AMIT KUMAR SEN,HOOGHLY vs. ACIT, CIRCLE 23(1), , HOOGHLY

8 • The Core Idea: The fundamental principle is that closing stock of one year becomes the opening stock of the next year. If you value closing stock higher in Year 1, profit for Year 1 increases. However, this higher closing stock then becomes the higher opening stock for Year 2, which reduces the cost of goods sold (COGS) and consequently reduces the profit for Year 2 (or increases the loss). • Net Effect: Over a period of two years (or more), the impact of a particular valuation of stock tends to neutralize. Any overstatement or understatement in one year's profit is typically offset in the subsequent year. Illustration: o Year 1: Sales - COGS (Opening Stock + Purchases - Closing Stock) = Profit o Year 2: Sales - COGS (Opening Stock + Purchases - Closing Stock) = Profit If Closing Stock in Year 1 is increased, Profit in Year 1 increases. But this increased Closing Stock becomes Opening Stock in Year 2, which increases COGS in Year 2, thus decreasing Profit in Year 2.

2. Impact on Specific Year's Taxable Income: • While the long-term impact on revenue might be neutral, the valuation of closing stock does affect the taxable income of a specific assessment year. • Higher Valuation of Closing Stock: Leads to higher gross profit and thus higher taxable income in that year, potentially resulting in higher tax liability for that year. • Lower Valuation of Closing Stock: Leads to lower gross profit and thus lower taxable income in that year, potentially resulting in lower tax liability for that year.

3. Income Tax Act Provisions: • Section 145A of the Income Tax Act, 1961: This section is crucial. It mandates that for the purpose of valuation of closing stock, all taxes, duties, cesses, and fees (by whatever name called) actually paid or incurred to bring the goods to their present location and condition must be included. This is known as the "inclusive method. • Cost or Net Realizable Value (NRV), whichever is lower: This is the general accounting principle (and often a tax principle as well) for inventory valuation. Its a prudence concept, preventing anticipation of profits. • Consistency: The Income Tax Act generally requires appellant to follow a consistent method of accounting for valuing closing stock. Any change in method must be bona fide and justified.

4. Potential for Litigation and Scrutiny: • Even though the overall revenue impact might be neutral, discrepancies or unreasonable valuations of closing stock can lead to scrutiny and litigation from the tax authorities.

9 • For instance, if an assessee artificially undervalues closing stock in one year to reduce tax, the tax department might challenge it. While the addition made in one year would be deductible in the next, it still involves litigation and potential interest/penalties. In summary, while the statement holds true that in the long run, the valuation of closing stock is revenue neutral due to the carry-forward effect, it significantly impacts the taxable income of individual assessment years. Proper and consistent valuation, adhering to the provisions of the Income Tax Act and relevant accounting standards, is crucial to avoid scrutiny and ensure accurate tax computation for each period. The Assessment Order, which makes an addition of undisclosed income based on an enhancement of closing stock, is fundamentally against of principal of law. The following points highlight the arbitrary and unjustified nature of the assessment:

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1. Misinterpretation of Presumptive Stock Discrepancy (Lack of Nexus): The Ld. Assessing Officer (AO) erroneously presumes that a difference in closing stock of Rs. 55,44,892 directly constitutes undisclosed sales. This assumption is made without any investigation into or consideration of standard business practices such as spoilage, necessary stock adjustments (e.g., revaluation, obsolescence), or legitimate variations in valuation methodologies. There is a complete absence of a causal link between the alleged stock discrepancy and any purported undisclosed sales.

2. Violation of Principles of Natural Justice and Section 142(1): Despite some initial delays, the Appellant duly submitted responses on 02-11-2019 and 08-11-2019. The Ld. Assessing Officer (AO)s arbitrary dismissal of these submissions as late,' especially when the assessment proceedings were still open, is unwarranted and constitutes a violation of the principles of natural justice. Ignoring the crucial data and explanations provided by the Appellant undermines the legitimacy and fairness of the entire assessment process.

3. Absence of Evidence Linking Cash Deposits to Undisclosed Sales: Ld. Assessing Officer (AO)s inference that high cash deposits during the demonetization period are intrinsically tied to undisclosed sales is speculative and lacks any corroborative evidence. There is no demonstrated nexus between these cash deposits and any specific undeclared sales transactions. Assumptions without supporting evidence render the addition legally unsustainable.

4. Arbitrary and Unsubstantiated Gross Profit (G.P.) Rate Application: The application of an arbitrary 5% G.P. rate, without any explanation of its basis, is a clear instance of an 10 unsubstantiated addition. The Ld. Assessing Officer (AO)has neither compared this rate with relevant industry benchmarks nor provided historical G.P. data from the Appellants own past records to justify its application. This renders the G.P. estimate arbitrary and devoid of factual backing .

5. Failure to Conduct Independent Verification or Third-Party Confirmation: A fair and thorough assessment necessitates independent verification of alleged undisclosed income. The Ld. Assessing Officer (AO)conspicuously failed to undertake any attempts to verify the claims through third-party sources such as suppliers, customers, or bank records. This lack of due diligence undermines the reliability of the assessment.

