DEPUTY COMMISSIONER OF INCOME TAX, JAIPUR vs. ZARI SILK (INDIA) PVT. LTD. , NARAYAN SINGH CIRCLE, JAIPUR

The assessee further claimed that, wages paid to labour in the Tally was recorded as Indirect Expense, however, the same is Direct Expense and thereby same should be considered while valuating the closing stock and thereby that is required to be increased by Rs. 1,98,88,536/-. Ld. AO did not considered this explanation considered that reply of the assessee as vague and contrary to the facts of the case of the assessee, because assessee maintains stock records and there exist a method based on which Sale Price of each item is fixed and accordingly Price Tags are tagged. The method for arriving at MRP of the items has been explained by Shri Virendra Dadhich, in-house Chartered Accountant of assessee in his statement recorded u/'s 131 on 26.11.2014. Further, the said procedure has u/s 131 dated 26.11.2014. Ld. AO noted that perusal of the statement shows that the Sale Prices is determined by inflating the cost of that item by a certain percentage. It is relevant to mention here that the percentage is also fixed based on the type of trade i.e. for wholesale there is a fixed percentage and for retail percentage is different. Since, Sale Price of an item is only a markup on cost of that item, it is necessary to have ascertained cost of that item first. Had assessee not considered the wages expenses as costing of such items beforehand it would have not been able to determine the sale price. Therefore, the claim of assessee that wages paid to labour were not included while reporting the closing stock in its accounting software was considered as contrary to the fact. Even ld. AO noted that, in the parallel inventory software (MISSBS) maintained by the assessee stock on the date of survey stood at Rs. 31,24,00,586/-, which is very close to the physical inventory found during the survey and accordingly ld. AO did not consider the contention of taking the labour expenses in considering the valuation of stock and accordingly ld. AO noted that the stock is undervalued/ understated by Rs. 1,98,88,536/- rejecting the contention of the assessee. the difference in the stock thereby it was claimed that it was assessee’s regular practice to value stock at 100% of cost if purchased in same year, 90% of cost if purchased in immediately preceding year and 80% of cost for all preceding year stock. Therefore, the difference to the extent of Rs.

1,29,81,073/- is nothing but ageing effect only. The reply of the assessee was considered, but however, the same was not found tenable by ld. AO because on the date of the survey the physical stock was valued at Rs. 31,38,42,649/- The valuation was done keeping in view both net realizable value of the stock and the cost that would have been incurred by the assessee and therefore, ld. AO did not considered the difference due to ageing and taken a view that it was automatically subsumed in the valuation so made. Ld. AO contended that assessee could not brough on record a single instance that the physical inventory taken on the date of survey was not in accordance to its net realizable value. Therefore, the argument put forward was considered as vague and without any corroborated documentary evidence and thereby the explanation was not acceptable for Rs. 1,29,81,073/-.

Thus, ld. AO did not consider the explanation furnished by the assessee in stock for an amount of Rs. 1,98,88,536/- for labour expenses amount of Rs. 14,42,063/- assessee failed to furnish any justification and this resulted an addition for the difference in inventory of Rs. 3,43,11,672/- as income of the assessee as undisclosed investment.

15. When the matter came up before the ld. CIT(A), he noted that ld. AO made addition of excess stock of Rs 3,43,11,672/- by reducing stock as calculated on tally software from physical stock (31,38,42,649 less 27,95,30,977). Before the ld. CIT(A) the assessee explained that difference as tabulated herein below :

16. As is evident from the record, the valuation of stock on "Tally software" by applying last year GP rate at 28.11% and did reverse calculation of stock. So while preparing the trading result, closing stock of made by the assessee. Thereafter, actual purchases so made is required to be shown on the debit side of the trading account along with the necessary expenditure incurred to bring the closing stock at their reported level. After doing so generally the regular gross margin earned by the assessee is reported and thereby the closing stock amount derived as balance credit.

That is how, the survey team derived the stock as per accounting software (Tally) at Rs. 27,95,30,977/-.

The appellant-assessee contended that while debiting direct expenses in trading account, the survey team had not taken the wages expenses Rs 1,98,88,356/- incurred during the year which was classified as Indirect Expenses under the head "Employee Welfare & Other Benefits" total of Rs 3,80,72,334/- and further that had the amount of manufacturing wages for Rs 1,98,88,356/- transferred to trading account, the stock valuation as

per tally software would have increased by that amount. Out of the total sum of Rs 3,80,72,334/- under the head Employee Welfare & Other Benefits the dispute is only related to Rs. 1,98,88,356/-. While giving the relief of this ld.

