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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri M. Balaganesh, AM & Shri S. S. Viswanethra Ravi, JM]
ORDER Per Shri M. Balaganesh, AM:
This appeal by revenue is arising out of order of CIT(A)-XII, Kolkata vide Appeal No. 403/XII/12(1)/11-12 dated 08.08.2012. Assessment was framed by ITO, Ward-12(1), Kolkata u/s. 144 r.w.s. 145(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2009-10 vide his order dated 30.12.2011.
The only issue to be decided in this appeal is as to whether the ld CITA is justified in deleting the addition made in the sum of Rs. 2,76,63,951/- on account of under valuation of closing stock in the facts and circumstances of the case.
The brief facts of this issue is that the assessee filed its return of Income declaring income of Rs. 2,35,228/- along with audited accounts on 29.09.2009. The case was selected for scrutiny and requisite notices were issued and served on the appellant requiring the details and documents and explanations thereof. The assessee filed all the details and documents and explained them to the best of AO's satisfaction. But while examining the accounts the AO found that the assessee company had shown opening and closing stock of fabrics, in which the assessee dealt in, in numbers. It was also come to the knowledge of the AO that the assessee used to avail loan facility from bank against hypothecation of its stock and for the purpose it had to submit monthly stock statement to the bank in a regular way. Comparing such stock statement submitted to the bank with that of the stock statement filed
S.T.Textiles Ltd., AY 2009-10 during the course of assessment proceedings the AO found huge difference i.e. huge excess in the statement submitted before the bank. Explanation was called for in this regard. In reply the assessee explained, "The stocks are taken at the end of the year and its method of valuation is at lower of the cost and market value. This method has been following by the assessee all along year after year." It was also submitted that the differences as pointed out were reconciled after the completion of audit. The AO also calculated on his own the rate per unit for opening stock, purchases, sales and closing stock and found wide ranging difference in sale rates. On calling for explanation the assessee submitted that such differences were due to loss in anticipated value of stock at lower market price. The AO was in doubt and thus not satisfied as to correctness and completeness of closing stock and at the same time of the accounts of the assessee. Thus he invoked the provisions of section 145(3) and made the assessment to the best of his judgment u/s. 144 of the Act by making an addition of Rs.2,80,51,128/- on account of under valuation of closing stock.
It was submitted that the assessee had got its accounts duly audited by an external chartered accountant and had submitted that all the bills and vouchers were duly documented and accounted for in the books of accounts maintained by the assessee. It was argued that the ld AO had found the average rate of opening stock, purchases, sales and closing stock and these details could have been obtained by him only out of details filed by the assessee in that regard. Hence, it would be unfair on the part of the ld AO to state that the assessee had not submitted the bills and vouchers properly in order to resort to valuation of closing stock on his own by the ld AO by rejecting the books of accounts u/s 145(3) of the Act. It was argued that the peculiar nature of assessee’s business, where the selling as well as buying rates were decided by the market forces, was not appreciated by the ld AO. It was also submitted that in view of certain goods becoming defective on account of rough handling and bad storaging in the earlier year, which was transferred as opening stock in this year, the same could not be sold out in entirety and hence had to remain as closing stock together with the unsold new purchases. It was argued that the impairment of the value of the goods and its usefulness had not at all been considered by the ld AO.
4.1. It was further submitted as below:- If the Assessing Officer comes to the conclusion that there is under-estimation of profits , he must give facts and figures in that regard to demonstrate that the impugned method of S.T.Textiles Ltd., AY 2009-10 accounting adopted by the assessee results in under-estimation of profits and is therefore rejected. Otherwise the presumption would be that the entire exercise is revenue neutral . Reliance was placed on CIT vs Realest Builders & Services Ltd reported in (2008) 307 ITR 202 (SC). It was further argued that there was no finding that there was material before the ld AO to lead him to the conclusion that a proper statement of income, profits and gains could not be deduced from the material placed before him. All the ld AO stated was that the profits appeared to be somewhat low due to suppression in the value of closing stock. It was argued that mere doubt of suppression in the value of closing stock without any material cannot lead the ld AO to reject the book results. Accordingly, invoking the provisions of section 145(3) of the Act was objected strongly. Before the ld CITA, the assessee filed the complete quantitative particulars of the closing stock and the valuation made thereon and accepted for the addition towards difference in the valuation of closing stock of Rs. 3,87,177/- (1,21,13,404 (-) 1,17,26,227).
