ITO, WD-11(4), KOLKATA, KOLKATA vs. AMBIKA SAREES PVT. LTD., KOLKATA

Ground no. 1 is against the action of the Ld. CIT(A) in deleting an addition of Rs.3,33,17,953/- made by the AO on account of undisclosed closing stock. Brief facts of the case as noted by the Ld. CIT(A) is that the assessee company during the relevant assessment year was engaged in the business of sarees. A Survey operation u/s. 133A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) was conducted in the business premises of the assessee on 20.03.2011. When the case of the assessee was scrutinized the AO noted that during the course of survey, an inventory of stock was taken physically by the survey team and valuation of stock was determined at Rs.4,34,99,660/- whereas as per books of account, the value of closing stock was shown at Rs.1.65 cr. The AO noted that the survey team had valued inventory item wise. The survey team had recorded the statement of the Director Shri Pankaj Madhogaria and the following questions and answers have been reproduced in the assessment order: “Q.2 During the course of survey we have found total number of sarees in your business premises is 24,534 pieces. Do you agree with this stock and whether these are reflected in your stock register/books of accounts? Ans. Yes, but all the stocks are not fully accounted for in my accounts. Q.3. What is the total value of this stock? Ans. Value of the stock as on today will be approximately Rs.4.30 crores to Rs.4.40 crores. Q.4. But as per your books of accounts, after taking your consideration of the opening stock, purchase, sales your stock comes to near about Rs.1.65 crores. Then where from this stock of $ 30 to 4.40 crores has been found in your business premises. Ans. This appears to be my undisclosed stock which has not been reflected in my books of accounts. Now, I want to disclose his unexplained stock as my income from this current year amounting to Rs.2.70 crores.”

We have heard rival submissions and gone through facts and circumstances of the case. We note that the assessee company is engaged in the business of sarees. During the survey operation conducted at the business premises of the assessee on 28.03.2011 physical verification of the sarees was taken and thereafter, the statement of the one of the directors Shri Pankaj Madhogadia was recorded (reproduced above). The AO has relied heavily on the statement given by the said Director during the course of survey for making the addition. The assessee’s plea is that the average cost of sarees was at Rs.302/- against which the assessee had taken the value at Rs.370/- which has not been accepted by the AO on the ground that the purchase bills shows the value of sarees in meters. We note from the statements recorded during the survey operation, the survey team confronted the director about the value of the stock shown in the books of account. The survey team has taken note of the fact that the assessee has shown in its books stock valued at Rs.1.65 cr. The survey team valued the stock at Rs.4.30 cr (approx.) as per the statement of the director. We note that the survey team while physically examining the sarees has found out that there were 24534 pieces of sarees. We take note of an important fact that the survey team has not made any reference to the quantity/number of sarees shown by the assessee in its books of account on the date of survey. We note that the survey team all along has only confronted the director of assessee company with the difference in valuation of sarees i.e. the assessee had shown the value of the stock held by it at Rs.1.65 cr. whereas according to the survey team based on the statement of the director the value should have been Rs.4.30 cr. to Rs.4.40 cr (approx.) . So, from the recorded statement of the director which has been verbatim reproduced in the assessment order and reproduced above, we note that the survey team though has referred to the discrepancy in valuation of stock shown in books and as stated by director whereas there is no mention or whisper about the quantity of sarees which were recorded/ reflected in the books of the assessee on the day of survey vis-a-vis the physical verification carried out by the survey team. By not clearly bringing out the number of sarees reflected in the books at the time of survey by the survey team and on the other hand bringing out the fact that the stock was at the time of survey valued at Rs.1.65 cr. makes us to draw an inference that the quantity of stock was tallying in the books of account of the assessee with that of the physical verification carried out by the survey team. So we agree with the assessee’s contention that quantity wise there was no discrepancy/difference in the number of sarees in the books of account of the assessee on the date of survey. The only discrepancy noted by survey team was regarding valuation of stock and when that was confronted to the Director, he accepted that the stock was under valued in the books. We note that the assessee while filing the return of income has retracted his statement recorded during survey and has filed an affidavit in this regard. The assessee during the assessment proceedings filed the books of account and the purchase bills of sarees which the AO has verified and ascertained the veracity of the bills and has not made any adverse finding against the genuineness of the purchase bills of sarees. We note that the AO has heavily relied on the statement of the director recorded during survey as the basis of making the addition when the law is that the statement recorded during survey cannot be the basis of making addition as held by the Hon’ble Supreme Court in Kader Khan 352 ITR 480 (SC). Moreover, we note that the quantity of the stock as per the books of account and as per physical inventory taken by the survey team fully tallied and the only difference was in respect of valuation, which was made on estimation and agreed to by the Director in his statement recorded during the survey. It has to be kept in mind that stock is always valued at cost or market rate whichever is lower. In the affidavit retracting the statement recorded during the survey the director has clearly stated that in order to wriggle out of the charged atmosphere created by the survey team and due to coercion he had made statement accepting the valuation estimated by the survey team. We note that other than the statement recorded by the survey team of one of its director there is no other basis for making the addition. The sole basis of the addition is the statement which has been made during the survey which cannot be the basis of making addition. It should be noted that the assessment should be based on papers found and impounded during the course of survey, which can show that there is undisclosed income of the assessee and not on the basis of admission/contention recorded during survey. Taking note of this undesirable practice only that the CBDT has issued circular dated 10.03.2003 wherein the judgment of the Hon’ble Madras High Court in the case of CIT Vs. S. Khader Khan Son (2008) 300 ITR 157 (Mad) which was confirmed by the Hon’ble Supreme Court in of CIT Vs. S. Khader Khan Son (2013) 352 ITR 480 (SC) has been taken note of and CBDT clarified that in the course of survey, the department should not insist on making any disclosure and further such disclosure made in the course of survey should not be relied on. And the assessment should be based on the papers found and impounded during the course of survey. We note that the assessee vide letter dated 21.02.2014 filed before the AO copies of the bills showing the purchase of sarees in the last quarter and it was shown before the AO that purchase in the last quarter i.e. on 18.01.2011 to 25.03.2011 was to the extent of Rs.76,91,246/- as per the said bills for sarees over 25000 pieces. The copy of the bills were also enclosed and it was explained that this low price sarees remaining as stock at the end of the year because of the on set of summer season and cotton sarees are in demand and which is cheaper compared with the other sarees during the season. We note that the purchases made by the assessee have been accepted by the AO after verification. It was pointed out to the AO that the high quality of sarees are generally purchased on firm orders and, therefore, the stock of such sarees are minimal. We note that the AO has not brought on record any evidence, disproving the explanation filed by the assessee nor has adversely commented on the same. We note that all the purchases were verified and the AO could not point out any discrepancy in the cost incurred by the assessee for purchases made. We also take note that in assessee’s own case for AY 2006-07 the assessment was completed on scrutiny and the AO had accepted the net profit and gross profit declared by the assessee. When compared with results of AY 2006-07, the net profit and gross profit declared by the assessee was fair and reasonable, rather more than the earlier years.