6. Conflation of Cash Flow with Revenue (Misunderstanding of Financial Concepts): The Ld. Assessing Officer (AO)has mistakenly equated cash deposits with revenue. Cash inflows during the demonetization period could have legitimate explanations entirely unrelated to undisclosed sales, such as the collection of outstanding receivables, the receipt of legitimate loans, or other non-revenue income. None of these plausible explanations were explored or verified by the Ld. Assessing Officer (AO).

7. Excessive and Sole Reliance on CASS Selection: While the case may have been selected under CASS (Computer Assisted Scrutiny Selection), CASS selection merely initiates scrutiny; it does not, in itself, validate arbitrary additions. The Ld. Assessing Officer (AO) is under an obligation to substantiate any additions with concrete findings and evidence, which has demonstrably not been done in this case.

8. Disregard for Normal Business Fluctuations and Economic Realities: The assessment order completely lacks any analysis of normal business variations. Businesses routinely experience fluctuations in sales, inventory, and cash flow influenced by seasonality, credit terms, market conditions, and other operational factors. The Ld. Assessing Officer (AO)'s failure to consider these inherent business dynamics renders the assessment unrealistic.

9. Failure to Consider Post-Demonetization Business Impact: The Ld. Assessing Officer (AO)'s order displays a complete disregard for the significant and often irregular cash flow patterns experienced by many businesses in the post- demonetization period due to widespread market disruptions. The conclusions drawn are therefore baseless and disconnected from the prevailing economic reality.

10. Unjustified Initiation of Penalty Proceedings (Section 270A): The initiation of penalty proceedings under Section 270A of the Income Tax Act requires clear and unambiguous 11 evidence of misreporting or concealment of income. Given the Ld. Assessing Officer (AO)'s reliance on presumptive discrepancies without any concrete evidence of deliberate misreporting or concealment, the initiation of penalty proceedings is unjustifiable and legally unsustainable.

11. Overlooked Appellant's Past Compliance Record: The Ld. Assessing Officer (AG) failed to consider the Appellants past compliance history. If the Appellant has a consistent record of transparent and timely filings, the sudden assumption of concealment without supporting evidence is unreasonable and runs contrary to established principles of assessment.

1. Presumptive additions without evidence are unsustainable: c Case Law: CIT v. K.Y. Pilliah & Sons (1967)63 ITR 411 (SC) The • Supreme Court held that mere suspicion cannot form the basis of an addition. Any addition must be supported by concrete evidence, and the absence of such evidence renders the assessment invalid. In this case, the Ld. Assessing Officer presumed unaccounted sales without proving the actual sale or purchase of excess stock, making the addition unsustainable.

12. CIT vs. Bilahari Investments (P) Ltd. (2018) 404 ITR I (SC): In this case, the Ld. Assessing Officer estimated the GP rate at 12.5% without considering the audited accounts of the Appellant.

14 The Supreme Court held that the Ld. Assessing Officer's estimation was arbitrary and without any basis. The court directed the Ld. Assessing Officer to re-compute the GP rate based on the audited accounts.

1. 1. Disregard for Audited Accounts: Multiple judgments (e.g., Bi/ahari Investments, Shree Rama Multi-Tech, Mahalaxmi Cotton Ginning Pressing and Oil Industries) explicitly state that the Ld. Assessing Officer cannot arbitrarily estimate GP rates without considering audited accounts.

2. Lack of Concrete Evidence: The addition appears to be based on presumed unaccounted sales and "stock discrepancy without proving actual sates or concrete evidence, which directly contradicts rulings in K. Y. Pilliah & Sons, Sugauli Sugar Works, Daulat Ram Rawatmull, and Calcutta Discount Co. Ltd.

3. Arbitrary Application: The arbitrary application of a GP rate without supporting evidence, industry comparison, or consideration of past records fails the burden of proof on the Revenue, as highlighted in Devi Prasad Vishwanath Prasad and Gotan Lime Khany Udyog.

4. Failure to Link Discrepancy to Income: The Ld. Assessing Officer has failed to establish a clear link between the alleged stock discrepancy and actual undisclosed sales or income, as emphasized in D.K. Garg and Baldev Raj Charla.

15 5. Violation of Natural Justice: If the appellants submissions, including audited accounts and ledgers, were disregarded, the assessment order is procedurally flawed (Samtel India Ltd., R. W. Promotions (P) Ltd.). Therefore, based on the principles established in these landmark cases, the addition of Rs. 56,55,790/- as undisclosed income due to undisclosed sates from undisclosed stock, when audited accounts and ledgers were furnished, would likely be challenged successfully and should be deleted from the total income. Grounds for Appeal Against Disallowance of Tea, Tiffin, etc. Expenses: The disallowance of Rs. 3,27,984/- under the head "Tea, Tiffin etc." by the Ld. Assessing Officer (AO) for the Assessment Year 2017-18 is arbitrary, inconsistent with logical reasoning. and legally unsustainable. The assessment order appears to be based on assumptions rather than substantive evidence, violating established principles of natural justice and the Income-tax Act, 1961.

