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Before: Shri Bhavnesh Saini & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the Revenue against the order of ld. CIT(A)- XXVII, New Delhi dated 22.09.2010 for the assessment year 2007-08 on the following grounds : “
1. On the facts and circumstances of the case, the Ld. CIT(A) has erred both facts and law deleting an addition of Rs.51,79,004/- and Rs.2,60,578/- disallowed by the AO u/s. 69 of the I.T. Act, 1961, on account of unaccounted stock find during survey operation carried out u/s. 133A and which were admitted by the partner of the firm during statement recorded on oath.
2. The CIT(A) has ignored the provision laid down under section 69 of the IT Act while deleting the addition.”
ITA No. 562/Del./2011 2
Brief facts of the case are that the assessee filed its return of income on 31.10.2007 declaring total income of Rs.7,06,590/-. The case was selected for scrutiny and notice u/s. 143(2) was served upon the assessee. The assessee was engaged in the business of manufacturing of essential oils and aromatic chemical. A survey operation was conducted at the business premises of the assessee on 01.02.2007 by ADIT (Inv.), Ghaziabad. In the survey proceedings, the stocks of finished goods, semi finished goods and raw materials were inventorised and evaluated by applying the rates of different items as provided by the assessee. There were 14 items of stock found and the same were valued at Rs.53,58,994/-. The stock registers were impounded for the period 2006-07 and marked as Annexure A-10, which showed only two items of stock, i.e., Alpha Terpine 2520 Kg. and Thymon 50 kg., which were in total valued at Rs.1,79,990/-. Therefore, there was difference of Rs.51,79,004/- in the stocks on physical verification made at the time of survey. The AO issued show cause notice stating that why it should not be added as unexplained investment u/s. 69 of the IT Act. The assessee submitted before the AO that the stock of semi finished and under process material was ignored by the department. The value of the same is Rs.35,40,075/- and the value of raw materials of Rs.11,77,120/- were reflected in the excise records. During the ITA No. 562/Del./2011 3 survey, statements of the partner were recorded. The relevant questions and their reply as noted by the Assessing Officer are as under : “Shri Anand Nath Gupta, partner, during his statement recorded on 01/02/2007 at the time of survey, vide question no. 32, was shown the daily account stock register and was asked to hand over the purchase bill if any of the dates subsequent to the dates (20/01/2007 to 27/01/2007) mentioned in the register so that the stock can be updated. In response, Shri Anand Nath Gupta replied that he has checked his purchase files and there was no purchase bill of a date subsequent to the dates mentioned in the register i.e. the stock register was up to date. Then, question No. 33 and its answer given by Shri Anand Math Gupta is reproduced as under: "Q.
The value of stock of 2520 Kg of Alpha Terpine as per your stock register as calculated @ Rs. 62/- per Kg as shown by you is Rs. 1,56,240/- whereas value of Thymol washing 50Kg in the stock register @ Rs. 475/- per Kg works out to be Rs. 23750/-. Total value of the stock as per stock register is of Rs. 1,79,990/- (Rs. 1,56,240 + 23,750), whereas there are no purchases subsequent to the dates as mentioned in Q,.32 above. The stock physically found of 14 items (of which the rates have been disclosed by you) totals Rs. 53,58,994/. How you are to explain the huge difference in the stocks as physically found and that found in the stock register. Ans. I am unable to explain at this moment." Further, in response to question 30, that if any stock was available in the premises, of which purchase bills were yet to be received, whereas the stock purchased had physically been received or if there was any case where bills had been received but the goods were in transit and were yet to be received, Shri Anand Nath Gupta, replied that no, there was no such case. And in response to question no. 31, Shri Anand Nath Gupta replied that this was the only godown, which existed in the factory premises only.” The Assessing Officer did not accept the plea taken by the assessee that the stock of semi-finished goods and under process materials has not been valued and recorded in the books of account. Therefore, the AO added the difference
ITA No. 562/Del./2011 4 value of stock of Rs.51,79,004/- to the total income of the assessee u/s. 69 of the IT Act and treated it as income from other sources.
Further, on survey dated 01.02.2007, it was found that 1280 Kgs of Agarbatti were also not recorded in the books of account, which was valued by survey team at Rs.39,680/- @ 31/- per kg. In this regard, the assessee submitted that it is exempted item under the Central Excise Act, therefore, it was not recorded in the excise records and any other records. The Assessing Officer valued it at Rs.2,60,578/- and added the same to the income of the assessee u/s. 69 of the Act. Aggrieved by the order of Assessing Officer, the assessee appealed before the first appellate authority and submitted the detailed written submissions. After considering the submissions of the assessee, the ld. CIT(A) deleted the additions. Aggrieved by the order of ld. CIT(A), the Revenue is in appeal before the Tribunal.
