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Income Tax Appellate Tribunal, DELHI BENCH ‘A’ : NEW DELHI
Before: SHRI J.S. REDDY & SHRI A.T. VARKEY
O R D E R PER A.T. VARKEY, JUDICIAL MEMBER :
The appeal filed by the revenue and the cross objection filed by the assessee are directed against the order of the CIT (Appeals)-XXVII, New Delhi dated 18.09.2012 for the assessment year 2009-10.
CO No.206/Del/2014 2. The revenue has taken the following grounds of appeal which read as under :-
“1. On the facts and in the circumstances of the case, the order of Ld. CIT(A) is bad in law and not in consonance with facts of the case.
On the facts and in the circumstance of the case, the Ld. CIT(A) had erred in law by deleting the addition of Rs.39,20,490/- in respect of suppressed sales and inflated closing stock in his P&L a/c.
3. On the facts and in the circumstance of the case, the Ld. CIT(A) has ignored the observation/recalculation of closing stock at Rs.1,63,14,265/- against declared value of closing stock by the assessee at Rs.2,04,85,000/-.
4. On the facts and in the circumstance of the case, the Ld. CIT(A) has ignored the observation of the A.O. for applying Net Profit @ 6% against @ 5.35% shown by the appellant.
The appellant craves leave to add, allow or amend any/all the grounds of appeal before or during the course of hearing of the appeal."
Brief facts of the case are that the assessee is engaged in the construction business. The return of income was filed on 20.09.2009 declaring net taxable income of Rs.9,80,890/-. The AO completed the assessment u/s 143(3) of the Act at an income of Rs.64,31,564/- after making various additions. On appeal, the ld. CIT (A) partly allowed the appeal.
The revenue, being aggrieved, is in appeal before us by taking the aforesaid grounds.
CO No.206/Del/2014 5. Grounds No.1 & 5 are general in nature and do not require any adjudication.
Grounds No.2 to 4 are inter-connected and are against the deletion of addition of Rs.39,20,490/- in respect of suppressed sales and inflated closing stock in his P&L account, which are against the observation/recalculation of closing stock at Rs.1,63,14,265/- against declared value of closing stock by the assessee at Rs.2,04,85,000/- and against the observation of the AO for applying net profit @ 6% against @ 5.35% shown by the assessee.
The AO observed that the assessee had shown net profit of Rs.10,80,890/- on sale of Rs.2,02,02,000/- giving a net profit rate of 5.35%. The AO applied the net profit rate of 6% and worked out the value of closing stock at Rs.1,63,14,265/- as against declared value of closing stock by the assessee at Rs.2,04,85,000/-. Therefore, the AO treated the difference of Rs.41,70,735/- as inflated closing stock and suppressed sales. Accordingly, the AO worked out the profit on these suppressed sales at Rs.39,20,490/- by applying the rate of 94% and added the same to the income of the assessee.
8. Aggrieved, the assessee went in appeal before the ld. CIT (A) who deleted the addition by observing as under :-
“7. I have carefully considered the submissions of the appellant, the facts of the case and the points made by the AO in the assessment order. The observation of the AO with regard to the addition of Rs.39,20,490/- are as under.-
CO No.206/Del/2014 “He has sold flats valued at Rs. 2,02,02,0001- out of opening stock of Rs.2,38,41,000/-. The net profit worked out by the auditor is @ 5.35%, if this is taken @6% on expenditure involved etc. the value of flats sold amounted to @ 94% of sales i.e., Rs. 1,89,89,880/-. The balance stock available as on 31.3.2009 will be Rs.48,51,120/-. If the construction expenses of Rs.1,14,63,145/- is added the closing stock will be Rs.1,63,14,265/- whereas the assessee had disclosed closing stock at Rs.2,04,85,000/-. This shows that he had inflated closing stock by Rs.41,70,735/-. This amount is the suppressed sale and net profit is adopted at 94% of suppressed sales i.e., Rs.39,20,490/-. This will be adopted against Rs.10,80,890/- declared in the profit and loss account."
From the above observations of the A.O. it is seen that while working out the value of the closing stock he has applied the net profit margin of 6% as against 5.35% shown by the appellant. No reasons have been given by the A.O. for adopting the net profit rate of 6%. Further, while working out the value of closing stock the A.O. has taken into account only the construction expenses and all the other expenses have been ignored, whereas the appellant had filed a consolidated Trading and P&L A/c i.e. on the credit side the appellant had included sales, interest income, renovation income and closing stock and on the debit side the appellant had included opening stock, construction expenses, other profit and loss expenses and the net profit. The value of the closing stock had been shown by the appellant at Rs.2,04,85,000/- on the basis of this consolidated Trading & P&L A/c.