2. Compliance with Statutory Provisions 2.1. Compliance with Section 44AB of the Income-tax Act, 1961 The Appellant's accounts were duly audited under Section 44AB of the Income-tax Act, 1961, and the audit report was submitted. This audit, conducted by independent auditors, inherently involves verification of financial records, including expenses like Tea & Tiffin, thereby ensuring their accuracy and authenticity. The Ld. AO's disallowance, despite a clean audit report, raises serious concerns about the reliance placed on the audited financials. 2.2. Allowability of Business Expenses under Section 37(1) of the Income Tax Act, 1961: Section 37(1) of the Income-tax Act, 1961, clearly allows any expenditure (other than those mentioned in 16 Sections 30 to 36) wholly and exclusively incurred for the purposes of the business. The Tea & Tiffin expenses are directly and intrinsically related to the Appellant's business operations. These are not personal expenses but are incurred to facilitate the efficient conduct of the business, making them fully deductible under Section 37(1) of the Income Tax Act, 1961.

3. Violation of Principles of Natural Justice The Ld. Assessing Officers disallowance of the expense without issuing a draft assessment order or providing a fair and adequate opportunity to explain the necessity and nature of such expenses constitutes a grave violation of the principles of natural justice. The right to be heard is a fundamental tenet of any quasi-judicial proceeding. As emphasized in CIT v. S. Chenniappa Mudaliar (1969 AIR 1068), a proper opportunity to present ones case is paramount. The Ld. Assessing Officers action, in this regard, renders the disallowance procedurally flawed and legally unsustainable.

4. Insufficiency of Evidence and Arbitrary Disallowance The Appellant provided the ledger account for Tea & Tiffin expenses. The Ld. Assessing Officer's vague allegation of insufficiency of evidence, despite the submission of audited accounts and specific ledger details, is unsubstantiated and does not justify the disallowance. The burden to prove that an expense is not genuine or not for business purposes lies with the revenue, especially when accounts are audited and supported by ledgers.

5. Reliance on Established Case Law The following judgments from the Honbie Supreme Court further substantiate the Appellant's claim: • CIT v. Waichand and Co. Pvt. Ltd. (1967) 65 ITR 381 (SC): This landmark judgment establishes that the reasonableness of an expense should be judged from the perspective of the businessman and not the Revenue. The Ld. Assessing Officer cannot substitute his commercial wisdom for that of the assessee when legitimate business expenditures are incurred. The expenditure on tea and tiffin, from a business perspective, is clearly reasonable and customary. • S.A. Builders Ltd. v. CIT (2007) 288 ITR I (SC): The Hon'ble Supreme Court emphasized that expenditure incurred for business purposes should not be disallowed merely because the Ld. Assessing Officer believes it is excessive or unnecessary, unless clear evidence is provided to the contrary. The Ld. Assessing Officer. in this case, has failed to provide any such clear evidence. • CIT v. Dhanrajgiri Raja Narasingirji (1973) 91 ITR 544 (SC): This judgment affirms that expenses necessary for business, even if 17 incidental or ancillary, should be allowed under Section 37(1) of the Income Tax Act, 1961. Tea & Tiffin expenses, being integral to the smooth running of business operations, fall squarely within this principle. • CIT v. Sales Magnesite (P) Ltd. (1995) 214 ITR I (SC): The Supreme Court held that expenses incidental to business activities, even if not directly productive, qualify as allowable deductions if incurred in the course of business. Providing refreshments to staff is an incidental activity that contributes to a conducive working environment, thereby supporting business operations. Conclusion and Prayer In light of the foregoing, the disallowance of Rs. 3,27,984/- towards Tea & Tiffin expenses is arbitrary, factually incorrect, and legally unsustainable. The expense is a necessary and customary business expenditure, fully allowable under Section 37(1) of the Income-tax Act, 1961. Furthermore, the Ld. Assessing Officer's failure to provide a fair opportunity to explain the necessity of the expense constitutes a clear violation of principles of natural justice. Therefore, it is respectfully submitted that the disallowance be deleted, and the addition of Rs. 3,27,984/- be deleted from the total income of the Appellant for the Assessment Year 201718. The assessment order, being riddled with speculative assumptions, arbitrary calculations. and procedural lapses, lacks any solid foundation in fact or law and thus warrants annulment of this particular disallowance. The Appellant draws your kind attention that the Adjudicating Authority has mislead and it has in against of natural justice under our judicial system of union of India as it has proved that every taxpayer under union of India Ave a fundamental right to express the view of their facts of income before the revenue authority according to PART Ill FUNDAMENTAL RIGHT of THE CONSTITUTION OF INDIA under the Article 19. It has also protected in respect of conviction for offences, if any person has been given any wrong descriptions or misrepresentation before the commission of executing authority of the Act as per Article 20 of THE CONSTITUTION OF INDIA. The duty of the commission of executing authority of the Act shall right to guide for protection the liberty of liability before the authority of Act as per Article 21 of THE CONSTITUTION OF INDIA read with Article 265 of THE CONSTITUTION OF INDIA mandates that no tax shall be levied or- collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law: Extract of Article 265 of Constitution of India "265. Taxes not to be imposed save by authority of law No tax shall be levied or collected except by authority of law "