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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]
This appeal preferred by the assessee is against the order of Ld. CIT(A)-14, Kolkata dated 31.10.2016 for AY 2013-14.
The grounds of appeal raised by the assessee is against the confirmation of addition of Rs.5,74,100/- and Rs.3,28,380/- on account of stock discrepancy as per the surveyor report.
3. Briefly stated facts are that the assessee is a partnership firm carrying on business of manufacturing of sluice valve and other valve items. A survey u/s. 133A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) was conducted at the assessee’s factory cum business premises at Howrah on 05.02.2013 and the AO observed that as per books of account it was shown stock of Rs.16,69,120/-. However, the physical stock found at Rs.1,04,83,654/-, therefore, discrepancy in the stock, according to AO was to the tune of Rs.88,14,534/-. The AO asked the assessee to reconcile. Pursuant to which, assessee
H. Sarkar & Co, AY 2013-14 produced its reconciliation along with the bills of the suppliers which could not be entered in the books though the fact was that the bills pertaining to the same were available at the time of survey. Even though the assessee contended before the AO that the discrepancy detected in the finished goods and semi finished goods stock valuation can be explained by way of supporting documents, invoices and goods movement challans, the AO did not accept the same, therefore, he came to the conclusion that the total stock discrepancy was to the tune of Rs.56,57,332/- which was added to the income of the assessee. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to grant relief of Rs.47,54,852/- ( Rs.5,04,250 + Rs.11,57,618 + Rs.30,92,984/-) however, sustained the addition of Rs.5,74,100/- and Rs.3,28,380/- totalling Rs.9,02,480/- against which the assessee is before us.
4. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the Ld. CIT(A) has given a relief of Rs.47,54,852/- which were added by the AO on account of discrepancy in stock (excess stock found during survey). We note that no appeal has been preferred by the revenue against the partial relief/ deletion ordered by the Ld. CIT(A). Our attention was drawn by the Ld. AR to the finding of fact of the Ld. CIT(A) that the survey party did not conduct any physical inventory properly and has done only rough estimate of the stock and has not bothered to physically assess the correct stock position. Thus, this finding of fact made by the Ld. CIT(A) that the survey team had roughly estimated the stock discrepancy has crystallised. It has to be kept in mind that when the survey team alleges that there is stock discrepancy at the time of survey vis-à-vis the stock shown by the assessee in its books of account, it is the duty of the survey team to physically verify the stock and then only it can allege that there is in fact discrepancy in the stock (excess stock). We note that the steel material in the assessee’s premises was to the tune of 47.36 tons which requires high intensity labour and equipments to weigh the raw material of such a huge quantity. We note that the partners at the time of survey had objected to the manner of estimation indulged by the survey team without actually weighing the stock using machines, however, the survey team did not bother. Therefore, the action of the survey team to allege stock discrepancy by roughly estimating the stock of the assessee, without physical verification of stock cannot be countenanced and so addition on account of H. Sarkar & Co, AY 2013-14 excess stock found during survey was warranted. In a similar case, the Hon’ble High Court in the case of CIT Vs. M/s. Balaji Wire P. Ltd. (2008) 304 ITR 393 (Del), the Hon’ble High Court in a similar case has answered the question framed before it in favour of the assessee and upheld the order of the Tribunal wherein in similar facts it was held as under: “16. The second question urged before the Tribunal and before us relates to excess stock being found during the course of the search. The assessee is engaged in the manufacture of mild steel galvanized iron wires. The wires are stacked in bundles and they apparently run into thousands of bundles. The search party did not physically count the bundles (as it was not possible) but took a visual estimate. There was also no actual weighment of the goods and the weight of the stock was taken on an estimate basis. As a result of this exercise, it was found that there was a discrepancy in the inventory as shown in the books and the inventory as found during the course of the search proceedings.
The assessee sought to explain this and contended that making an estimate of the number of bundles and estimating the weight of the goods visually is totally inadequate. It was contended by the assessee that different bundles have a different weight and it cannot be said with any degree of certainty that the average weight of the goods was 65 kg per bundle. That the entire exercise was an estimate is confirmed by the CIT(A) who arrived at an average weight at 60 kg per bundle. Similarly, in respect of the fine wire products, the Assessing Officer took the average weight at 20 kg per bundle and this was reduced by the CIT (A) to 16 kg per bundle. This fact is being mentioned only to show that both the Assessing Officer as well as the CIT(A) made a guess with regard to the average weight of each bundle. The Assessing Officer as well as the CIT(A) took into consideration the fact that the employees of the assessee accompanying the search party did not raise any objection when the estimates were made and in fact they signed the panchnama indicating the number of bundles and the average weight.
The Tribunal came to the conclusion, with which we agree, that it would have been appropriate if the number of bundles and the average weight was worked out on some empirical basis rather than through mere guess work. It appears that during the search, the number of bundles and weight estimate in respect of half a dozen business concerns were made within a few hours. The search party either did not have the necessary time or did not have the necessary expertise to correctly assess the stock position. A short cut appears to have been taken by the search party which came to a certain conclusion on an estimate basis. In law, as in life, a short cut is often a wrong cut.
The mere fact that some employees of the assessee signed the panchnama does not mean that they certified the correctness of the number of bundles or the average weight of each bundle. They only certified that they were witnesses to the proceedings. What conclusions have to be drawn from the panchnama is of no concern to those employees.
Of course, the best method of determining the number of bundles and their average weight would be to actually count the bundles and use machines/cranes for weighing each bundle. This is no doubt a tedious exercise but where a liability is sought to be foisted upon an assessee, the Revenue has to be a little more serious while exercising powers conferred upon it under the Act. Mere guess work or an estimate cannot be an adequate substitute for a scientific investigation or carrying out some empirical study. The officers who conducted the search did not want to take the necessary trouble which, of course, would have been time consuming, but the impact of making a guesstimate can be quite damaging in so far as the assessee is concerned. The assessee cannot be made to suffer the consequences of lethargy on the part of the officers of the Revenue. "
Under these circumstances, we are of the opinion that the Tribunal rightly came to the conclusion that the alleged excess stock calculated by the Revenue needs to be deleted. It is, of course, not possible today to re-determine the stock so the question of any remand does not arise.”
5. In the present case also the contention/objection of the assessee’s partner at the time of survey that the rough estimate made in respect of the stock is not correct and the finding of fact made by the Ld. CIT(A) that the survey team resorted to rough estimate of the stock in the premise of the assessee since has crystalised because the Revenue has not challenged this factual finding, the allegation of AO that there was discrepancy of stock when survey was conducted at the premise of the assessee cannot be accepted and no addition is legally tenable on the basis of excess stock found at the time of survey as held by the Hon’ble High Court of Delhi in M/s. Balaji Wire P. Ltd. (supra). Therefore, we are inclined to delete the addition of Rs.9,02,480/- ( Rs.5,74,100/- and Rs.3,28,380/-).
In the result, appeal of assessee is allowed.
Order is pronounced in the open court on 27th September, 2018. Sd/- Sd/- (Dr. A. L. Saini) (Aby. T. Varkey) Accountant Member Judicial Member Dated : 27th September, 2018 Jd.(Sr.P.S.) Copy of the order forwarded to: 1. Appellant – M/s. H. Sarker & Co., Baltikuri, P.O. Bakultala, Howrah- 711113 2 Respondent – ACIT, Circle-47, Kolkata
CIT(A)-14, Kolkata
CIT, Kolkata
DR, ITAT, Kolkata. (sent through e-mail)