COTTAGE HANDICRAFT TEXTILE EMPORIUM,JAIPUR vs. DCIT,CENTRAL CIRCLE-1, JAIPUR, JAIPUR

"A survey u/s 133A was carried out at your business premises on 28.09.2017. During the course of survey proceeding stock report on MRP titled as "Stock Report on MRP On Date 29/09/2017" and stock report on purchase rate titled as "Report On Purchase Rate on Date 29/09/2017" was obtained. On perusal of both the reports following discrepancies were noticed:- • Item description as "0713/326/01/42 M03 HANDI/C M/TOP" mentioned at page no. 13 of "Report On Purchase Rate on Date 29/09/2017" purchase cost is mentioned at Rs. 12500/-, however the same item is not found in the list titled as "Stock Report on MRP On Date 29/09/2017". This show that all the items mentioned in both the list does not tally. The reports for quantification of stock furnished by the assessee are not correct. • Further, on perusal of some of items it is noticed that the profit on the basis of MRP and purchase price is upto 950%. As exercise is done to examine the profit margin of certain items (mentioned at S.No. 1 to 54 here under) and it is noticed that profit margin ranges from 0% to 950%. The average profit rate comes to 194.37% i.e. 10496.24/54. This proves that there is very high profit margin in your trade. However, you have declared GP @ 55.76 in the P&L Account. The GP on the basis of MRP and Purchase cost does not match with the GP declared by you. The ld. AO listed some of them vide page 2 to 5. • This shows that in respect of items, MRP/Tag Price is not mentioned and it is entered only with cost price in both the inventories. • On the basis of above discrepancies it is proved that the stock is not properly maintained by you. • Further, it was also noticed during survey, that there were certain items in the showroom, which had Tag's but MRPs had not been written on these items (item code no. C-555 to C-599). • One of your employee, Shri Ganesh Chandra Gharoi, admitted in reply to Q. No. 8 of his statement that tag price is mentioned by making addition 200% to 300% to the cost.

Cottage Handicraft Textile Emporium vs. DCIT • One perusal of P&L Account, it is noticed that the turnover is shown at Rs. 51,12,461/-and closing stock is at Rs. 1,27,27,319/-. The stock/turnover ratio is very abnormal. The opening stock is also of Rs. 1,22,79,480/-. • This goes to suggest that turnover is highly suppressed. No prudent business person will run continue a business with investment of Rs. 1.25 cr. in stock for a meager turnover of Rs. 51.12 lakh, that too for a net profit of Rs. 3.70 lakhs. Besides investment in stock, the business require a lot of other things like working capital, hiring of place (show room), employees, furniture and other infrastructure etc. • Vide notice dated 14.11.2019 and subsequent notices issued from time to time, the assessee was asked to produce purchase book, sale bill book, stock register etc., but these have not been produced. The assessee filed return of income by disclosing profit u/s 44AD but this does not mean that the turnover reported by him is correct. It is onus upon the assessee to prove that the turn over disclosed by him is true and correct. The assessee has not discharged its onus before the AO. • Hence it is concluded that the turn over reported by assessee is highly understated and book result shown by it are not subject to verification. Provisions of section 145(3) are clearly attracted in this case. • In view of above findings/observations, you are required to show cause as to why the provisions of section 145(3) may not be invoked in your case and why the suitable addition may not be made to your total income? In compliance to the above query letter the AR of the assessee furnished written submission on 14.04.202.

3.2 Ld. AO noted that the submission of the assessee has been considered, but the same was not found to be acceptable due to the following reasons:-

• The assessee has submitted that the item described as "0713/326/01/42 M03 HANDI/C M/TOP" the purchase cost of which is mentioned as Rs. 12,500/- was already sold on 05.06.2017, and therefore, the same was not in the list. The submission of the assessee is not acceptable because if the item was already sold, then why the same was appearing in the stock list maintained on cost basis. Further, if the one item has already been sold then how the number of articles in both the lists tally in number. Therefore, it is proved that the stock list maintained by the assessee is not reliable. • The assessee has requested for the copy of list "Report on Purchase Rate on Date 29.09.2017" and "Stock Report on MRP on date 29.09.2017". In this regard it is worthwhile to mention that these lists provided the assessee itself.