We also do not agree with the action of the AO in rejecting the contentions of the assessee that the aforesaid cost of sarees was at Rs.370/- and the assessee produced the purchase bills of the sarees to support the said claim. However, the AO did not accept the said contention only on the basis that the cost of sarees are given in meters. As rightly taken note by the Ld. CIT(A), the length of each saree is approximately at 6.5 meters and nobody prevented the survey team from taking the measurement of each sarees. On this plea rejecting the purchase bills produced by the assessee was not correct and the Ld. CIT(A) has rightly held that the AO had also not found any defects in the books of account which were examined in the course of survey and also in the course of assessment proceedings. The Ld. CIT(A) has also noted that the AO has verified the purchases and sales by issue of notices u/s. 133(6) and 131 of the Act. The Ld. CIT(A) rightly held that the survey team failed to bring any evidence of any concealed income or under valuation of stock and, therefore, in the light of the retraction made by the assessee and the statement given before the survey team, without any material, the addition made cannot stand the scrutiny of law. The Ld. CIT(A) rightly took note of the fact that the AO has not pointed out any specific item of stock or entry which is not entered into the books of account. As we noted earlier, the survey team could not point out that there was any excess stock or unrecorded stock found either during survey or during the assessment proceedings. The sole basis of making the addition was based on the statement recorded during survey on 28.03.2011 and 131 statement recorded on 12.04.2011 which cannot be the basis for making the addition when the facts remain that the assessee has retracted the statement. The Hon’ble Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. Vs. State of Kerala & Anr. 91 ITR 18 (SC) held that the assessee should be given opportunity to say that admission is incorrect or does not say the correct state of facts. Since the assessee has produced the books of account as well as the purchase bills which have been verified by the AO, the addition made by the AO has rightly been deleted by the Ld. CIT(A). The Ld. CIT(A) has also took note of the fact that the rate of net profit and gross profit declared by the assessee is higher than that of the results of the earlier years and in 2006-07 the department has accepted the net profit and gross profit offered by the assessee and since the net profit and gross profit is higher than that of the earlier years, we do not find any justification in making the addition, therefore, we do not find any infirmity in the order of the Ld. CIT(A) and, therefore, we dismiss this ground of appeal of revenue.

When asked to reconcile the discrepancy, the assessee brought to the knowledge of the AO that M/s. Awatram & Sons and Pooja Sarees sent letters addressed to JCIT, Range-11 cancelling the receipt of discount of Rs.3,23,406/- and Rs.6,53,855/- from the assessee. The AO did not accept the same taking note of the fact that the letter head used by both the said parties at the time of submitting reply u/s. 133(6) of the Act and the letter heads of the copy enclosed by the assessee are quite different. So, therefore, he rejected the said letter of the parties and made the addition of Rs.9,22,557/-. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to delete the same. Aggrieved, revenue is in before us.

We have heard rival submissions and gone through facts and circumstances of the case. We note that the AO partly disallowed the discount allowed to Awatram & Sons and Pooja Sarees totaling Rs.9,00,019/- on the ground that from the initial reply the AO got from the said parties he could not verify the veracity of the claim made by the assessee. However, when the assessee was confronted with the said fact, the assessee confronted the said parties who after verification of their books handed over the confirmation of the discount given by the assessee which was duly produced by the assessee before the AO. However, the AO did not accept the said confirmation from the parties on the ground that there were difference in the letter heads of both the parties when compared with that of the initial reply given by the said parties to the AO. We note that the AO has not doubted the sales to the said parties. However, he doubted the genuineness of the confirmation given taking note of the different letter heads used by the said parties. When the AO confronted the assessee with the initial reply, the AO got from the said parties u/s. 133(6) of the Act, the assessee in turn confronted the said parties and once they had issued confirmation after verification which has been placed before the AO, the AO ought to have verified the veracity of the said confirmation letter if he has any doubt by calling the said parties before him or by deputing the Inspector to find out the veracity of the letter heads, rather than disbelieving the confirmation letter only on the basis of surmises and conjectures which cannot stand the scrutiny of law and, therefore, the Ld. CIT(A) has rightly deleted the addition which warrants no interference from our part and, therefore, we dismiss the revenue’s ground of appeal.

In the result, appeal of revenue is dismissed.