ACIT, CIRCLE-13(1), NEW DELHI vs. KAMDHENU LTD, NEW DELHI

CO No.24/Del/2024 The assessee in its earlier submission filed on 26th “ September, 2020 had explained the reason of difference in opening stock of the current year and closing stock of previous year reflected in the P&L Account as per Return of Income. The assessee had also explained that the assessee Company had valued its opening stock of finished goods as at 1st April, 2017 at Rs. 44,26,95,229/- as against the figure of Rs. 67,39,43,878/- reflected in the audited balance sheet of the Company as at 31st March, 2017.

The assessee Company has also explained that it had not claimed reduction in value of stock of Rs.23,12,48,649/- being the decrease in value of finished goods of the Company as on 1st April, 2017 in its income tax return in the A.Y. 2018-19 in any earlier years. The decrease in value of finished goods of the Company as on 1st April, 2017 has been reduced from retained earnings as at 1st April, 2016.

The decrease in the value of opening stock as at 1st April, 2017 as compared to closing stock as at 31st March, 2017 has not been incorporated in its income tax returns and has no Tax implication. Therefore, difference in valuation of opening stock of the current year and closing stock of previous year is not to be considered as unexplained income as the assessee had neither claimed the reduction in value of inventory as expenses in profit and loss account nor in ITR. Even otherwise, reduction in opening stock as on 1st April, 2017 resulting the book profit, not the book loss for

Answer: In the first year of adoption of Ind AS, the companies would prepare Ind AS financial statement for reporting year with a comparative financial statement for immediately preceding year. As per Ind AS 101, a company would make all Ind AS adjustments on the opening date of the comparative financial year. The entity is also required to present an equity reconciliation between previous Indian GAAP and Ind AS amounts, both on the opening date of preceding year as well as on the closing date of the preceding year. The amounts as on start of the opening date of the first year of adoption should be considered for the purposes of computation of transition amount. For example, companies which adopt Ind AS with effect from 1st day of April 2016 are required to prepare their financial statements for the year 2016-17 as per requirements of Ind AS. Such companies are also required to prepare an opening balance sheet as of 1st day of April 2015 and restate the financial statements for the comparative period 2015-16. In such a case, the first time adoption adjustments as of 31st day of March 2016 should be considered [i.e. the start of business on 1st day of April 2016 (or, equivalently, close of business on 31st day of March 2016)] for computation of MAT liability for previous year 2016-17 (Assessment year 2017-18) and thereafter" 6.10 Therefore, in order of comply with the same, figures of FY 2016-17 coming in Audited financials of FY 2017-18 were different from figures appearing in Audited financials of FY 2016-17. 6.11 This is the only reason as to why closing stock as on 31.03.2017 in the ITR of A.Y 2017-18 was different from opening stock as on 01.04.2017 in the 'ITR of A.Y 2018-19. 6.12 Thus the issue raised on account of difference in stock has been worked out by your goodself in respect of valuation of finished goods being part of total stock which is stated as under:- Total Stock Finished goods (Rs.) Rs. (Part of total stock Closing stock as on 31.03.2017 81,33,53,995 67,39,43,878 Opening stock as on 01.04.2017 58,21,05,346 44,26,95,229 Difference 23,12,48,649 23,12,48,649 6.13 Thus following assets were revalued as on 01.04.2016 in the audited financials for the period ending 31.03.2018 so that figures of FY 2016-17 and FY 2017-18 become comparable in order to make it Ind AS compliant :- Property, Plant & Equipment Dr 38,46,41,589 Investment in M/s. Orange Spa Hotels & Dr 6,12,500 Resorts Pvt. Ltd. Interest receivable on Security Deposit Dr 1,56,99,490 Dividend Payable and Tax thereon Dr 1,97,14,583 To Retained Earnings (Net Result) Dr 3,08,29,308 To Deferred Tax Liabilities Cr 8,14,15,690 To Investment in M/s. Shree Bankey Behari Cr 70,35,490 Ispat Pvt. Ltd. To Investment in M/s. Stalex Coating Ltd. Cr 3,00,406 To Trade Receivable (Expected Credit Loss) Cr 5,41,39,128 To Interest Accrued on Security Deposit Cr 1,56,99,490 To Inventory of Finished Goods Cr 23,12,48,650 Total 42,06,68,162 6.14 Thus from the aforesaid entry it is clear that inventory of finished goods was revalued as on 01.04.2016 by Rs.2312.48 lacs in Audited financials ending on 31.03.2018 whose treatment in the books of accounts were actually given only on i.e. at the time of applicability of Ind AS. Further details of finished goods as on 31.03.2017 being re-valued on 01.04.2017 on applicability of Ind AS appears at Annexure 6 of the paper book and also revaluation report of property, plant & machinery is also enclosed as Annexure 7 of the paper book. 6.15 Thus figures as on01.04.2016 were revalued in the Audited financials for the period ending 31.03.2018 and effect of the same was given only on 01.04.2017 in the books of accounts. 6.16 Further the net effect of valuation of various assets on Fair Value as per Ind AS as on01.04.2016 amounting to Rs.308.29 lacs was adjusted in Reserve & Surplus Account as on 01.04.2016. The said fact can be illustrated as under :- Audited Audited Adjustment Balance sheet Balance of FY 2017-18 sheet of FY DATED 2017-18 28.05.2018 dated 28.05.2018 Value of Reserve and 6263.39 lacs 5955.10 lacs 308.29 lacs Surplus as on 01.04.2016 6.17 Relevant pages of Reserve & Surplus are being highlighted in the audited financials of assessee company as on 31.03.2017 dated 30/05/2017 (as per old AS) and 31.03.2018 dated 28/05/2018 (As per new Ind AS) which appears as Annexure - 8 of the paper book. 6.18 Thus from the aforesaid discussion it is summarized that aforesaid entries were passed in order to comply with the provisions of accounting standards which were mandatory applicable on the assessee company w.e.f. from 01.04.2017 and to make figures of FY 2016-17 comparable to figures of FY 2017-18 in the audited financials for the period ending 31.03.2018, values of various assets as on 01.04.2016 were revalued. 6.19 Secondly it is submitted that these figures are tax neutral merely values of various assets were re-valued in order to make them AS compliant. However no change in quantitative figures is being made, therefore it cannot be said that assessee has made sales outside the books of accounts.