Cottage Handicraft Textile Emporium vs. DCIT So, request of the assessee for these list is not tenable as these were provided by the assessee itself. However, the copy of the same has been provided to the • With regard to assessee's submission that profit margin is to be computed on the basis of sale price. It is to be stated even if computing average profit on the basis of sale price is taken still the GP submitted by the assessee is very low. • On the query regarding same MRP and Actual cost. The assessee has submitted that these articles has already sold on 25.06.2017, 05.06.2017 and 16.10.2016. The submission of the assessee is not acceptable. If these items has already sold then why the same are appearing in both the lists. Hence, the inventory of stock maintained by the assessee is not proper. • The submission of the assessee that they have 100% billing and maintain day to day stock is not acceptable. During the course of assessment proceedings open market enquiry was conducted, and it is found that the assessee is selling articles without bill also. The report of the inspector is as under-

• On the basis of above report it is verified that the assessee is not issuing bills to each and every customer. Therefore, the complete sale is not disclosed in the books of accounts of the assessee. Hence, the turnover disclosed by the assessee is not acceptable.

• Further, if the stock was maintained on day to day basis then why the sold stock was entered in these lists. Therefore, the submission of the assessee on this regard is not accepted. • For the item code C-555 to C-5999 on which price tag was not mentioned the assessee has submitted that the price tag process was going on. However, the assessee has not furnished such information during the course of survey. Thus, this is the afterthought of the assessee as no such fact was noticed during survey. • With regard to the submission of the assessee that sale price of some of the articles is not even twice of purchase price, it is to be stated that in the statements of Shri Ganesh Cnadra Gorai, recorded during the course of survey. it was admitted that the sale price is 2 to 3 times of cost price. The submission of the assessee is not accepted on this issue. • The assessee has furnished justification of low net profit vis-à-vis high investments. The assessee has submitted the issues of competition and demand of discount by the customers. These arguments are general in nature and are un acceptable. Why the prudent man will invest too much high capital and earn only an amount of Rs. 3.70 lac in whole year. Therefore, the comparison of net profit vis-à-vis high investment is not tenable. • On the basis of above discussion it is clear that the stock of the assesee was not property maintained. Therefore, in absence of proper valuation and quantification of the stock the trading result of the assessee could not be accepted. • The Closing stock of the assessee was Rs. 1,27,27,319/- whereas turnover for the year under consideration is 51 12.461/-. The stock/turnover ratio is 2.49:1, which is highly improbable. This also goes to suggest that the turnover is under reported. • The assessee is not maintaining proper stock register. The assesee has submitted stock valuation on the basis of actual price and MRP. However, the same was not reconciled. Therefore, the proper valuation of the stock could not be derived. • Non maintenance of day to day stock register is a specific defect, in absence of which the books of accounts of the assessee cannot be relied upon completely so as to deduce the correct profit there from.

3.3 The ld. AO thus based on the above observation added a sum of Rs. 50,00,000 by observing as under :

Cottage Handicraft Textile Emporium vs. DCIT Considering the above defects, it is clear that the trading results declared by assessee are not subject to complete verification. Therefore, the books of accounts maintained by the assessee is hereby rejected and provisions of section 145(3) are invoked. Considering the overall facts and circumstances of the case it will be fair and reasonable to make a lump-sum trading addition of Rs. 50,00,000/-. Accordingly lump-sum addition of Rs. 50,00,000/- is being made to cover up the possible leakage of Revenue.