The ld CITA accepted to the amount of offer of sum of Rs. 3,87,177/- made by the assessee and deleted the remaining sum of Rs. 2,76,63,951/- by observing as under:- “l) There was a difference between the net purchase of a stock during the month and the total stock available during the month. The A.O. could not appreciate this difference. 2) The assessee has been making valuation of its closing -stock at purchasing price or net realizable price whichever is lower since last many years, The A.O. has taken the average value of closing stock, therefore, he could find the difference between the figure shown by the assessee and calculation made by him. 3) In the same year the closing stock has been valued by A.O. on average price of stock, but the opening stock has been accepted as per assessee's valuation of exact value of the stock. In the same year two different methods of valuation of a stock cannot be permitted as per the norms of accountancy. 4) The A.O. has accepted the purchase register showing purchases, sales register showing sales and other expenditures as per the books of accounts of the assessee. But he has rejected the stock register. Partly rejection of books of accounts cannot served the purpose of computing the income of the assessee from the practical point of view. Keeping in view facts discussed above, AO's action of arriving at the valuation of closing stock at average value cannot be accepted. Therefore, addition made on this ground is not allowed. However, the AR. in his submission has written that there is a difference of Rs. 387177/- i.e. (12113404/- - 11726227/-) which was by mistake while valuing stock at the end of the year. The figure is arrived as follows : Stock in shop (opening stock + unsold purchases made during the year) - Rs. 85,09,254/- Add: Goods in transit - Rs. 36,04,150/- - Rs. 1,21,13,404/-
S.T.Textiles Ltd., AY 2009-10 Thus there is difference only of Rs. 3,87,177/- ( 1,21,13,404 - 1,17,26,227 ) which was made by mistake while valuing the closing stock at the end of the year . Thus, addition of Rs. 387177/- is sustained and the addition made by the AO on the valuation of closing stock is thus, restricted to Rs. 387177/-. Therefore, assessee's appeal on ground no. 3 is partly allowed.”
Aggrieved, the revenue is in appeal before us on the following grounds:- “
1. Whether on the facts and in circumstances of the case Ld. CIT(A) was justified in deleting an addition made amounting to Rs. 2,76,63,951/- (Rs.2,80,51,128 - 3,87,177) on account of under valuation of closing stock despite the fact that the assessee failed to substantiate the valuation of closing stock.
2. Whether on the facts and in circumstances of the case order of Ld. CIT(A) is liable to be reversed, as the same is based on incorrect and inaccurate appreciation of facts.
3. Whether on the facts and in circumstances of the case Ld. CIT(A) violated the provisions of Rule 46A of the LT. Rules, 1962.”
7. The ld DR argued that the opening stock was valued at Rs 12.80 per piece and closing stock was valued at Rs. 16.64 per piece. During the year, average purchase price was Rs. 103.06 per piece and average sales price was Rs. 109.89 per piece. The assessee had not adopted the valuation of its closing stock at the average purchase price which was much more than the value adopted by it. With regard to Goods in Transit of Rs. 36,04,150/-, the cost of goods is not taken by the assessee. The version of the ld CITA that the stock register was not rejected by the ld AO is factually incorrect as no stock registers were produced by the assessee before the ld AO. He further argued that the details of closing stock was furnished together with quantitative particulars before the ld CITA by the assessee for the first time and the ld CITA without even obtaining the remand report from the ld AO in that regard had proceeded to appreciate the details filed by the assessee and agreed for the addition proposed by the assessee, thereby violating the provisions of Rule 46A of the IT Rules. He accordingly prayed for set aside of this issue to the file of the ld AO for examination of the evidences and details filed by the assessee before the ld CITA. In response to this, the ld AR fairly agreed for examination of the details filed by the ld AO.
We have heard the rival submissions. We find that the details of closing stock together with quantitative details were filed before the ld CITA by the assessee for the first time. In those circumstances, the ld CITA should have obtained the comments of the ld AO by way of remand report. In the instant case, the same is not done. We also find that the revenue had raised a specific ground in this regard for violation of Rule 46A of the Rules by the ld CITA. Hence in the interest of justice and fair play, we deem it fit and appropriate, to set
S.T.Textiles Ltd., AY 2009-10 aside this issue to the file of the ld AO, and decide the same afresh in accordance with law, in an expeditious manner. Needless to mention that the assessee be given reasonable opportunity of being heard. Accordingly, the grounds raised by the revenue are allowed for statistical purposes.
In the result, the appeal of the revenue is allowed for statistical purposes.
Order is pronounced in the open court on 17.10.2016