6.20 Quantities wise details of Stock summary for FY 2016-17 finished goods are stated as under:-

6.21 Thus from the aforesaid table, it can be seen that only value of finished goods as on 01.04.2017 has been changed to give effect of Ind AS and there is no change in the quantitative figures. Therefore it is again submitted that there is no sale of finished goods outside the books of accounts. 6.22 In view of the Ind AS, the assessee company to make a fair assessment of various assets including property, plant & equipment, building apart from fair valuation of debtors & other assets. The net impact of the fair valuation has been adjusted in the reserve & surplus. 6.23 The assessee company has adopted lesser amount as per Ind AS in the value of opening stock by Rs.2,312.48 lakhs without effecting quantitative details. In a way, the assessee company has claimed less expenditure on account of brought forward opening stock and has not sold any goods as inferred by your honor out of the books of account. The books of accounts have been prepared in accordance with Ind AS- 101 which are audited both under Income Tax Act and Companies Act. The Company is listed on stock exchange and is also governed by rules and regulations of SEBI. Its accounts are regularly audited and the stock inventory is also physically verified by bankers, throughout the year. 6.24 Even otherwise the assessee company had not claimed book loss of Rs.2312.48 lakhs being the decrease in value of finished goods of the Company as on 01.04.2016 in its Income Tax Return for the A.Y. 2017-18 and A.Y. 2018-19 or in any other years as this is just an accounting entry to comply with Ind.AS and this has no effect on the taxable income 6.25 The financial statements were duly approved by the Board of Directors and subsequently approved by the Shareholders of the Company in the AGM. The assessee company is a listed company having fifty percent professional independent directors and made all compliances required under the various statutes. Entire financial results including but not limited to Balance Sheet, Profit & Loss statement, cash flow statement and its annexures for the F.Y. 2017-18 (A.Y.2018-19) have been approved by the Board of Director in their meeting held on 28.05.2018. Further, AGM notice dated 28.05.2018 for calling Annual General Meeting to approve the annual accounts along with other resolutions had been served to the shareholders as well as designated stock exchanges i.e. Bombay Stock Exchange and National Stock Exchange. The Shareholders in their meeting held on 24.09.2018, approved the audited financial statement for the F.Y. 2017-18. Copy of the Board Resolution for the approval of annual accounts, extract from the Minutes of the Board of Directors dated 28.05.2018 appears as Annexure-9 of the paper book, Notice of AGM dated 28.05 2018 appears as Annexure-10 of the paper book and Shareholder Resolution for the approval of annual accounts, extract from the Minutes of the AGM dated 24.09.2018 appears as Annexure-11 of the paper book. 6.26 The assessee company is mainly having two business verticals, steel business and paint business. Kindly note that the cost audit is applicable on the steel business only whereas, cost audit is not applicable on the paint business. Therefore, we are enclosing herewith the Cost Audit Report dated 28.05.2018 towards the steel business as Annexure-12. It is pertinent to mention here that the difference in the value of inventories of Rs.2,312.48 lakhs pertains to paint products only on which cost audit is not applicable. Notification dated 31/12/2014 issued by Ministry of Corporate Affairs regarding applicability of cost audit appears as Annexure-13 of the paper book. 6.27 Further it is submitted that there is no manipulation in the books of accounts as the QUANTITY of closing stock (31.03.2017) and opening stock (01.04.2017) are same, therefore, the question for any unrecorded sales does not arise. The difference in the value of stocks for the same quantity is on account of fair valuation is as per the first time adoption of Ind AS. The books of accounts have been prepared in compliance with all the provisions of Companies Act as well as Income Tax Act. 6.28 We would like to submit before your honor that the provision of section 145(3) of the Income Tax Act, pertaining to rejection of books shall not be attracted in the present case, as we are providing a detailed submission along with documentary evidences to justify the reason for difference in value of opening stock as on 01.04.2017.