“4.3 I have considered the facts of the case and written submissions of the appellant as against the observations/findings of the AO in the assessment order for the year under consideration. The contentions/submissions of the appellant are being discussed and decided as under:- Brief facts of the present case are that the appellant is a partnership firm engaged in retail trading of handicrafts items through its showroom at Jaipur. A survey u/s 133A was carried out at business premises on 28.09.2017. The Id. AO has noted that during the course of assessment proceeding the assesse has furnished Balance Sheet, Profit and loss accounts its annexures. On perusal of the final accounts, it is noticed that the assessee has shown total turnover of Rs. 51,12,461/- on which gross profit has been shown at Rs. 28,50,888/- giving a gross profit rate of 55.76%. During the course of survey proceedings the assessee has furnished two inventory of stock Le one on the basis of cost and second on the basis MRP. On examination of these inventories some discrepancies were noticed, which show that the stock register maintained by the assessee is not reliable. The Id. AO concluded that turnover is highly suppressed. No prudent business person will run continue a business with investment of Rs. 1.25 or in stock for a meager turnover of Rs. 51.12 lakh, that too for a net profit of Rs. 3 70 lakhs. Besides investment in stock, the business require a lot of other things like working capital, hiring of place (show room), employees, furniture and other infrastructure etc. The Id. AO has further noted that the submission of the assessee that they have 100% billing and maintain day to day stock is not acceptable. During the course of assessment proceedings open market enquiry was conducted, and it is found that the assessee is selling articles without bill also. Therefore, the complete sale is not disclosed in the books of accounts of the assessee. Hence, the turnover disclosed by the assessee is not acceptable. The Closing stock of Cottage Handicraft Textile Emporium vs. DCIT the assessee was Rs. 1,27,27,319/-, whereas turnover for the year under consideration is 51,12,461/ The stock/turnover ratio is 2.49:1, which is highly improbable. This also goes to suggest that the turnover is under reported. Non maintenance of day to day stock register is a specific defect, in absence of which the books of accounts of the assessee cannot be relied upon completely so as to deduce the correct profit there from. The Id. AO concluded that the books of accounts maintained by the assessee is hereby rejected and provisions of section 145(3) are invoked and a lump-sum addition of Rs. 50,00,000/- was made to cover up the possible leakage of Revenue

The appellant has submitted that the appellant is registered under the VAT and GST laws. During the year under consideration, the turnover of the appellant was Rs 51,12,462. Return of income was filed u/s 44AD by declaring income under presumptive taxation scheme. Books of account consisting of cash book, ledger, journal, purchase register, sales register, sales bills, purchase & expenditure bills/vouchers etc. were maintained. Day to day stock records were also being maintained. The learned assessing officer made a lumpsum trading addition of Rs.50,00,000/- after rejecting the books of account u/s 145 of the Income-tax Act. 1961.

Appellant's main submission is that return of income was filed u/s 44AD which does not require maintenance of books of account, hence trading addition of rupees fifty lakhs was wrongly made after rejection of books of account u/s 145(3). The appellant submitted that under presumptive taxation u/s 44AD there is no requirement of maintaining books of account and the assessee is not required to explain entries in the books of account. The appellant relied on the judgment of Mahendra Kumar Vs NFAC (ITAT Bangalore) decided on 21.09.2023 which followed the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Surinder Pal Anand [2010] 192 taxmann 264

The appellant has also contened that no specific defect was pointed out by the learned AO while rejecting the books of account u/s 145(3) which is also evident from the assessment order and the notices issued and replies submitted during the assessment proceeding which have been placed at paper book page no. 7 to 49.

The appellant has also contended that the learned AO arbitrarily and without any basis made a trading addition of rupees fifty lakhs which is nearly equivalent to the turnover of the appellant o Rs. Rs 51,12,461/- The appellant relied on the judgment of Dhakeshwari Cotton Mills Ltd. 26 ITR 775 wherein Hon'ble Supreme Court held that assessment cannot be made on guesswork without any reference to any material on record.

Further the appellant has contended that no opportunity/show-cause was given by the Id. A.O. in respect of the proposed estimation of income after rejection of Cottage Handicraft Textile Emporium vs. DCIT books of account u/s 145(3). The appellant relied on the judgment of Yaggina Veeraraghavulu & Mavuleti Somaraju & Co. v. CIT [1966] 62 ITR 528 (AP) wherein it was held that where, after rejecting the accounts of the assessee, an estimate of the turnover and gross profits is fixed to the determent of the assessee, the assessee is entitled to know the basis and also to an opportunity to rebut the same.

Decision:-

It is seen that the appellant firm is retailer of handicrafts who maintained regular books of accounts and opted for presumptive taxation and filed return of income u/s 44AD of the Income-tax Act, 1961. The AO had made a lumpsum trading addition of rupees fifty lakhs by rejecting books of account under section 145 of the Income Tax Act 1961. The contention of the appellant is that trading addition cannot be made by rejecting books of accounts under section 145 of the Income Tax Act 1961 because the assessee has opted for presumptive taxation under section 44AD in which there is no requirement of maintaining any books of accounts.

