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Income Tax Appellate Tribunal, KOLKATA ‘B’ BENCH, KOLKATA
Before: Shri P.M. Jagtap, Vice-(KZ) & Shri S.S. Viswanethra Ravi
Per Shri P.M. Jagtap, Vice-President (KZ):- This appeal filed by the assessee is directed against the order of ld. Commissioner of Income Tax (Appeals)-4, Kolkata dated 25.01.2018.
The relevant facts of the case giving rise to this appeal are that the assessee is a Company, which is engaged in the business of trading of readymade garments, textiles and accessories. The return of income for
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the year under consideration was filed by it on 27.09.2009 declaring a loss of Rs.135,24,57,920/-. In the assessment originally completed under section 143(3) vide an order dated 08.12.2011, the total loss of the assessee-company was determined by the Assessing Officer at Rs.1,15,40,13,969/- after making certain additions. On appeal, the ld. CIT(Appeals) allowed a part relief to the assessee and accordingly the total loss of the assessee-company was recomputed by the Assessing Officer at Rs.125,69,09,249/- after giving effect to the order of the ld. CIT(Appeals). Thereafter it was noticed by the Assessing Officer that the assessee-company had under-valued its closing stock and also claimed deduction for bogus purchases. He accordingly reopened the assessment and issued a notice under section 148 on 21.03.2014 after recording the reasons. In response to the said notice, the return of income was filed by the assessee on 05.05.2014 showing a total loss of Rs.135,22,38,140/-. The assessee-company also raised certain objections challenging the validity of reopening of assessment. The Assessing Officer did not find the said objections raised by the assessee to be sustainable and overruling the same, he proceeded to complete the reassessment under section 147 of the Act. During the course of reassessment proceedings, the assessee- company was called upon by the Assessing Officer to explain the stock of Rs.97.26 crores written off by it during the year under consideration. In reply, it was submitted on behalf of the assessee-company that the stock to that extent was written off on account of shrinkage, slow-moving, non- moving, obsolete, damaged goods, etc. This explanation of the assessee- company was not found acceptable by the Assessing Officer in the absence of relevant details and documents furnished by the assessee. He noted that no evidence whatsoever was produced by the assessee to show the market price of the slow-moving, non-moving, obsolete and damaged goods. He also found that there was not even any valuation report filed by the assessee to support the value of stock written off and the methodology of estimation of inventory. He accordingly disallowed the claim of the assessee for deduction on account of write off of closing
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stock and made addition to the extent of Rs.97.26 crores to the total income of the assessee. He also made a further addition of Rs.10,16,67,300/- on account of bogus purchases and determined the total loss of the assessee-company at Rs.18,26,41,949/- in the assessment completed under section 147/143(3) vide an order dated 20.03.2015.
Against the order passed by the Assessing Officer under section 147/143(3) of the Act, an appeal was preferred by the assessee before the ld. CIT(Appeals) and since the submissions made on behalf of the assessee in support of its claim for write off of stock of Rs.97.26 crores were not found acceptable by him, the ld. CIT(Appeals) confirmed the addition made by the Assessing Officer on this issue by observing that the write-off of stock represented provision only, which could not be allowed as deduction. To arrive at this conclusion, the ld. CIT(Appeals) relied on the order of his predecessor passed in assessee’s own case for A.Y. 2010- 11, wherein a similar claim of the assessee for write off of stock was disallowed by the first appellate authority with a rider that the stock so written off has to be treated as a part of closing stock. The ld. CIT(Appeals) accordingly directed the Assessing Officer to add the amount of Rs.97.26 crores to the value of closing stock as on 31.03.2009 but refrained himself from giving any direction for the impact of the same on the opening stock of the subsequent year. As regards the other issue relating to addition of Rs.10,16,67,300/- made on account of bogus purchases, the ld. CIT(Appeals) held that the entire amount of bogus purchases could not be treated as the income of the assessee and only profit element involved therein as estimated at the rate of 2% could be treated as the income of the assessee. He accordingly sustained the addition made by the Assessing Officer on this issue only to the extent of Rs.20,33,346/-. Aggrieved by the order of the ld. CIT(Appeals), the assessee has preferred this appeal before the Tribunal on the following grounds:- “1. That in the facts and circumstances of the case, the notice u/s 148 of the Income Tax Act does not satisfy the statutory 3
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requirements for issue of such notice and as such all the proceedings under section 143(3)/147 of the Act is void ab initio and is liable to be quashed. The Ld. CIT(A) erred in confirming the action of the A.O.
That in the facts and circumstances of the case the Learned Assessing Officer has erred in making additions of Rs.1,07,42,67,300/- on pre-conceived notions and surmises and doesn't satisfy the basic criteria i.e., 'reasons to believe' for issue of notice u/s 148 of Income Tax Act, 1961.