The ld. DR relied on the order of the Assessing Officer and submitted that in the survey, the partner’s statements were recorded, who could not explain the impugned difference in stocks. There was entry in the stock register of only two items valuing Rs.1,79,990/-. The assessee also could not justify the stock of semi-finished goods. The Partner Shri Anand Nath Gupta
ITA No. 562/Del./2011 5 also could not produce purchase bills of a date subsequent to the date mentioned in the stock register, i.e., 27.01.2007. He further submitted that 1280 Kgs of Agarbatti were also not recorded in the books of account. Therefore, the AO has rightly made the valuation applying the rate of subsequent sales. The assessee also could not produce the invoice of Agarbatti Masala issued by Shri Sai Dhoop Agarbatti Co. at the time of survey as well as before the Assessing Officer whereas the ld. CIT(A) has relied on the bill submitted by the assessee without giving an opportunity to the Assessing Officer. Therefore, the ld. CIT(A) is not justified in deleting the additions made by the Assessing officer.
On the other hand, the ld. AR relied on the order of the first appellate authority and submitted a written synopsis, which reads as under : “It is respectfully submitted that grounds taken by the revenue department in appeal before the Hon'ble ITAT are against the facts of the case as the Ld. A.O. has not gone through the facts & material available before her, while passing assessment order U/s 143(3). All the additions in inventory are purely based on surmises & conjectures as she has not verified the facts at all. More over from the details your honor will find that the Ld. A.O. has not considered the seized documents relating to excise department. The investigation team has taken away both the register i.e. RG - 1 relating to finished goods & RG - 23A Part 1 relating to raw materials. This case is based on facts only, the Ld. A.O. has made unwanted additions without application of her mind. The total value of inventory by the survey team was taken at Rs. 53,58,994/- and the Ld. A.O. took the inventory of finished stock
ITA No. 562/Del./2011 6 only as per RG - 1 at a Rs. 1,79,990/- & balance amount of Rs. 51,79,004/- was added to the income of the assessee as unexplained stock. Your honor, in spite of detailed submission the Ld. A.O. has not gone through the excise register RG - 23 A Part 1 relating to raw material, which is containing a inventory of Rs. 7,95,196/- as per valuation of investigation team. There were two material left out in the form of IPA 9600 Kg. & Clove Terpene 1080 Kg. Your honor the excise department has prescribed register for raw materials & finished goods only. There is no prescribed register to be maintained regarding semi-finished goods and due to this reason only the revenue is not in a position to understand the status of inventory lying at floor. H'ble sir, there is no finding in the assessment order that the assessee has made purchases out of the books but the Ld. A.O. was not able to understand the system of accounting that how to take inventory of the semi-finished goods. Assessee's total stock as on 01.02.07 is tallied with the inventory taken by survey team. We hereby enclose detailed Chart regarding purchase of raw material, consumption of raw material, Production of finished goods, wastage & semi- finished goods. From the charts your honor will find that the total weight of semi-finished goods is 16513 Kg. and value is Rs. 39,46,128/- which has been totally ignored by the Ld. A. O. We hereby enclose two chart of inventory valuation as on 01.02.07, one by department at Rs. 53,58,994/- & other by assessee for a value of Rs. 49,07,165/- this difference in valuation is due to inclusion of excise duty in the value of stocks by the department, whereas the assessee excludes excise duty from the purchase as the same is allowed as Modvat credit. So this addition of Rs. 51,79,004/- is totally unjustified as the total inventory stands in the books. Moreover the assessee has himself shown inventory of Rs. 49,07,165/-as on 01.02.07 & for Rs. 56,35,530/- as on 31.03.07 in the audited books of accounts as on 31.03.07. if there has been no inventory in the books how the assessee can show profit in the statement of accounts. The assessee has filed separate trading account for both the periods i.e. as on 01.02.07 & as on 31.03.07. The assessee has also filed monthly trading summery of stock at S. No. 98 & your honor will find there has been no negative stock. Total summary of Raw material purchased/ consumed is as under:- Total Purchases 113440 Kg. Less :- Issued at floor 100520 Kg Converted into finished goods 56665 Kg
ITA No. 562/Del./2011 7 Wastage 27342 Kg Semi- finished goods at floor 16513 Kg. Raw material Stock 12930 Kg. From the above explained facts your honor will find that the Ld. A.O. has not taken the value of Raw material 12930 Kg & Semi- finished goods 16513 Kg., So difference of Rs. 51,79,004/- was duly explained before the Ld. CIT (A) & the same is rightly deleted by the Ld. CIT (A). The Ld. CIT (A) has discussed these facts in Para 7 from page 19 to 21 of the order of CIT (A).
The second ground taken by the revenue department is also baseless & against the facts of the case. The Ld. A.O. is totally unjustified in making addition of Rs. 2,60,578/- on account of Agarbati stock. During the year under assessment, the assessee has purchased 1280 Kg Agarbati masala for Rs. 31,500/- only, there was no sale of any Agarbati during the year under assessment & this material was not entered in the excise register as the same is exempted from Excise Duty. Due to inadvertence the survey team has taken the inventories of Agarbati Masala as Agarbaties. The Ld. A.O. has taken the value of 1280 Kg on the basis of sale in the subsequent year @ 203.50 app. per Kg. Our humble submission is that, Raw material cannot be valued at price of finished goods & the Ld. A.O. has taken the gross margin 10.25% at her own. Although the department at the time of survey has taken this value as Rs. 39,680/- & before making Agarbaties saleable the assessee has to add lot of ingredients in the masala to make Agarbaties. So this action of Ld. A.O. is totally unjustified & CIT (A) has rightly deleted the addition.”