Further, theoretically, if the rate of 8% as provided under section 44AD is applied to the profit addition of Rs. 50 lakhs that gets converted to a turnover of Rs. 625 lakhs, meaning and implying thereby that the Id. AO has estimated the undisclosed additional turnover of Rs. 625 lakhs as against the reported turnover of Rs. 51.12 lakhs. Survey action was taken at the premises of the appellant and there is no reference to any evidences in this regard from the survey action. Considering the huge amount estimated by the learned AO, evidences regarding large unaccounted sales and purchases, unaccounted cash, etc. were very likely to have been found if actually there was suppression of such a huge turnover by the appellant.

Also from the perusal of the assessment order it is noted that no basis for arriving at the figure of Rs. 50 lakhs has been given by the learned AO in the assessment order.

It is held by the Hon'ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax [1954] 26 ITR 775 (SC) (29-10-1954] that" We think that both the Income-tax Officer and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. It is thus a fit case for the exercise of our power under article 136.

In this judgement it is also held by the honourable Supreme Court whereby directions are given to the Hon'ble ITAT that it should also disclose to the assessee the matenal on which the Tribunal is going to found its estimate and then afford him full opportunity to meet the substance of any private inquiries made by the Income-tax Officer if it is intended to make the estimate on the foot of those enquiries"

As per the ratio of judgement, as applying to the present case, before making the addition the assessing authority was required to inform the material to the assessee appellant on which the assessing authority based its estimate. However in the present case no such material has been mentioned in the assessment order regarding arriving at the figure of quantification of the estimate and also that the quantification figure is exorbitantly high in comparison to the reported turnover. The appellant has rather claimed that no show cause notice was issued by the assessing authority.

During appellate proceeding appellant was given an opportunity vide letter dated 06.01.2025 to provide copy of physical inventory of stock taken during the course of survey action and copy of statement (if any) recorded of the partner of the appellate firm.

From the perusal of the assessment order and of the submission of the appellant it is seen that physical inventory was not taken during survey and calculations have been done using the stock as per the data in the computer. The finding of Ld. AO that no bill was not provided by the appellant on the basis of inspection report is of very small amount and of Rs.100 and is a single instance and is not correlated during survey and further it doesn't mean that the sale was not recorded in the books and further no show cause notice is mentioned in the assessment order in this regard. Further, the inspection has mentioned that the staff told that GST will be levied since GST invoice is issued the same can't be treated as suppressed/bogus without evidences

The appellant assessee is an eligible assessee engaged in eligible business and the profits and gains under the head business and profession shall be deemed to be a certain percentage of turnover as per section 44AD. There is no dispute on this aspect in the assessment order. The dispute is regarding not substantiating that the turnover reported in the ITR is the correct turnover and then using of some material and benchmark to arrive at an estimated figure of the actual turnover. However in the present case there is no material available in assessment order to lead to the working of a reasonably accurate estimate of the actual turnover in case the declared turnover is incorrect. Hence there is no further scope of any trading addition by pointing out defects in the books of accounts which were otherwise not required to be maintained under section 44AD. Even otherwise the appellant has explained the queries pointed out by the AO during the assessment proceedings with regard to the stock valuation on MRP and cost, stock price tag, low GP, stock turnover ratio, high investment in stock etc. The Id. AO made a lumpsum trading addition of Rs. 50 lakhs by neither providing any basis for his estimation nor giving any opportunity to the appellant for such estimation. It has been held in judgements that a rejection of accounts, however, would not necessarily imply a trading addition (CIT v. Gotan Lime Khaniz Udhyog [2002] 256 ITR 243/120 Taxman 779 (Raj.)), and it is open for the assessee to explain Cottage Handicraft Textile Emporium vs. DCIT its trading results. In fact, the books of account are but only the assessee's explanation for its returned (trading) profit. [Hon'ble ITAT JAIPUR BENCH 'B' (THIRD MEMBER) in the case of Joint Commissioner of Income-tax (OSD), Circle-4, Jaipur v. Smt. Asha Mandowra, in IT Appeal No. 110 (JP) of 2012 (ASSESSMENT YEAR 2008-09]] It is held by the Hon'ble Rajasthan High Court in the case of Principal Commissioner of Income Tax, Jaipur-2, Jaipur v. M/s Hues India Pvt. Ltd. (D.B. Income Tax Appeal No.56/2015) as under-