CO No.24/Del/2024 6.29 The assessee has maintained its books of accounts in accordance with the accounting standards laid down by the Institute of Chartered Accountants of India and in accordance with the provisions of Companies Act, 1956 from which correct income could be arrived at. The books of accounts have been audited under the Companies Act and also under the Income Tax Act. The statutory auditor and the tax auditor have not made any adverse inference with respect to maintenance of accounts. 6.30 The entries for sale purchase and expenditure as reflected in the audited books of accounts are backed with requisite documentary evidence and support. The books of accounts cannot be rejected summarily without pointing out any defect / deficiency because of which the correct income of the business of the assessee cannot be deduced.”

From the explanations submitted by the assessee for valuation of opening stock at lower valuation, it is seen that the Auditor’s comment was not in agreement with the assessee's claim of lower valuation of operating stock as the Auditor has specifically stated that there was no change in the method of valuation of stock. Secondly, if we consider the above reply of assessee made vide Para 9.3 of its submission, i.e. if the opening stock is taken as closing stock as on 31/03/2017, there would not be any impact. However, if the assessee had not revalued the opening stock, the GP would have been too low or negative. (ii) Despite giving several opportunities to the assessee, the assessee could not justify the huge reduction of valuation of the stock as on 31/03/2017 to 01/04/2017 when its Auditor certifies that there was not any change in the method of valuation during the year. (iii) Further vide Para 9.8 of its submission, the assessee has tried to justify the reduction of GP by providing the comparable prices of raw materials as well as finished products for AY 2017-18 and AY 2018-19 as per the submission of assessee, there were increase in price of raw materials and decrease in selling price of Paints manufactured by assessee. The average increase in cost of raw materials was 16.56% and average decrease in selling price was 6.78% viz-a-viz that of previous year. This very submission of assessee itself contradicts the assessee’s claim of reduction of opening stock valuation as there was no reduction of price/value of raw material, the assessee had as on 01/04/2017. Further, as submitted by assessee itself, the reduction of selling price was in an average of 6.78% only whereas the assessee has reduced the value of opening stock by Rs.23,12,84,649/- (62,08,35,268 minus 38,95,66,619) which comes to around 37.25 percentage which at any stretch of imagination cannot be justified keeping in view of assessee's submission that selling price of finished goods were decreased to 6.73% only from the prevailing rates of previous year. (iv) The assessee company takes shelter off Ind AS adoption but could not justify the reduction in value of opening stock to the tune of rupees 23.13 crore i.e. 37.25%. The assessee company is a listed entity in Stock Exchange and by simply reducing the value of opening stocks without any justification, the company siphoned of rupees 23.13 crore from its reserves and surplus which would have been distributed as dividend to its shareholders. The management of the company has siphoned off 23.13 crore of shareholder’s money by simply reducing the reserve without routing the proper entry through P&L account. (v) The submission of assessee in its Para number 10.2 that the valuation was done by taking account of gelled stock and slow moving item lying with it under finished goods of Paint Division is also not acceptable because as per method of valuation followed by the assessee year to year and as certified by CO No.24/Del/2024 assessee’s auditor is that the assessee makes its valuation of stock at cost or realisable value whichever is lower. This means that the closing stock shown by assessee necessarily takes into account of the saleable value or cost whichever is lower for all its items included in closing stock is every valuation of stock as on 31st March of every year. The assessee failed through justify its claim of reduction of value of opening stock of pains as on 01/04/2017 viz-a-viz the valuation of same items taken and certified by assessee itself as on 31/03/2017. (vi) Despite availing several opportunities to explain the reduction of value of opening stock, the assessee has not produced any reasonable explanation and