Thus, the argument of the appellant -assessee was found correct that wages expense of Rs 1,98,88,536/-. Thus, if the amount of manufacturing wages for Rs 1,98,88,356/- transferred to trading account, the stock valuation as per tally software would have increased by the same and the difference up the extent of Rs 1,98,88,536/- required to be considered as explained. Thus, we do not find any infirmity in finding of the ld. CIT(A) so recorded and thereby the ground taken by the revenue has no leg to stand the addition of Rs. 1,98,88,536/-.

As regards the second limb of explanation of the assessee that ageing difference of stock as is regularly followed by the assessee was not considered. Before we proceed to go into the merits of the dispute it was noted that there was no dispute on quantitative records maintained and verified by the survey team, and was found to be in accordance with the software maintained by the assessee, but the dispute which revenue has taken up about the valuation of that stock. As is experienced by the revenue during the survey that the assessee using Tally software for financial reporting and accounting purpose but at the same time assessee-appellant maintains MISSBS inventory software for keeping records of inventory. The Survey Team found value of stock as per MISSBS inventory software at Rs 31,24,00,586/-. When the assessee asked about the difference the assessee contended that over a period after manufacturing the cloth or that of the wearable considering the style and age of stock, older the style and stock chance of getting the same price gets reduced and thereby the stock price was considered based on the past statistic of getting reduced percentage of price and valuation cost or market price being the recognised method as per Accounting Standard-2 and even that case Income Tax Act, method of accounting is regularly followed by the assessee and even the assessment completed for A. Y. 2014-15 after the date of survey on 23.11.2016 [ date of survey 16.11.2014] wherein same method of valuation was considered and no separate adjustment was called for.

Thus, the assessee’s plea that value of the stock, which is recorded in Tally software, is at net realizable value because the same is lower than the cost. The basis of the valuation being consistently followed and no one while doing necessary adjustment of stock ageing in its stock valued at 100% of cost price on MISSBS inventory software. The assessee-appellant had stated that even during the course of survey as well as during assessment proceeding that the basis of calculating the net realizable value (NRV) is that the same year stock including the purchases of the current year is valued at 100% of cost price, one year old stock valued at 90% of cost price, two years old stock is valued at 80% of cost price and stock purchased before that third year, is value at 50% of cost price. It was because of valuation of inventory at net realizable value by giving effect to stock ageing calculated separately and recorded in Tally only and that has been followed consistently and accepted by the revenue even after the survey when the assessment for A. Y. 2014-15 is considered then why the his order noted that the survey team, while survey proceeding had valued the stock by giving effect to stock ageing and taken printout of valuation sheet at page no 64 of Annexure A-8. From that impounded document, he noted that on 31.03.2014 (i.e. on last day of preceding year) cost arrived from MISSBS software was Rs 21,88,73,000/-, however, after considering the ageing effect, NRV was taken at Rs. 20,54,30,000/-.

In the light of those cognisant past practices being followed while preparing the trading results on Tally Software. Considering that being fact while deciding the issue ld. CIT(A) observed as under:

• Thus, while preparing the trading a/c on Tally Software during the course of survey, the opening stock was taken at Rs 28,66,09,180/- which was the closing stock of preceding year for which the bifurcation is as under:

