Commissioner of Income Tax, vs. Agricultural Market Committee,

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON FRIDAY ,THE 12TH DAY OF OCTOBER 2018 / 20TH ASWINA, 1940 ITA.No. 133 of 2011 AGAINST THE ORDER/JUDGMENT IN ITA 504/2009 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 31-03-2011 APPELLANT/S: THE COMMISSIONER OF INCOME TAX, (CENTRAL), COCHIN. BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC FOR INCOME TAX RESPONDENT/S: M/S.P.H.MOHAMMED KUNJU AND BROTHERS, MARKET ROAD, KOCHI-682031. BY ADVS. SRI.JOSEPH MARKOSE (SR.) OTHER PRESENT: THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12.10.2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA 133/2011 2 JUDGMENT Vinod Chandran, J. The appeal is by the Revenue against the order of the Tribunal, which set aside the limited addition permitted by the First Appellate Authority. The brief facts to be noticed are that the premises of the respondent-assessee in which the business of iron and steel was carried on was inspected on 05.10.2005. The stock inventory was taken and there was discrepancy found. After explanations were offered, the assessee admitted to excess stock of 3,14,378 kgs. The Assessing Officer did not accept the explanation and made further addition of Rs.2.1 crores, being the value of the excess stock found. In first appeal, the First Appellate Authority found that the assessee having included excess stock in its books of accounts, the expenses incurred for purchase of the excess stock alone could be termed as unexplained expenditure under Section 69C. Hence, the addition was permitted only with respect to Rs.78,59,450/-.

ITA 133/2011 3 2. The assessee was in appeal before the Tribunal. The Tribunal found that since the stock has been added to the books of accounts, the excess stock found has been corrected in the books of accounts and the stock register after inspection reflects the excess stock also. The Tribunal also found that the gross profit between 01.04.2005 to 05.10.2005 was 2.72%, while there was a marked variation in the gross profit at the rate of 6.43%, after the search period, ie., after 06.10.2005 to 31.03.2006. It was found that the Assessing Officer has not found any further expenditure having been made by the assessee during the previous year to purchase the excess stock. Hence, there was no nexus established on the basis of the excess stock to find an unexplained expenditure under Section 69C of the Act, was the finding. The Tribunal found that any addition made after the stock register has been corrected to its rightful position would be a duplication of the value of the excess stock found. 3. The learned Standing Counsel appearing for Government of India (Taxes) would submit that if assessments are set aside on mere inclusion of stock in

ITA 133/2011 4 the stock register, any assessee could wriggle out of the additions made under Section 69C and in such circumstances, the addition or correction made to the stock register would be of no avail. The learned Counsel for the assessee, however, submits that when the excess stock was found and there was no other expenditure found from the books of accounts, the value of the excess stock would be reflected in the gross profit on further sale being carried out from the stock available with the assessee; which includes the excess stock detected on physical verification. 4. We agree with the finding of the Tribunal that there would be duplication if further addition is made on the basis of an unexplained expenditure. It is to be noticed that when a search was conducted on 05.10.2005, the excess stock was found on a physical inventory being taken of the stock. The excess stock is computed on adding the opening stock as per the stock register with the purchases made in that previous year and then deducting the sales carried out in the subject previous year. The stock so arrived at was verified with the physical inventory of stock, which revealed the excess.

ITA 133/2011 5 It is also to be noticed that what was revealed was the stock-in-trade and not a money, bullion, jewellery or other valuable articles as is spoken of in Section 69A. It is hence, the addition was made to the stock register and there was found a marked increase in the gross profit after such correction was made in the stock register. The value of the excess stock would be reflected in the closing stock of the year in which the search was conducted. The computation of profit and loss for the year would hence reflect the value of the excess stock found as profit and the assessee would be obliged to pay tax on the same.

ITA 133/2011 6 however, it cannot be said to be an unexplained expenditure under Section 69C, which expenditure has not been detected. The assumption seems to be that there would be money spent as consideration to acquire this excess stock, which is from undisclosed income. Then, it would be an investment made but in stock-in-trade for the business. The purpose is served when the stock is reflected in the closing stock of that year. We, hence, do not think that any interference can be caused to the order of the Tribunal and there arises absolutely no question of law from the order. Therefore, the I.T.Appeal would stand rejected. However, the Assessing Officer could verify whether in fact the assessee had disclosed the excess stock in the subject year. No order as to costs. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENON dkr JUDGE