documentary evidence nor produced any valuation reports as on 31/03/2017 and 01/04 2017 of item wise stock under the head Paint. The assessee simply took shelter of Ind AS but not produced the valuation report of stock in question and in this situation it can be concluded that the assessee necessarily failed to justify its reduction of rupees 23.12 cr from its opening stock and accordingly not showing the correct GP on sale of paint division during the year. (vii) The assessee company is subject to obtain cost Audit report, however, the assessee has obtained Cost Audit Report for Steel Division only and not for Paint Division. This also shows that the assessee has arbitrarily reduced the opening stock of its Paints without proper valuation. (viii) It is pertinent to note here that the assessee is earning Royalty Income also which is directly added under its Gross sales and operating revenue. During the year, the assessee has earned royalty income of Rs. 62,26,76,813/-, however, NP shown by the assessee is only 24.41 cr and in every year the NP is much lower than its Royalty. This clearly shows that the assessee is continuously showing loss from its business activities (ix) The decision relied upon by the assessee is not applicable to facts of the case. (x) The contention of the assessee has been already considered and countered in preceding paragraphs 4.5 to 4.8 in details regarding reduction of closing stock to the tune of Rs. Rs. 23,12,48,649/- just within one day i.e. from 31/03/2017 to 01/04/2017 and reduction of GP ratio nearby 9 %. The contents of Para 4.8 is again re-produced which clearly state that assessee has not disclosed the GP in a fair manner. Para- 4.8 The chart in Para-4.7, clearly indicate that G.P Ratio of Paint Division for the FY.2017-18 relevant to AY. 2018-19 is very low compare to A.Y. 2016-17 and 2017- 18 even though the decreased in opening stock of Finished Goods of Paint Division amounts to Rs.23,12,48,649/- without considering the net realisable value in accordance with the provision of CO No.24/Del/2024 Section 145 and 145A read with ICDS-II. Now, when the opening stock is under-valued to the extent of Rs. 23,12,48,649/-, it means trading account has to give higher result of Gross Profit but it’s not happened in the assessee’s case which establish that assessee has not disclosed true and correct GP Margin in Paint Division. The adoption of value of opening stock of finished goods of paint division without any supporting documents to enable for verification. Therefore, the prima facie opening stock of finished goods of paint division has been sold by the assessee at a price higher than what is declared in the accounts books which is not provided during the assessment proceeding to substantiate the genuineness of sale of opening stock of finished goods of paint division. The explanation of the assessee dated 30/03/2021 in respect of reduction of GP for Paint Division is not satisfactory, even though the decision relied upon by the assessee from the various court is not applicable to the facts of the case. The rate of Gross Profit declared by the assessee is low as compared to assessee’s margins in earlier years. The past history of the declared G.P. is considered as a reasonable and proper guidance for estimation of the income of Paint Division. Further, it is observed that G.P ratio of the assessee of entire division is reduced to 10.96 % compare to previous year 14.17% on a total turnover even though the assessee has received Royalty of Rs. 62.27 Crore compare to previous year 41.36 crore only. In totality of facts, the GP Ratio of Paint Division has been taken for average of two years which comes to 38.2%(37.21+39.19) after invoking the provision u/s 145(3) that income has not been computed in accordance with the standards notified under sub-section (2). In view of the above, the GP Ratio of Paint Division is determined as under:- GP Ratio of 38.2 % of Rs.1,98,51,00,000/-= Rs. 75,83,08,200/- 5.5 As the assessee has shown GP margin of Paint Division at Rs.61,38,00,000/-. Hence the difference of Rs. 14,45,08,200/- is added to the total income of the assessee on account of GP Addition ( As discussed in Para- 4.8). Penalty proceedings u/s 270A is separately initiated for under reporting of income by issuance of a separate notice.”

1. Whether on the facts and in law the Ld. CIT(A) is erred in accepting the variation in the valuation of finished stock when the same is not in agreement with the tax audit report and notes to financial statements.

