ACIT, CENTRAL CIRCLE-1(2), CHENNAI vs. NEW SARAVANA STORES, CHENNAI

The Revenue has raised the following grounds of appeal:

1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law. 2.1 The Id. CIT(A) erred in directing the Assessing Officer to delete the addition of Rs. Rs. 3,46,10,055/- made on account of mark-up price.

The brief facts of the case are that the assessee is a partnership firm which is engaged in the business of retail trading of textiles. A search and seizure action u/s.132 of the Act, was conducted in the Saravana Group on 18.08.2011 and during the course of search, the business premises of the assessee was also covered. During the course of search, physical inventory of stock lying in the premises of the assessee was taken, which was at Rs.49.44 Crs. The statement of the principle partner Mr.Pondurai was recorded and asked him to correlate the physical stock available with relevant purchase invoices to ascertain the stock of the goods. The physical stock of inventory of textile was taken on tag price. Therefore, in order to arrive at cost of stock as on the date of search, the mark-up added by the assessee has been reduced by taking average gross profit rate declared by the assessee for the earlier years and accordingly, cost price of the physical stock has been worked out to Rs.42.81 Crs. by reducing average gross profit rate of 13.43% from the tag price. Further, after comparing the physical stock available with the assessee to the book stock as on 18.08.2011, excess stock of Rs.24.56 Crs. was determined and assessee has admitted the excess stock found during the course of search as undisclosed income.

During the course of assessment proceedings, the AO has examined the closing stock arrived at by adopting average mark-up of 13.43% and found that the closing stock worked out as on the date of search, is incorrect and thus, re-worked the closing stock by drafting trade account and has arrived at closing stock at Rs.4.28 Crs. Based on the above facts, the AO has compared closing stock available at the time of search to the book stock and determined excess stock of Rs.38.51 Crs. as against 24.55 Crs. determined by the search party. The assessee opposed the closing stock value arrived at by the AO by reducing average gross profit rate of 13.43% from tag price and argued that it has a mark-up of 32% to 47.5% on various products depending upon their type, size, etc. Therefore, reducing average gross profit declared by the assessee for the earlier years to arrive at cost price is not correct. Therefore, claimed that if you allow 32% average mark-up on tag price, then the correct physical stock figure would come, which tallies with stock difference arrived at during the course of search and thus, no further addition is called for. The AO did not agree with the arguments of the assessee and according to him, there is no basis for the assessee to show that average mark-up is at 32% as against the average mark-up of 25% claimed by other assessee in the group.

Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has filed a detailed Written Submissions on this issue along with certain sample purchase bills and argued that it has mark-up of 32% to 47.5% on various products depending upon type of product and if you consider the average mark-up on all products, then it works out to 32%. Therefore, the AO is incorrect in allowing 25% of mark-up on tag price to arrive at closing stock as on the date of search. The Ld.CIT(A) after considering the relevant submissions of the assessee and also taken note of sample copies of purchase invoices, where MRP rate with selling rate was given, came to conclusion that the AO is incorrect in allowing 25% mark-up on tag price to arrive at cost price of closing stock held by the assessee as on the date of search as against 32% worked out by the assessee on the basis of average mark-up added on the goods. Therefore, directed the AO to work out the closing stock found at the time of search by allowing 32% mark-up on tag price. Aggrieved by the Ld.CIT(A), the Revenue is in appeal before us.

The Ld.DR submitted that the Ld.CIT(A) erred in directing the AO to delete the addition made on account of mark-up price on closing stock reducing average mark-up at 32% as against the average mark-up of 25% allowed by the AO. The Ld.DR further submitted that the assessee has declared average gross profit of 13.43% for the earlier years and after considering gross profit declared by the assessee, the Department has allowed 25% of mark-up on tag price to arrive at cost price of closing stock held as on the date of search and thus, there is no reason for the assessee to claim 32% mark-up to arrive at closing stock.

The Ld.AR, on the other hand, supporting the order of the Ld.CIT(A) submitted that to arrive at cost price of closing stock held by the assessee, average gross profit declared for the earlier years, cannot be considered as good yardstick, because the assessee had mark-up of 32% to 42.5% depending upon the products and thus, it is incorrect on the part of the AO to reduce 25% of mark-up on tag price to arrive at cost of closing stock held as on the date of search. The Ld.AR for the assessee referring to sample invoice copies of purchases submitted that if you see the purchase invoices, it is noticed that the assessee having mark-up of 47.5% on some products and 32% mark-up on some products and if you average it, the mark-up, would works out to 32%. The Ld.AR further submitted that if you reduce mark-up of 32% on tag price, then the excess stock found during the course of search, works out to 20.47 Crs., which is lesser than the closing stock difference offered by the assessee to tax during the course of search. Therefore, argued that, the AO is incorrect in allowing 25% of mark-up to arrive at excess stock at Rs.27.55 Crs. to make additions towards difference in mark-up. The Ld.CIT(A) after considering the relevant facts has rightly deleted the additions made by the AO and his orders should be upheld.

We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. There is no dispute with regard to the fact that there is a difference in closing stock held by the assessee as on the date of search, when compare to book stock.

The next issue that came up for our consideration from Ground Nos.3.1 to 3.3 of the Revenue’s appeal is deletion of additions made towards disallowance of employees’ contribution to PF u/s.36(1)(va) of the Act r.w.s.43B of the Act. The AO has made additions towards employees’ contribution to PF on the basis of Tax Audit Report by the Auditor, where the Tax Auditor has quantified the belated remittances of employees’ contribution to PF beyond due date specified under the PF Act. The Ld.CIT(A) has deleted the additions made by the AO by following the decision of the Hon’ble Madras High Court in the case of CIT v. Industrial Security & Intelligence India Pvt. Ltd., by holding that employees’ PF remitted beyond due date specified under the PF Act, but within due date specified u/s.139(1) of the Act for filing return of income is allowable u/s.43B of the Act.

Having heard both the sides and considered the materials on record, we find that the issue of belated remittances of employees’ contribution to PF beyond the due date specified under respective Act, but within due date of filing of return of income u/s.139(1) of the Act, is not a res integra.

In the result, the appeal filed by the Revenue is dismissed.