That in the facts and circumstances of the case, the Ld. Assessing Officer has erred in disallowing Rs.97,26,00,000/- representing write-off of inventory in the Profit & Loss Account of the instant year. The Ld. CIT-(A) erred in confirming the action of the A.O.
Without prejudice to the above, the additions of Rs.97,26,00,000/- made by Ld. Assessing Officer in the order passed under section 147/143(3) is void ab-inito, since there was no failure on the part of the appellant Company to disclose the said write off of stock in its annual accounts, which was submitted during original assessment proceedings. The Ld. CIT(A) erred in confirming the action of the A.O.
Without prejudice to the above, the Ld. Assessing Officer should have given specific observation that even if such write- off of inventory is not allowable in the instant year, being in the nature of provision for diminution in the value of stock, deduction may be claimed in A. Y. 2011-12 in which all the stock of the Company has been sold. The Ld. Assessing Officer has erred in not following the principle adopted with respect to write off of stock in A.Y. 2010-11 which was allowed in A.Y. 2011-12, considering the order of Ld. Commissioner of Income Tax (Appeal) dated 21-03-2014 for A.Y. 2010-11 read with order under section 144A in A.Y. 2011-12, by virtue of which the write off of inventory was held to be a provision and allowed in the year of sale of stock, Le. A. Y. 2011-12. The Ld, ClT(A) erred in confirming the action of the A.O.
That in the facts and circumstances of the case, the Ld. Assessing Officer has erred in disallowing an amount of Rs.10,16,67,300/- alleging accommodation entry in the form of bogus purchases. The Ld. CIT(A) has erred in confirming the addition of Rs.20,33,346/- being 2% of the purchase amount of Rs.10,16,67,300/-.
That in the facts and circumstances of the case, the Ld. Assessing Officer has erred in treating Rs.10,16,67,300/- as bogus purchases without finding any defects in the books of accounts of the appellant Company. The Ld. Assessing Officer did not consider the submission of the appellant Company that
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there was no scope of bogus purchases as the appellant Company was maintaining quantitative details of goods in SAP software (a worldwide recognized software for maintaining huge volume of data). The Ld. CIT(A) has erred in confirming the addition of Rs.20,33,346/- being 2% of the purchase amount of Rs.10,16,67,300/-. 8. That in the facts and circumstances of the case, the Ld. Assessing Officer has erred in making addition on account of alleged bogus purchase of Rs.10,16,67,300/- by relying upon statement of some parties, without allowing any opportunity to the appellant Company to cross-examine the persons making such alleged statements, despite specified requests made by the appellant. The Ld. CIT-(A) has erred in confirming the addition of Rs.20,33,346/- being 2% of the purchase amount of Rs. 10,16,67,300/-“.
We have heard the arguments of both the sides and also perused the relevant material available on record. Although the assessee has raised as many as eight grounds in this appeal, the ld. Counsel for the assessee, at the time of hearing, has not pressed Grounds No. 1 to 4 and 6 to 8. The solitary ground that now survives for our consideration is Ground No. 5 and the limited relief that is sought by the assessee-company in the said ground as submitted by its ld. Counsel is that the provision made by the assessee for write off of stock having been disallowed by the authorities below and the amount of such provision having been added to the value of closing stock, the value of opening stock of the subsequent year/(s) is liable to be increased to that extent till the stock so written off is finally sold by the assessee-company in the previous year relevant to A.Y. 2011- 12. We find merit in this contention of the ld. Counsel for the assessee. Since the value of closing stock as finally determined is to be automatically carried forward as the value of opening stock for the immediately succeeding year, we are of the view that this corresponding effect is required to be given by the Assessing Officer automatically without even any specific direction, especially when the value of closing stock as determined after making the addition on account of disallowance of the provision made for write off of closing stock has been accepted by
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the assessee and it has become final. We accordingly allow Ground No. 5 of the assessee’s appeal.
In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on November 14, 2018.
Sd/- Sd/- (S.S. Viswanethra Ravi) (P.M. Jagtap) Judicial Member Vice-President (KZ) Kolkata, the 14th day of November, 2018
Copies to : (1) V2 Retail Limited, Chhaparia & Associates, Chartered Accountants, 8, Camac Street, Shantiniketan Building, 5th Floor, Rom No 2, Kolkata-700 017
(2) Deputy Commissioner of Income Tax, Circle-10(2), Kolkata, Aayakar Bhawan, 5th Floor, P-7, Chowringhee Square, Kolkata-700 069
(3) Commissioner of Income Tax (Appeals)-4, Kolkata, (4) Commissioner of Income Tax- , (5) The Departmental Representative (6) Guard File By order
Assistant Registrar, Income Tax Appellate Tribunal, Kolkata Benches, Kolkata Laha/Sr. P.S.