Though the Books of Account have have been rejected, and proper estimation can certainly be made but it is no ground to make an addition in a case where the Assessing Officer was not able to come to further material or controvert the facts narrated by the assessee during the course of assessment proceedings. The Assessing Officer was unable to pinpoint as to any specific defect noticed during course of the proceedings except that the Books of Account were rejected on certain discrepancies. It was for the Assessing Officer to come out clearly as to the basis for rejection of the Book of Accounts. Though both the appellate authorities have concurred with the finding of the Assessing Officer that rejection of Books of Account under Section 145(3) of the Act is found justifiable but whether in each and every case where Books of Account are rejected, does it entitle the Assessing Officer to make an addition to the Trading results? This court has taken into consideration similar issue in the case of CIT v. Gotan Lime Khanij Udyog (supra) which has been considered by the Tribunal wherein it has been held ad infra:-

"The Assessing Officer had found that the trading accounts of the assessee for the assessment year 1986-87 were not backed up with the quantitative and qualitative stock details and that there was a considerable fall in the gross profit rate and invoked the provisions of Section 145 (1) of the Act. The Assessing Officer was not convinced by the reason given by the assessee that the assessee had employed a method of accounting regularly which was accepted by the Department and made an addition of Rs.3,34,960 by increasing the gross profit rate. The Commissioner (Appeals) while substantially accepting the explanation of the assessee for reduction in gross profit rate was of the view that the addition was on the higher side and sustained an addition of Rs.34,000 only to cover up the possible leakage in the books of account The Tribunal upheld the invocation of the provisions of section 145(1) but did not sustain the additions retained by the Commissioner (Appeals). On a reference

Held, that the Tribunal had reached the finding on the ground that, in the absence of any finding recorded by the Commissioner (Appeals) that the expenses incurred on any accourit appeared to be unreasonable or excessive, the additions sustained merely on suspicion of pilferage or leakage were not justified. This conclusion was a finding of fact keeping in view that the additions in the profits and gains returned by the assessee were not a necessary concomitant of an order made under sections 145(1) or 145(2). Therefore, there was no error in the Cottage Handicraft Textile Emporium vs. DCIT order of the Tribunal deleting the entire additions to the trading results after holding that the proviso to section 145(1) was applicable

"Mere deviation in GP rate cannot be a ground for rejecting books of account and entering realm of estimate and guesswork. Lower GP rate shown in the books of account during current year and fall in GP rate was justified and also admitted by the AO as well as CIT(A) as well as the Tribunal. Therefore, fall in GP rate lost its significance. Having accepted the reason for fall in GP rate, namely, stiff competition in market and also that huge loss caused in particular transaction, neither the rejection of books of account was justified nor resort to substitution of estimated GP by rule of thumb merely for making certain additions. We are, therefore, of the opinion that the findings arrived at by the Tribunal suffers from basic defect of not applying its mind to the existing material which were relevant and went to the root of the matter. When all the data and entries made in the trading account were not found to be incorrect in any manner, there could not have been any other result except what has been shown by the assessee in the books of account. We are, therefore, unable to sustain the order of the Tribunal.

(emphasis supplied)

In view of the above discussion, the Id. AO was not justified in making lumpusum trading addition by rejecting the books of account thereby ignoring the provisions of section 44AD of the Income-tax Act. 1961, hence, the trading addition of Rs.50,00,000/- is directed to be deleted.

It is also noted that in reply to Q.No. 11 & 12 Sh. Nathu Lal Jain admitted that stock of value Rs.3,62,900/- was not entered in the books which was even though physically available and the bills were not available and not verified through challan during survey.