2. Whether on the facts and in law, the Ld. CIT(A) is erred in deleting the addition of Rs. 14,45,08,200/- made on account of re-computing the gross profit of paint division by rejecting the books of accounts of assessee and applying previous year’s GP rate.”

9. At the time of hearing, ld. DR for the Revenue submitted that the issue under consideration is recording of closing stock of previous year and opening stock in the current assessment year. Assessee has not recorded the closing stock of previous year and recorded the value of stock of Paint Division at Rs.23,12,48,649/- as opening stock. Because of this, the book results declared by the assessee are not proper and assessee has not satisfied with proper documents before the AO. Accordingly, the AO has rejected the CO No.24/Del/2024 books of account and proceeded to apply GP rate of previous assessment year to above said difference in recording of value of opening stock. He supported the findings of the Assessing Officer who considered the fact that assessee has reinstated the opening stock to reduce the taxable income. In this regard, he brought to our notice findings of the ld. CIT (A) at para 8.4 of the appellate order and he objected to the findings of the ld. CIT (A) and prayed that the reasonable and proper findings of the AO may be sustained.

10. On the other hand, ld.AR for the assessee brought to our notice page 22 of the paper book which is the balance sheet prepared based on Indian Accounting Standard 101 (Ind. AS-101). He submitted that assessee has adopted Indian Accounting Standard first time and, therefore, assessee has to reinstate the balance sheet of previous two FYs in order to present assets and liability in its financial statements/Books of accounts and carried forward the fair value by adopting Indian Accounting Standards. The assessee has followed the procedure as laid down in Ind. AS-101. In this regard, he submitted a certificate from the statutory auditor. For the sake of clarity, the same is reproduced below :- “We wish to confirm and certify that the company M/s Kamdhenu Limited (PAN: AAACK7155M) has adopted Ind AS in the Financial Year 2017- 18, mandatorily made effective from 1st April, 2017 vide notification dated 16th February, 2015 issued by the Ministry of Corporate Affairs. As per Ind AS 101, in order to make comparable of the first Financial Year 2017-18, figures of the previous Financial Year 2016-17, the Company was required to prepare and present its opening Ind AS Balance Sheet at 1 April 2016 by giving all transitional effect of assets and liabilities with the balances as at 1st April, 2016.

As per Ind AS 109, Financial Assets and Liabilities have to be valued at fair value. Accordingly, the Company has made fair valuation of its Assets and Liabilities as per applicable Ind AS 101 and 109 as on 1st April, 2016 and its impact has been adjusted with related entries as on 1st April, 2016. The impact of accounting entry for Ind AS as on 1st April, 2016 are given below:

Property Plant & Equipment Dr. 38,46,41,589 Investment in M/s. Orange Spa Hotels & Dr. 6,12,500 Resorts Pvt. Ltd. Security Deposit Recd. Dr. 1,56,99,490 Dividend Payable and Tax thereon Dr. 1,97,14,583 To retained Earning Cr. 3,08,29,308 To Deferred Tax Liabilities (Net) Cr. 8,14,15,690 To Investment in M/s. Shree Bankey Cr. 70,35,490 Bihari Ispat Pvt. Ltd. To investment in M/s. Stalex Coating Ltd. Cr. 3,00,406 To Trade Receivable (Provision of ECL) Cr. 5,41,39,128 To Interest Accrued Cr. 1,56,99,490 To Inventory of Finished Goods Cr. 23,12,48,650 Total Rs. 42,06,68,162 42,06,68,162 Further, decrease in the value of 'Inventory of Finished Goods' was mainly on account of identification and consideration of gelled stock of paints division while arriving at the fair value on the date of transition i.e. 1st April, 2016 and taken the restated figures in Financial Year 2016-17. There was no impact on the Profit & Loss Account of the Financial Year 2017-18 due to implementation of Ind AS, stock position as at 31.03.2016, 01.04.2016, 31.03.2017 & 31.03.2018 are given hereunder:

This Certificate is being issued on the request of Kamdhenu Limited (PAN: AAACK7155M) and as per the documents provided to us further the figure also verified by management.”

by the Revenue are dismissed.

16. Since we have already decided the issue in favour of the assessee, we are not inclined to adjudicate cross objections filed by the assessee.

17. In the result, the appeal filed by the Revenue and cross objections filed by the assessee are dismissed. Order pronounced in the open court on this 27th day of November, 2024.