& 631/JP/2024 Zari Silk (India) Pvt. Ltd. • Therefore, the closing stock of preceding year was valued at Rs. 20,54,30,000/- as on 31.03.2014 after considering ageing effect of Rs. 1,34,40,000, which has not been disputed by the AO while passing assessment order for AY 2014-15 and accepted this ageing effect of Rs 1.34 cr. All such figures are taken from audit report for previous assessment year as well as stock summary of valuation of opening stock. Similarly the AO had passed the assessment order for AY 2012-13 and AY 2017-18 and had accepted the ageing effect while calculating the stock. • Further for the year under consideration i.e. AY 2015-16, the AO had again taken the opening stock same as closing stock of preceding year as mentioned above. Thus, the AO had again taken said ageing effect in opening stock in impugned assessment order, however, the said treatment is being disputed only as far as the valuation as on date of survey is concerned which is not correct. • While preparing trading account, the opening stock was valued at Net Realisable Value (NRV), thus the closing stock as per tally software was also calculated at NRV at 28,66,09,180/-. It shows that the actual difference calculated by the AO for making addition was the difference between the physical stock valued from MISSB software and the physical stock valued at NRV in tally, which is not a correct method. When the AO had valued the stock physically from MISSB software, then the AO have to take value of stock in trading account as per cost shown in MISSB software. • In simple words while preparing the trading account from tally software, the AO is taking stock value as per Net realizable value i.e. the cost reduced by ageing effect, but while calculating the stock physically, the AO is taking the value as per MISSB software where actual stock cost is taking without considering the reduced cost due to ageing effect. Thus, due to this ageing effect, the difference is explained. • It is pertinent to mention here that there is no dispute on the quantity. • The assessee had himself valued the Stock as per his stock maintaining software (MISSBS) at Rs 31,24,00,586/-. Whereas during the course of survey the physical stock was calculated and valued at Rs 31,38,42,649/-. Thus, the difference was not what the AO had made addition. • The Appellant has regularly followed valuation of finished goods at lower of cost or net realizable value after following stock ageing effect. This approached/manner of valuation of stock was prevalent in previous assessment year also including AY 2014-15 as the opening stock was derived following the said method of accounting. • Thus, while taking the opening stock in tally software as on date of survey, the reduced value of opening stock up to Rs 1,34,40,000/- was taken. However the appellant had valued this ageing effect as on date of survey i.e. on 26.11.2014 was of Rs 1,29,81,073/-, in valuation of inventory resulting in reduced value of Stock as per tally software. • As stated above, the appellant has regularly followed valuation of finished goods at lower of cost or net realizable value after following stock ageing effect and the AO had passed the assessment order for AY 2012-13, 2013-14 and AY 2017-18 and had accepted the ageing effect while calculating the stock.

& 631/JP/2024 Zari Silk (India) Pvt. Ltd. • Considering the above discussion, the arguments and contention of the appellant is found to be correct and the reconciliation / difference of Rs 1,29,81,073 is hereby explained due to ageing effect on valuation of stock.

At the time of hearing ld. DR did not find any fault with the observations of the ld. CIT(A) and on the facts placed on record upon which ld. CIT(A) has given his finding in favour of the assessee-appellant, the decision cannot go in favour of the revenue, without pointing out that how that finding is incorrect or inconsistent. Thus, on this aspect of the matter we do not find any merits on the ground of ‘valuation’, and therefore, the same deserves to be dismissed.

9651418 85,85,268/-) on account of totalling mistake/omission as explained above, which is apparent from the stock sheet summary prepared by the survey authorities. That arguments of the assessee-appellant were accepted by ld. CIT(A) and before us ld. DR did not point out anything contrary on facts and that finding being very simple like one plus one. Thus, we do not find any infirmity in that finding of the ld. CIT(A) while accepting the total mistake for an amount of Rs 10,66,150/-.

Based on the discussion recorded herein above, the appeal of the is hereby dismissed.

18. Now, we take up the appeal filed by the assessee, wherein the assessee has raised two grounds of appeal. First one relates to the sustained addition on account of Rs. 375913/- by ld. CIT(A). The assessee contends that the said difference is very insignificant / meager considering deserves to be ignored and should be deleted. Second addition confirmed by the ld. CIT(A) is the amount of lump sum disallowance for an amount of Rs. 3,00,000/- made by the ld AO out of travelling, repairs & other expenses u/s 37(1) and 38(2) of the IT Act, 1961 on account of alleged un-verifiability of those expenses and not being incurred wholly/exclusively for the business of the assessee.

The facts relating to these two grounds being already discussed herein above while dealing with the appeal of the revenue and therefore, the same are not repeated to avoid duplication but will deal with it when it required to do so while decided grounds of appeal of the assessee.

18.1 As regards the first ground taken by the assessee, same is related to the addition sustained by the ld. CIT(A) being the amount of excess stock found during the course of survey. As discussed herein above the physical stock was calculated and valued at Rs 31,38.42.649/-. Survey team had also valued the physical stock as per inventory software (MISSBS) maintained by assessee at Rs. 31,24,00,586/-. Whereas the physical stock as per accounting software (Tally) was worked out at Rs. 27,95,30,977/-.

Ld. AO made addition of excess stock of Rs 3,43,11,672/- (31,38,42,649 less 27,95,30,977). The assessee-appellant explained the difference / reconciled before the ld. CIT(A) who has considered the major difference of addition due to wages expenses, ageing effect and totalling effect mistake total of Rs 3,39,35,759/- (Rs. 1,98,88,536 + Rs. 1,29,81,073 + Rs. 10,66,150, respectively) and has sustained the balance amount of Rs 3,75,913/-. In terms of the percentage, same is about 0.12 %. As is evident the inventory has been taken by item wise and there was not allegation of the revenue that the assessee could not reconcile the quantitative records.