We have heard the submissions of both the parties and perused the entire material available on record and we find that in respect of addition of Rs.51,79,004/-, the ld. CIT(A) has made a reasoned order and it does not require any interference. The relevant observations of the ld. CIT(A) read as under : “I have gone through the submissions made by the appellant before me during the appellate proceedings and also the assessment folder & the survey folder (which have been called for by me during the course of ITA No. 562/Del./2011 8
appellate proceedings from the assessing officer for the purposes of verification of facts). I observe that the survey folder contains the impounding order dt. 01.02.2007, its enclosures Annexure A, Annexure L. P., Annexure C etc. 7.1. The Id. A. R. correctly pointed out that during the course of examining Sh. Anand Nath Gupta the ADIT (Inv.) Ghaziabad relied only on the finished goods stocks register "RG-1" (impounded as Annexure A-10). Other records like the raw material register "RG 23 - A Part - I," containing quantitative details regarding raw material & under process goods, (impounded as Annexure A - 11) and loose papers particularly the purchase invoice dt. 28.01.2007 in respect of 2000 kgs. of Meta Cresol (impounded as Annexure L. P. - 4 / Page nos. 28-31) have not been put across to Sh. Anand Nath Gupta. This resulted in the erroneous calculation of the finished goods figure. Further that the ADIT (Inv.) Ghaziabad asked Sh. Anand Nath Gupta to handover the purchase bills if any subsequent to 27.01.2007. The Id. A. R. further correctly pointed out that since the purchase invoice in respect of 2000 kg of Meta Cresol - the raw material, was not available in the purchase file, Sh. Anand Nath Gupta could not hand over the said invoice to the ADIT (Inv.) Ghaziabad. Under such circumstances Sh. Anand Nath Gupta could not have given specific replies to the ADIT(lnv.) Ghaziabad and in turn could not explain the alleged difference in the stocks, at the time of survey operation. 7.2. I further observe that during the course of assessment proceedings the appellant furnished extracts of the excise records / stock registers maintained by it /impounded by the Deptt. while explaining that the stock inventorised by the survey team consisted of raw material (Rs. 11,77,120/- ), semi -finished / under- process goods (Rs. 35,40,075/-) & finished goods (Rs. 1,06,470/-). The appellant made reference to the excise record "RG 23 - A Part - I (impounded as Annexure A - 11) and explained that this register contains the quantitative details regarding raw material as well as under process goods. However the assessing officer brushed aside this contention of the assessee by stating in para no. 3.2.2 as under - "The second contention of the assessee that the stock of semi finished and under process material has been ignored by the department, whose value comes to Rs.35,40,075.00, is not accepted, as the same was not recorded in it's books of account and even Sh. Anand Nath Gupta, partner did not disclose the same in its statement".
ITA No. 562/Del./2011 9
I observe from the records that the assessing officer neither rejected the books of accounts, nor clarified as to how the semi finished and under process material can be recorded in the books of accounts. The Semi- finished /under process materials are not purchased by the appellant. It is a inter mediatory stage. The raw materials issued on floor from time to time for manufacturing the finished goods are duly recorded in the EXCISE RECORD RG 23-A, part-l. Regarding other stand of the assessing officer relating to the statement of Sh. Anand Nath Gupta, I observe that this was a statement recorded during the course of survey u/s 133A . The ADIT as well as the AO did not examine the above aspect while recording their statement from Anand Nath Gupta. The assessing officer was bound to make an assessment on the basis of evidence and material gathered during the survey operation. The assessing officer must bring some material on record that the assessee had made purchases out of books. The assessing officer did not bring on record any such material /evidence and merely relied on the statement of the partner which is inherently deficient owing to the reasons discussed above, l am inclined to agree to the reliance placed by the appellant in the cases of Goojarmal Ganpat Rai Vs. CIT [268 ITR 191 - Delhi] & CIT Patiala Vs. R. K. Rice Mills [319 ITR 173 -P & H]. 7.3. I, therefore, hold that the assessing officer was not justified in making addition of Rs. 51,79,004/- u/s 69 on account of alleged unexplained purchases. I do not find any justification to sustain this addition of Rs. 51,79,004/-. Hence the appellant gets relief of Rs. 51,79,004/-. (Relief of Rs. 51,79,004/-)” We do not find any material available on record to discard the decision reached by the ld. CIT(A) as reproduced above. Accordingly, the impugned order does not call for any interference on this count.
The next issue relates to deletion of addition of Rs.2,60,578/- in respect of stock of Agarbatti which was detected on survey proceedings. The stock of unrecorded Agarbatti was valued at Rs.39,680/- by the Survey team. The ITA No. 562/Del./2011 10