The A.O. worked out the value of the closing stock at Rs.1,63,14,265/- by -
- applying a net profit of 6% as against the NP rate of 5.35% shown by the appellant resulting into a difference of Rs.(-) 1,31,313/- (65% on sales of Rs.2,02,02,000/- )
- by ignoring the P&L expenses except for construction expenses resulting in the difference of Rs.45,45,351/-
CO No.206/Del/2014 - by ignoring two credit side amounts of Rs. (-) 2,43,585/- i.e. Rs.1,35,000/- shown on account of renovation / customization receipts and Rs.1,08,585/- on account of interest income.
By thus applying his own calculations the AO arrived at the value of the closing stock at Rs.1,63,14,265/- resulting in a difference of Rs.41,70,735/- between the closing stock shown by the appellant and as worked out by the A.O. The AO has not mentioned any reason as to why he applied the NP rate of 6% to the appellant's results as against the NP rate of 5.35% shown by the appellant. Similarly he has not given any reason as to why he ignored the P&L expenses on the debit side and two items of income shown by the appellant on the credit side. If certain items of expenditure and income mentioned in the Trading and P&L account are excluded arbitrarily while working out the value of the closing stock the result is bound to be different from the result shown by the appellant on the basis of the Trading and P&L account.
11. In view of the discussion made above, it is held that the calculations adopted by the A.O. for arriving at the value of the closing stock are arbitrary and not based on any accounting principles. Moreover, the appellant has shown closing stock at Rs.2,04,85,000/- whereas the AO worked out the same at Rs.1,63,14,265/- i.e. the appellant had shown higher closing stock. The difference of the two figures cannot be treated as suppressed sales as the difference had already got accounted in the P&L account. Even if there were some suppressed sales, then also net profit rate of 5.35% (taken at 6% by the AO) would have been applicable to them for working out the taxable profits and not 94% as applied by the AO (which according to the AO's own working is the cost of sales). Therefore, the addition of Rs.39,20,490/- made by the A.O. on account of net profit on suppressed sales is deleted.”
9. The ld. DR relied on the order of the AO and submitted that the AO has rightly made the addition, which has been deleted by the CIT (A), so he wants us to reverse the order of CIT (A) and uphold the order of the AO.
CO No.206/Del/2014 10. On the other hand, the ld. AR for the assessee reiterated the submissions made before the ld. CIT (A) and submitted that the AO had not provided any reason for adopting the net profit rate of 6% and the method adopted by the AO for working out the value of closing stock at Rs.1,63,14,265/- was incomprehensible and was not based on any recognized accounting principle.
He submitted that while working out the value of the closing stock, the AO had ignored the expenses debited by the assessee in the P&L Account and had only accounted for the construction expenses. He further submitted that the closing stock shown by the assessee was more than that worked out by the AO. He submitted that the difference between the two had been arbitrarily treated by the AO as inflated closing stock and suppressed sales. Further, he submitted that the AO had applied the profit margin of 94% on the so called suppressed sales had not been explained by the AO in the assessment order. Therefore, he pleaded that the ld. CIT (A) rightly deleted the addition and wants us not to interfere with the order of the ld. CIT (A) on this issue.
We have heard both the sides and perused the material. We find that the assessee had shown net profit rate of 5.35%. However, AO adopted net profit rate of 6%. No reason has been given by the AO to adopt this figure. And AO while working out the closing stock had ignored all other expenses debited by the assessee in P&L account and only included the construction expenses. The AO erred in adopting net profit rate at 6% without valid reasons and exclusion
CO No.206/Del/2014 of other expenses as pointed out to value the closing stock, makes the order of the AO erroneous and not sustainable. We concur with the finding and reason given by the ld. CIT (A) to delete the said addition of Rs.39,20,490/-, so we uphold the order of the CIT (A) and dismiss these grounds of revenue’s appeal. 12. At the time of hearing, the ld. AR for the assessee has not pressed the cross objection, hence the same is dismissed as not pressed.
In the result, the appeal of the revenue as well as cross objection of the assessee are dismissed. Order pronounced in open court on this day of 2nd February, 2016.