There was also no allegation or material found showing that the assessee was engaged in the unaccounted purchase and sales of goods. The books of accounts are maintained as per the companies act as well as under the Income tax Act. No adverse finding of the ld. AO on the records of the quantity maintained by the assessee. It is also evident that in this case, the revenue has prepared the list of 10 different type or location of the goods, while doing so and is confirmed by the ld. CIT(A) that there was totalling mistake/omission for an amount of Rs. 10,66,150/-. The balance difference pleaded on account of stock taking error and omission and in fact considering the volume of the stock and taking them hurriedly while recording the figure and benefit of the error and quantitative terms. Even in value terms the difference is less than 1 % and while taking the stock the error of less than 1 % shall be considered as on account of error or omission when the assessee is following the same method of accounting year to year and there is no adverse comments on the quantitative record. Based on these observations we direct the ld. AO delete the addition of Rs. 3,75,913/- which was sustained by the ld. CIT(A).

In the light of this observation ground no. 1 raised by the assessee is allowed.

18.2 The second ground of the appeal relates to the disallowance of lump sum disallowance of Rs. 3,00,000/- made by the ld. AO out of travelling, repairs & other expenses u/s 37(1) and 38(2) of the IT Act, 1961 on account of alleged un-verifiability nature of expenses and not considered to be expended wholly/exclusively for the purpose of the business of the assessee. In support of the grounds so raised, it has been argued that the provision of section 37(1) does not provide allowability of the expenditure in part based on the surmises and conjectures and without specifying the specific fault on the part of the assessee. Ld. AO has not identified as to which of the expenses and for what amount was not considerable as for the purpose of the business. The expense pickup were conveyance expenses, repairs and show room miscellaneous expenses. As is clear from the heading of the expenses itself that all expenditure are expressly demonstrate it nature and once the expenditure is duly recorded in books supported by bills and vouchers no lump sum addition can be sustained in the corporate entity.

Even if the same is not for the purpose of the business the same is for the employee welfare and are also considered as allowable and part of perquisite and thereby also stands allowable. Therefore, we do not concur with the finding of the lower authority and the same are directed to be deleted. While arriving at this conclusion we get support from the decision of our own jurisdictional High Court’s in the case of CIT-II, Jaipur Vs. M/s.

Consulting Engineering Group Ltd., [ 44 taxmann.com 232(Rajasthan) ] wherein Hon’ble High Court observed that ;

14. In so far as the disallowance out of the Soil testing and surveying expenses is concerned, both the ITAT as well as CIT(A) have correctly disallowed the deletion and there was no occasion for any adhoc disallowance out of the said expenditure at the rate of 10%. The CIT(A) so also the ITAT had considered the matter after analyzing the details submitted before them and it has been observed by the CIT (A) and approved by the ITAT that the receipts by the assessee were to the extent of Rs.85,75,162/- as against the expenditure of Rs.50,18,663/-. Therefore, even the receipts are substantially higher than the expenditure and in our view, the disallowance deleted by the CIT(A) and approved by the ITAT cannot be faulted with.

17. In view of what we have discussed herein above, on all the three issues, the ITAT, after appreciation of evidence, has come to the conclusion that the disallowance out of job work charges, soil testing and surveying charges and directors' remuneration is not proper and it had been rightly deleted by the CIT(A) and we do not find any infirmity or perversity in the said order of the ITAT. It is & 631/JP/2024 Zari Silk (India) Pvt. Ltd. purely a finding of fact and no question of law much less substantial question of law can be said to emerge out of the said order of the ITAT so as to call for any interference of this Court. In our view, no substantial question of law arises out of the order passed by the ITAT.

Respectfully following the above binding precedent, we do not find any reason to sustain the addition, and thereby direct to delete the same. Based on this observation, ground no. 2 raised by the assessee is allowed.

In the result appeal filed by the assessee is allowed and that of the revenue stands dismissed.

Order pronounced in the open court on 09/01/2025.

Sd/- Sd/- ¼ujsUnz dqekj½ ¼jkBkSM+ deys'k t;UrHkkbZ½ (NARINDER KUMAR) (RATHOD KAMLESH JAYANTBHAI) U;kf;d lnL;@Judicial Member ys[kk lnL; @Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 09/01/2025 *Ganesh Kumar, Sr. PS आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. The Appellant- DCIT, Circle-02, Jaipur izR;FkhZ@ The Respondent- M/s Zari Silk (India) Pvt. Ltd., Jaipur 2. vk;djvk;qDr@ The ld CIT 3. vk;dj vk;qDr¼vihy½@The ld CIT(A) 4. 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZQkbZy@ Guard File (ITA Nos. 693 & 631/JP/2024) vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत