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Income Tax Appellate Tribunal, “B” BENCH : KOLKATA
Before: Hon’ble Shri S.S. Godara, JM & Shri M.Balaganesh, AM ]
ORDER Per M.Balaganesh, AM
This appeal by the Assessee arises out of the order of the Learned Commissioner of Income Tax(Appeals)-13, Kolkata [in short the ld CIT(A)] in Appeal No. 101/CIT(A)- 13/W-44(3)/Kol/2015-16 dated 28.02.2017 against the order passed by the ITO, Ward- 44(3)), Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 23.03.2015 for the Assessment Year 2012-13.
The only issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in upholding the addition made towards gross profit in the sum of Rs. 1,04,37,167/-, in the facts and circumstances of the case.
Mr. Sushanta Kumar Maji A.Yr. 2012-13 3. The brief facts of this issue is that the assessee is an individual carrying on business in trading of Iron & Steel materials i.e. C.R. Oils, G. C. Sheets & H.R. Sheets etc. under the trade name M/s East India Steel Corporation. The return of income for the assessment year 2012-13 was filed by the assessee on 01.10.2012 declaring total income of Rs. 7,12,980/-. The assessee is an authorized dealer of Steel Authority of India Ltd. (SAIL). He was maintaining three godowns for the purpose of storing his stock-in-trade i.e. two godowns were located at 21, Maharshi Devendra Road, Kolkata and one godown at 1, Riverside Road, Shalimer, Howrah. He was valuing his stock-in-trade year after year as per records and without conducting physical verification of the closing stock. The assessee carried on business after obtaining overdraft from Bank of Baroda, Burrobazar Branch on hypothecation of his stock. The bank loans were in subsistence for almost 40 years. Even Bank of Baroda had not conducted any physical verification of his stock but the overdraft limits were periodically increased based on the value of stocks reported by the assessee.
The ld. AO observed that the assessee had shown closing stock as on 31.03.2011 at Rs. 21,07,54,755/- in his balance sheet and whereas the opening stock as on 01.04.2011 was reflected at Rs. 4,96,87,367/-, thereby leading to a discrepancy in opening stock as on 01.04.2011 at Rs. 16,10,67,387/-. The ld. AO observed that this discrepancy represents sale of goods made by the assessee outside his regular books and accordingly sought to tax the gross profit thereon. When show caused in this regard, the assessee replied that the bank overdraft limits were periodically enhanced by the Bank of Baroda based on the stock reported by the assessee and that no physical verification of stocks were carried out by the bank all along. But when Bank of Baroda in assessment year 2012-13 decided to conduct a physical verification of stocks for the purpose of granting of fresh loans/renewal of overdraft limits to the assessee, the assessee engaged his auditor for physical verification of stock before the stock audit was mandated by the bank. On physical verification of such stocks, the assessee found that the physically 2
Mr. Sushanta Kumar Maji A.Yr. 2012-13 stocks were available only to the extent of 1034 MT valued at Rs. 4,96,87,367/- as against quantity of 4126.874 MT valued at Rs. 21,07,54,755/- as on 31.03.2011. The assessee found that the closing stock as on 31.03.2011 was inflated by Rs. 16,10,67,388/-. Accordingly, he had recasted the financial accounts for the financial year 2011-12 relevant to assessment year 2012-13 by replacing the actual opening stock figure of Rs. 4,96,87,367/- in respect of Rs. 21,07,54,755/-. This was done by the assessee for the reason of recognizing the actual loans of stock in the books of accounts to the tune of Rs. 16,10,67,388/- (3093 MT of quantity) and also for the reason that the bank auditor would not found any discrepancy in his stock. The assessee also felt the need of presenting the true picture of his books of account which also warranted him to make this adjustment in the value of opening stock. The assessee pleaded before the ld. AO to accept the value of opening stock by him and that there was no unaccounted sale as alleged by the ld. AO and stated that the stock reported in the earlier years in the balance sheet as well as before the bank authorities were inflated and that more taxes were paid by the assessee in the earlier years. The assessee time and again pleaded before the ld. AO that certain stocks were