In respect of stock valuation difference during survey, a specific opportunity was provided to the appellant for making the addition vide order sheet entry dated 27.11.2024. The appellant has submitted that in quantity there was no difference in physical stock and books of account stock during survey but difference was there in valuation where stock as per books at cost was Rs. Rs.1,40,53,362/- Cottage Handicraft Textile Emporium vs. DCIT whereas, the value of stock as per MRP was Rs.3,32,61,683/- The appellant submitted that if GP margin is deducted from MRP based valuation to arrive at the cost valuation and compared with sheet on cost basis, the difference is Rs.6,61,606/- which in percentage terms works out to be 4.49%. Having considered the submissions of the appellant as well as the facts and relevant material on record it is held that whatever the difference was computed in stock valuation it was the duty of the appellant to explain the same time since the appellate failed in explaining the same, addition to the extent of Rs.6.61,606/- is sustained and the addition of Rs.50,00,000/- made by the Assessing Officer as lumpsum trading addition is deleted. Alternatively the addition of Rs.6.61,606 is to be sustained to address the issues highlighted in the assessment order. Accordingly, this ground of appeal is hereby partly allowed.”

5. As is evident that the assessee got relief in part vide order of the ld. CIT(A) but since the ld. CIT(A) has sustained the addition on the issue for an amount of Rs. 6,61,606/- the assessee is in appeal challenging the finding of the ld. CIT(A) before this tribunal challenging that solitary addition.

In support of the ground raised by the assessee ld. AR of the assessee filed a detailed written submissions which reads as follows :

Brief Facts : The appellant is a partnership firm engaged in retail trading of handicrafts items through its showroom at Jaipur. A survey u/s 133A was carried out at business premises on 28.09.2017. The appellant is registered under the VAT and GST laws. During the year under consideration, the turnover of the appellant was Rs. 51,12,462/-. Return of income was filed u/s 44AD by declaring income under presumptive taxation scheme (paper book page no. 1 to 6). Books of account consisting of cash book, ledger, journal, purchase register, sales register, sales bills, purchase & expenditure bills/vouchers etc. were maintained. Day to day stock records were also being maintained. During assessment proceedings the learned Assessing Officer asked query about difference in stock valuation as per maximum sales price (tag price) and cost price which was satisfactorily explained by the appellant and no addition was made by the AO in this respect (paper book page no. 7 to 49). However, the learned Assessing Officer arbitrarily rejected the books of account by invoking the provisions of section 145(3) of the Income-tax Act, 1961 and made a Cottage Handicraft Textile Emporium vs. DCIT lumpsum trading addition of rupees fifty lakhs without specifying any basis for the same (last two paras at page no. 10 of the assessment order).

The learned CIT(A) has deleted the action of the AO in rejecting the books of account u/s 145(3) and also deleted the lumpsum trading addition by holding that the learned AO was not justified in ignoring the provisions of section 44AD of the Act (last two paras at page no. 26 of the order of CIT(A)). However, the learned CIT(A) made an addition of Rs. 6,61,606/- on account of stock valuation difference by ignoring the fact that the difference in stock valuation was explained during the assessment proceedings and the AO, being satisfied, did not make any addition in this regard.

Being aggrieved, the appellant has preferred this appeal in order to get justice.

Appellant’s Humble Submissions: It is humbly submitted that the learned CIT(A) grossly erred in appreciating the facts of the case as well as the provisions of law while making an addition of Rs.6,61,606/- on account of stock valuation difference. The appellant maintains item wise day to day stock register and no difference in physical stock quantity was found during survey and it was only due to different methods of valuation one at cost price and other at selling (tag) price, the difference occurred which was duly explained by the appellant. The ld. AO vide notice dated 01.01.2021 (paper book page no. 12) raised the following query:-

“On the date of survey as per books stock of Rs.1,40,53,362/- valued, but as per MRP the same comes to Rs.3,32,61,683/-. You are therefore requested to furnish your explanation for the same” The appellant replied to the ld. AO during the assessment proceedings (paper book page no. 19) as under:-

“1. In respect of the query regarding stock valuation it is submitted that the books stock on the on the date of survey was Rs.1,40,53,362/- which is at cost, whereas, the stock as per MRP was Rs.3,32,61,683/- which is the maximum sale price which is being mentioned and tagged on the stock items displayed in our showroom for the benefit of our customers. The difference in MRP and book stock is bound to happen and both are not at all comparable as one is maximum sale price and the other is cost. This is further explained as under:

