetic does not define the realities of business, and that in law, the addition made by the Ld. AO is not wholly sustainable and that there is no particular flaw in the explanation submitted by the assessee, I am of the considered view that the overall appreciation of facts would require me to uphold part of the addition made by the Ld. AO. After considering the totality of facts and circumstances, I find it fair and reasonable to sustain the addition of Rs.10,00,000/- and delete the balance.” 5. The assessee is still aggrieved and is in further appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
ITA No. 139/Ahd/2016 Sampura Moorti Art Vs. DCIT Assessment year: 2011-12 Page 5 of 5
We have noted that the CIT(A) has held that the very foundation of addition of Rs.48,59,907/- is unsustainable in law and yet he has confirmed the disallowance to the extent of Rs.10,00,000/- by making a vague observation to the effect that “there is no particular flaw in the explanation submitted by the assessee, I am of the considered view that the overall appreciation of facts would require me to uphold part of addition made by the learned AO” and that “after considering the totality of facts and circumstances, I find it fair and reasonable to sustain the addition of Rs.10,00,000/-”. Once the basis of addition is deleted, and that aspect has reached finality, one cannot run away from corollaries of the same. The right course of action, therefore, was to delete the entire addition.
In view of the above discussions and bearing in mind entirety of the case, we deem it fit and proper to delete the impugned addition of Rs.10,00,000 as well. The assessee thus succeeds in appeal.
In the result, the appeal is allowed. Pronounced in the open court today on the 12th October, 2018
Sd/- Sd/-
Mahavir Prasad Pramod Kumar (Judicial Member) (Accountant Member) Ahmedabad, the 12th day of October, 2018 **bt Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order TRUE COPY Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad 1. Date of dictation: ...12.10.2018........ 2. Date on which the typed draft is placed before the Dictating Member: ... 12.10.2018.... 3. Date on which the approved draft comes to the Sr. P.S./P.S.: …..12.10.2018..... 4. Date on which the fair order is placed before the Dictating Member for Pronouncement: .. .. 12.10.2018.... 5. Date on which the file goes to the Bench Clerk : . 12.10.2018…. 6. Date on which the file goes to the Head Clerk : ……………………………. 7. The date on which the file goes to the Assistant Registrar for signature on the order: …. 8. Date of Despatch of the Order: ………………......