inflated only with the limited purpose of securing higher credit limits (overdraft limits) from the Bank for carrying on his business. The assessee pleaded that when the stock audit was mandated by the bank for renewal of limits after a gap of almost 40 years, the assessee in order to understand the real situation prevailing in this business with regard to quantity of stock available, carried out physical verification through his auditor, and found the shortage of 3093 MT amounting to Rs. 16,10,67,387/- which was correspondingly reduced from the value of opening stock as on 01.04.2011. The ld. AO however did not heed to this contention of the assessee and proceeded to treat the difference in value of opening stock of Rs. 16,10,67,387/- as sales made by the assessee in the market outside the books and accordingly taxed average gross profit at 6.48% thereon and made an addition of Rs. 1,04,37,167/- to the returned income. This action of the ld. AO was upheld by the ld. CIT(A). Aggrieved the assessee is in appeal before us. 3
Mr. Sushanta Kumar Maji A.Yr. 2012-13 5. We have heard rival submissions. At the outset we find that the following facts are not disputed before us: i) The assessee had availed overdraft facilities from Bank of Baroda against the hypothecation of his stocks. ii) The assessee has been submitting the stock statement to the bank on a periodical basis. iii) Physical verification of stocks was not carried out by the bank in the last four decades prior to the year under appeal. iv) The assessee carried out the physical verification of stock during the year and found shortage of 3093 MT of quantity valued at Rs. 16,10,67,387/-.
We find that the assessee had given a plausible explanation that pursuant to physical verification carried out by his auditor, prior to the visit of stock auditor of the bank, shortage of 3093 MT were found and assessee in order to show true picture of his financial affairs and to project a true picture to the bank, sought to recast the opening stock at Rs. 4,96,87,367/- as on 01.04.2011, even though the closing stock as on 31.03.2011 was Rs. 21,07,54,755/-. We find barring this recasting of opening stock figure when compared with the closing stock of earlier year, there is absolutely no evidence brought on record by the revenue to prove that the assessee indeed had made certain sales outside the books of account. Hence the basic allegation of the revenue that the certain sales had been made outside the books of account cannot be accepted in the facts of the instant case. With regard to the income tax behavior of the assessee, it could be seen that he had been showing excess closing stock in earlier years and had paid more taxes to the revenue. Admittedly, the taxes paid thereon were out of inflated stocks. It is not the case of the revenue that the assessee had maintained two sets of accounts i.e. one for bank loan purposes and one for the purpose of income tax. Hence it could be safely concluded that the stocks were shown at a higher figure in the earlier 4
Mr. Sushanta Kumar Maji A.Yr. 2012-13 years which were the same as submitted to the bank on a periodical basis. The assessee on realizing the shortage of 3093 MT of stock value at Rs. 16,10,67,387/- , had no other option but to recast the opening stock value as on 01.04.2011 or alternatively could have claimed the same as loss of stock which would be allowable as a regular trading loss u/s 28 of the Act. The ld. AR has made an alternative submissions before us stating that from the profit & loss account of the assessee, it could be seen that the assessee had credited a sum of Rs. 3,53,50,000/- in his trading account towards sundry balances written off. This sundry balance written off obviously cannot be part of trading results of the assessee and accordingly the same requires to be ignored while computing gross profit. According to the ld. AR, the said sum of Rs. 3,53,50,000/-, if ignored, would only result in a gross loss of Rs. 2,04,00,547/-. Hence there cannot be any adoption of gross profit percentage thereon on the alleged undisclosed sales of the assessee for the year. We find lot of force in this argument of the ld. AR and hold that in any case there cannot be any addition towards gross profit during the year by adopting the average gross profit rate of 6.48%. Accordingly, grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 03.08.2018