S.No. Particulars Rs. a. Maximum Sales Price (sale price tagged on 3,32,61,683 showroom items) b. Less : Discount offered to arrive at the Sale Price (Varies from case to case, customer to customer)

Cottage Handicraft Textile Emporium vs. DCIT c. Sale Price (This is the price charged to customers) d. Less : Gross Profit Margin @ 55.76% (As per FY (-) 1,85,46,715 2017-18 Trading A/c : Sales Rs.51,12,462/-, Gross Profit : Rs.28,50,888/-, Gross Profit Rate : 55.76%) e. Cost of closing stock as per MRP valuation 1,47,14,968 (subject to discount) f. Cost of closing stock (as per books) 1,40,53,362 g. Difference (subject to discount) 6,61,606 h. Difference in % (661606/14714968x100) 4.49%

The learned AO was satisfied and has accepted the contention of the appellant with regard to difference in stock valuation due to different methods of valuation. The learned AO did not make any addition on this account, however, the learned CIT(A) made the impugned addition ignoring the submissions of the appellant and material on record. Alternatively, it is submitted that since the appellant opted for presumptive taxation and filed its return u/s 44AD, any separate addition for stock valuation difference due to different stock valuation methods shall be illegal and unjustified. Reliance is being placed on the judgement of Mahendra Kumar Vs NFAC (ITAT Bangalore) decided on 21.09.2023 (paper book page no. 73 to 83) wherein it was held that as income is estimated under section 44AD of the Income Tax Act, so addition under section 68/69A of the Income Tax Act is impermissible. Hon’ble ITAT, Bangalore followed the judgment of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Surinder Pal Anand [2010] 192 taxmann 264. In view of the above, it is most respectfully requested that the impugned addition, being illegal and justified, may kindly be deleted. In view of the above, it is most respectfully requested that the appeal may kindly be allowed.

6. To support the contention raised in the written submission reliance was placed on the following evidence / records / decisions:

S.NO. PARTICULARS PAGE NOS.

1 ITR and Computation 1 to 3 2 Financial Statements 4 to 6 Notices by A.O and replies filed by Assessee during 3 Assessment Proceedings 7 to 49 Satements recorded of Ganesh Chander Gorai during 4 survey 50 to 55 5 Stock Valuation Summary during survey 56 to 57 Tutorial On Presumptive taxation issued by Income Tax 6 Department 58 to 72 Judgements Relied:- ITAT Bangalore Bench in the case of of Mahendra 7 Kumar Vs NFAC ITA 423/Bang/2023 73 to 83 ITAT Ahmedabad Bench in the case of Chirai Salt India 8 Pvt. Ltd. Vs. DCIT ITA 898/Ahd/2018 84 to 90

7. The ld. AR of the assessee in addition to the above written submission so filed vehemently argued that ld. AO based on surmises and conjectures made an addition of Rs. 50 lac on lumpsum basis which the ld. CIT(A) after appreciating the fact that has already been placed on record in the reply filed before the ld. AO [ paper book page 19] wherein the assessee has reconciled the difference and the only difference of Rs. 6,61,606/- was derived which ld. CIT(A) has confirmed. That difference is on account of valuation and not of any shortage or excess of stock and therefore, merely based on the valuation basis no addition can be made in the case of the assessee. Even the ld. AO has not issued compulsory notice as required u/s. 145(3) of the Act and even if he do so the order is required to be passed to the best of judgment as per provision of section 144 of the Act which also not in the case of the assessee. Even if the difference is considered it is less than 10 % which was considered to be in tolerance limit in while dealing with the 50C case and here the same logical will apply and the difference being less than 10 % the same is required to be ignored. Even the assessee declared the income as per provision of section 44AD and in that case no separate addition is required to be made. and more particularly advanced the similar contentions as stated in the order of the ld. CIT(A). She submitted that the ld. CIT(A) has given substantial relief to the assessee and the addition sustained is only to the extent of Rs. 6,61,606/- and thereby she supported the order of the ld. CIT(A).

