DCIT CC-1, MUMBAI vs. POOJA EXPORTS, MUMBAI

In ground nos. 1 & 2, department has challenged the deletion of addition made on account of difference in stock.

Briefly, the facts of the case are that the assessee – a partnership firm, is engaged in the business of export of cut and polished diamonds. A search and seizure operation u/s. 132 of the Act was conducted on 28.07.2009 in the business premises of the assessee. During the course of search a Compact Disc (CD) containing books of account were seized. In the assessment proceedings for the impugned assessment year, the AO while verifying the figure shown in the accounts contained in the CD and the accounts filed along with the return of income found difference between the net profits shown. The AO, therefore, called upon the assessee to explain why an amount Rs.8,59,75,074/-, as reflected in the account contained in the CD, should not be assessed as additional income for the year under consideration.

In the course of hearing of appeal before the first appellate authority, the assessee again furnished statement for reconciling the difference of net profits between the CD and audited books of account and submitted that no difference actually exists. It was submitted by the assessee that CD contained unaudited accounts, hence, cannot be considered to be reflecting the complete result of the assessee’s financial activities for the year. He submitted, once such unaudited accounts are examined under audit, the final account prepared has to be considered as appropriate books of account of the assessee. On the basis of submissions made and reconciliation filed by the assessee, the CIT(A) found that before the AO the assessee has submitted statements/material reconciling the difference in net profit as per the unaudited books of account and audited books of account. He found that the AO has not found any anomalies in the reconciled book result and has simply stated that there is variation in closing stock, gross profit, expenses and net profit. He further observed that the statement of reconciliation clearly suggest that the difference is mainly on account of valuation of stock, foreign exchange fluctuation and write off of bad debt, which are normally considered at the time of finalization of accounts. He also noted that to cover up the discrepancies, the assessee has offered additional income of Rs. 8 crores over and above the book result of Rs.50,17,152/-. Thus, ultimately the CIT(A) concluded that since the assessee has properly reconciled the difference between the unaudited and audited books of account and the addition is mainly on account of valuation of stock, which was properly proved by the assesse with supporting purchase bills and sales bills indicating that in the seized CD goods already exported were still shown as closing stock. Actually, there is no difference and hence, no addition on account of valuation of stock could be made. Accordingly, he deleted the addition.

The learned DR submitted before us that the AO while rejecting the books of account and estimating profit has not made any bifurcation of the differences on the basis of which addition was made. Therefore, the CIT(A) was not justified in holding that the addition was on account of valuation of closing stock. He further submitted the AO has made the addition on the basis of seized material and during the assessment proceedings the assessee failed to reconcile the difference. Therefore, the addition should be restored.

The learned AR supporting the decision of the CIT(A) submitted that in course of search and seizure operation, on the basis of discrepancies found the assessee has offered additional income of Rs. 8 crores. He therefore, submitted that no further addition can be made. In this context, the learned AR drew our attention to the statement recorded u/s. 132(4) of the Act on 29.07.2009 as well as the details of disclosure made at the time of search in the name of the group concerns. He submitted, before the AO assessee had submitted reconciliation statement with supporting material on each item of difference found as per the CD and audited books of account. He submitted, the assessee has co-related each purchase bills with corresponding sales bills, hence, as such there is no difference. He submitted, even if there is some difference, to cover up such discrepancies / difference the assessee has made disclosure of additional income amounting to Rs.8 crores. That being the case no further addition can be made.

We have considered the submissions of the parties and perused the materials on record. Undisputedly, the rejection of books of account and estimation of income made by the AO is solely on the basis of unaudited books of account contained in the CD seized at the time of search and seizure operation. However, it is a fact on record that subsequently, the assessee has got its books of account audited and return has been filed on the basis of audited books of account. It is also relevant to observe, in the course of assessment proceedings the assessee has furnished statements reconciling the difference between the net profit as per unaudited books of account contained in the CD as well as the audited books of account. However, as it appears, the AO has failed to examine the reconciliation statement filed by the assessee with reference to the seized material as well as the audited books of account. From the order of the CIT(A), it is evident that in the reconciliation statement filed by the assessee, the difference between the unaudited account contained in the CD as well as the audited books of account have been reconciled item-wise and the basis for such difference has been clearly pointed out. The learned CIT(A) having thoroughly examined the reconciliation statement as well as the books of account and other relevant material, has found that the difference in the net profit rate between unaudited account as per the CD and the audited accounts primarily arises on account of valuation of closing stock, write off of bad debts and foreign exchange fluctuation gain/loss. On verification of accounts and statement he has further found that in the unaudited account seized by the department the goods already exported were still being shown in the closing stock hence difference arises. He also found that in the audited accounts the assessee has written off bad debt of Rs.1,43,28,093 out of which an amount of Rs.66,28,093/- is from discontinued business of share trading hence, cannot be allowed as business write off or expenditure. However, as far as the balance amount of Rs.77 lacs is concerned, it relates to the debit balance standing in the name of Shri Sajjan Jhunjhunwala and Shri Shyam Sunder Jhunjhunwala relating to sale of diamonds on 29.06.1995. Having perused the correspondence between the parties he also found that assessee’s efforts to recover the amount did not yield any result hence, the amounts were written off. The learned CIT(A) therefore allowed the write off as it arose out of regular business transaction. He also observed that the assessee has properly reconciled the exchange difference gain and loss by producing invoices and matching the same with the books of account. Accordingly, he has deleted the addition. On perusal of material on record, we are of the view that the factual finding given by the learned CIT(A) is on the basis of facts and materials brought on record by the assessee. The department has failed to bring any substantive material on record to controvert such factual finding. Moreover, it is not in dispute that to cover up discrepancies the assessee has declared additional income of Rs. 8 crore over and above the regular business income of Rs.50,17,152/- as per the audited books of account. It is relevant to observe, the AO has not questioned the regular net profit declared by the assessee. In the aforesaid view of the matter, we do not find any infirmity in the order of the learned CIT(A). Accordingly, we uphold the same and dismiss the grounds raised by department.

As far as ground nos. 3 & 4 on the issue of allowance of assessee’s claim of write off of bad debt and deletion of addition on account of difference in exchange fluctuation is concerned, we may observe that the AO in the assessment order has not made any separate addition on this count apart from the adhoc addition of Rs.5,25,49,162/- However, the learned CIT(A) on the basis of reconciliation statement and audited books of account has found the basis of such addition to be on account of valuation of stock, write off of bad debt and difference on foreign exchange gain/loss. Be that as it may, as could be seen from the order of the learned CIT(A), as far as write of off bad debt is concerned, he has given a factual finding that bad debt of Rs.77 lacs, arises out of the regular business transaction of the assessee and such amount has actually been written off in the books of account. Similarly, the exchange difference for gain/loss was reconciled by the assessee by producing invoices. No material has been brought before us by the department to controvert the aforesaid factual finding of the CIT(A).

In the result, the revenue’s appeal is dismissed. Order pronounced in the open court on 24th day of March 2017.