9. We have heard the rival contentions and perused the material placed on record. The solitary ground raised by the assessee in this appeal is that the ld. CIT(A) has erred in making an addition of Rs. 6,61,606/- (4.49% difference in percentage terms) in respect of stock valuation difference during survey by ignoring the fact that the impugned addition was not made by the learned Assessing Officer in the assessment order.

The brief facts related to the dispute are that a survey action under section 133A of the Act was carried out on 28.09.2017 at the business premises of the assessee. Ld. AO noted that the assessee has two inventory of stock i.e. one based on cost and second valued at MRP. That inventory record was compared by the ld. AO and he found certain discrepancies on that stock record. That defect he pointed out vide page 2 to 5 of the assessment order. He observed that the profit percentage on various items varies in large number ranging from 70 % to 548 %. Based on on certain item the MRP was not mentioned. The stock versus turnover was not convincing. The assessee filed the ITR u/s. 44AD of the Act and hence ld. AO noted that the assessee has not reported correct turnover and thereby he made lumpsum addition as trading addition. While doing so he did not mention any section under which he make the addition of Rs. 50 lac.

When the matter carried before the ld. CIT(A) he in appreciation of the argument sustained the addition in the hands of the assessee for the difference calculated by the on account of the discount to be given for an amount of Rs. 6,61,606/-, while doing so he has appreciated the following chart submitted by the assessee;

S.No. Particulars Rs. a. Maximum Sales Price (sale price tagged on showroom 3,32,61,683 items) b. Less : Discount offered to arrive at the Sale Price (Varies from case to case, customer to customer) c. Sale Price (This is the price charged to customers) d. Less : Gross Profit Margin @ 55.76% (As per FY 2017- (-) 18 Trading A/c : Sales Rs.51,12,462/-, Gross Profit : 1,85,46,715 Rs.28,50,888/-, Gross Profit Rate : 55.76%) e. Cost of closing stock as per MRP valuation (subject to 1,47,14,968 discount) f. Cost of closing stock (as per books) 1,40,53,362 g. Difference (subject to discount) 6,61,606 h. Difference in % (661606/14714968x100) 4.49% assessee but only dispute about the valuation of the stock at the business premises of the assessee. When the matter carried before the ld. CIT(A) he sustained the addition for an amount of Rs. 6,61,606/- as the assessee failed to explain the difference between the stock price and MRP price stock price maintained by the assessee. Thus, so far as the quantity of the stock ld. AO or that of the ld. CIT(A) has not observed anything contrary and since the quantity of the stock is not in dispute merely there was difference in the stock record based on the cost and MRP does not got reconciled no addition merely on that difference can be made and therefore, we direct the ld. AO to delete that addition. We get support of our on the issue by the decision of our Hon’ble jurisdictional Rajasthan High Court in the Case of PCIT-1 Vs. M/s. Jewels Emporium in DBIT no. 43/2021 wherein High Court has held that ;

Cottage Handicraft Textile Emporium vs. DCIT 8. The CIT(A) held that the statement of a partner recorded at the end of forty five hours long search cannot be the sole basis for making addition for excess stock. Moreso, when there was no quantitative difference found and difference was result of valuation being done on current market price and books being maintained on cost.

9. There is no question of law much less substantial question of law involved in the appeal. The addition was deleted on the basis of the factual findings recorded.

Since the facts of the case being similar, we considered the solitary ground in favour of the assessee based on the discussion recorded here in above.

In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 20/05/2025. Sd/- Sd/- ¼ Mk0 ,l- lhrky{eh ½ ¼ jkBksM deys'k t;UrHkkbZ ½ (Dr. S. Seethalakshmi) (Rathod Kamlesh Jayantbhai) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 20/05/2025 *Ganesh Kumar, Sr. PS आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. The Appellant- Cottage Handicraft Textile Emporium, Jaipur izR;FkhZ@ The Respondent- DCIT, Central Circle-01, Jaipur 2. vk;dj vk;qDr@ The ld CIT 3. 4. vk;dj vk;qDr¼vihy½@The ld CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZ QkbZy@ Guard File (ITA No. 183/JP/2025) vkns'kkuqlkj@ By order,

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