KESHRI EXPORT,SURAT vs. INCOME TAX OFFICER, WARD - 3(3)(3), SURAT

On the other hand, ld DR for the Revenue argued that reasons mentioned in the affidavit, are not sufficient reasons to condone such huge delay. The assessee needs to explain each day of delay which the assessee has failed to do so, hence delay may not be condoned.

We heard both the parties on this preliminary issue. We note that primarily, delay occurred in filing the appeal is on account of that the unit of Keshri Exports totally closed down with entire manufacturing activity suspended since 2016. Keshri Exports sold its manufacturing unit in March, 2016, as it could not survive the financial crunch and as a result, there was no administrative set up for looking after filing the appeal. The accountant also left the organisation in 2017. Further, partner of Keshri Exports Shri Valjibhai Gabani, who was primarily responsible for looking after the accounts, administration and legal matters passed away on 10.12.2021. The exercise of discretion in condonation of delay in matters of limitation, has to be carried out [within the meaning of “Sufficient Cause” as envisaged in Section 5 of Limitation Act. Hence, the general rule of law of limitation is that an extension shall not be granted under Section 5 if there is no sufficient cause or cogent ground for the condonation of delay, the onus of proving which lies on the assessee as clearly laid down in the judicial pronouncements by the Highest Courts of Law.

In the case of Perumon Bhagvathy Devaswom, Perinadu Village v. Bhargavi Amma (Dead) by LRs, (2008) 8 SCC 321, the Hon'ble Supreme Court had enunciated certain principles which are applicable while Keshri Export considering applications for condonation of delay under Section 5 which may be summarized as follows:

Briefly stated, the relevant material facts are as follows. The assessee has filed his return of income on 30.09.2017, declaring total income of Rs.6,72,826/-. The return of income was processed u/s 143(1) of the Income Tax Act, 1961. Later on, the assessee`s case was selected for scrutiny under CASS. Accordingly, notice u/s 143(2) of the Act was issued on 28.08.2018 and duly served upon to the assessee. Further, notice u/s 142(1) issued along with detailed questionnaire and notice u/s 142(1) issued online on 15.01.2019, and duly served upon to the assessee. In response to the statutory notices issued u/s 143(2) and 142(1) of the Income Tax Act, 1961, the assessee filed required details from time to time before the assessing officer. During the year under consideration, the assessee is engaged in the business of trading in polished and rough diamonds. During the course of assessment valuations of inventories have been verified by assessing officer and it was observed by the assessing officer from the Audit Report that the assessee has shown the valuation of closing and opening stock of finished goods as under: Qty Total value Rate per ct Opening stock 9165 10,85,53,647/- 11844/- Closing stock 4826 5,12,39,523/- 10,617/- Difference 1,227/- In this connection, vide show cause notice of assessing officer, dated 17.11.2019, the assessee was asked to explain the method of valuation of stock with documentary evidences. Keshri Export 11. In response, the assessee, vide its submission dated 18.11.2019, has stated that closing stock of finished goods has been valued in the same manner as the opening stock of finished goods. All that has happened during the year is sale of inventories out of opening stock of finished goods. The assessee explained with help of Schedule-7 of the audited financial statements, which would show how the inventories have been reduced from the opening inventories to absorb against sales. The audited accounts have been submitted by assessee before the assessing officer.

However, the assessing officer rejected the contention of the assessee and observed that assessee has shown valuation of stock of polished diamond at Rs.11,844/- per carat, whereas the closing stock was valued at Rs.10,617/- per carat. There is no purchase of finished goods during the year. The assessee should have valued the closing stock of finished diamonds at the rate of 11,844/- instead of Rs.10,617/-. Accordingly the value of closing stock was arrived at by the assessing officer by adopting the rate at which opening stock has been valued as under: Closing stock Total Value Rate Difference in Total under in quantity rate valuation 4826 5,12,39,523/- 10,617/- 1,227/- 59,21,502/- (4826 x 1227) Thus, an addition of Rs.59,21,502/- was made by the Assessing Officer on account of undervaluation of closing stock.

Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A), who has partly deleted the addition made by the Assessing Officer. Aggrieved by the order of the Ld. CIT(A), the assessee is in further appeal before us. Keshri Export 14. The Ld. Counsel for the assessee argued that assessing officer cannot make addition on account of valuation of closing stock without rejecting books of accounts, and relied on several case law, which we have gone through. Apart from this, ld Counsel submitted written submission, which are reproduced below (to the extent relevant for our analysis): “Ground No. (1)  No estimate of valuation of stock can be undertaken without rejecting books of accounts.  There is no whisper anywhere in the entire assessment order about rejection of books u/s 145.  Ingredients of section 145 are not satisfied so as to reject the books.  The assessee relies on the decisions being given at the time of hearing it has been held that without rejection of books, no estimation can be done (page nos. 36 to 139)  If the books of accounts are found satisfactory as well as specifications of u/s 145(3) are not doubted with respect to o Correctness or the completeness of the accounts o Method of accounting o ICDS - Then no addition can be done by tinkering with estimation or valuation of inventories.  The only power that is vest with the officer in respect of estimation is only u/s 40A(2)(a).” To support his submission, ld. counsel for the assessee relied on the following decisions:

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. We also considered the various decisions relied by ld. counsel for assessee. We find some merit in the tested proposition canvassed by ld DR for the Revenue that for each mistake it is not necessary for the assessing officer to reject the books of accounts of the assessee. A heavy onus is on the assessing officer to reject the audited books of accounts, if there is any mistake in the audited books of accounts or any bills, vouchers, documents or in any evidences, the assessing officer may reject such bills, vouchers, documents, and evidences and may make line by line addition, without having rejected books of accounts. While scrutinizing the expenditure u/s 143(3) of the Act, or valuation of any item, if the expenses claimed are not having any nexus to the business of the assessee or if there is deficiency in the vouchers or there is no bills supporting the incurrence of an expenditure, at the most expenses to the extent that are not supported by Keshri Export the vouchers can be held to be non-genuine and can be disallowed by the assessing officer and item-wise the assessing officer could have disallowed the expenses. Hence, we find merit in the submission of ld DR that it is not necessary for the assessing officer to reject the books of accounts of the assessee, when the assessing officer thinks that if the expenses claimed by assessee are not having any nexus to the business of the assessee or if there is deficiency in the vouchers, valuation method, etc. in these circumstances, the assessing officer may make addition for that particular item without rejecting books of accounts.

We note that ld CIT(A) has considered the submission of the assessee in respect of rejection of books of accounts of the assessee. The ld CIT(A) observed that the assessee has not submitted the Annexure in prescribed Format as laid down in Column No. 14(b) of Tax Audit Report (3CD Report). It was further noticed from the Tax Audit Report (3CD report) that the quantitative details of principal items of goods traded are required to be given. However, in the Tax Audit Report (3CD report), it was mentioned that ‘As per Annexure – Q’. However, Annexure-Q was not enclosed to the Tax Audit Report (3CD report) submitted by the assessee. In view of the above, the Assessing Officer had not estimated the addition but systematically computed the addition taking into consideration the quantum of closing stock as per books of account and the difference in rate per ct adopted by the assessee in respect of opening stock and closing stock. Therefore, we note that it was not necessary to reject the books of accounts of the assessee. Hence assessing officer was right in not rejecting the books of accounts. However, the assessing officer noticed that some details were not filed or annexed with tax audit report, as noted by ld CIT(A), therefore assessing officer made addition. On appeal by the assessee, we note that ld CIT(A) has provided enough relief to the assessee Keshri Export based on the audited books of accounts of the assessee. The relief provided by the ld CIT(A), by following the accounting standards and accounting principles are as follows: “9.9 From the ratio of the above case law, it is justified to take the average rate per ct in place of the rate per ct at a particular point of time. Accordingly, I direct the Assessing Officer to adopt average rate per ct to compute the value of closing stock. The computation of closing stock by adopting average rate per ct is as under: 1 Rate per ct adopted by the Assessee to arrive value of Rs.11844 opening stock 2 Rate per ct adopted by the appellate to arrive value of Rs.10617 closing stock 3 Average rate per ct [(Rate per ct of opening stock + Rate Rs.11231 per ct of Closing stock/2] – [(11844 + 10617/2= 11231 4 Under value of Rate per ct [Average Rate per ct (-) Rate per 614 ct adopted by the appellate arrive value of closing stock] 5 Quantity of closing stock 4526 6 Total under valuation by adopting average rate per ct Rs.29,63, (Under value of Rate per ct X quantity of closing stock) 164 9.10 As per above computation, the Assessing Officer is directed to restrict the addition to Rs.29,63,164/-. Accordingly, the assessee gets relief of Rs.29,58,338/-.”

We have gone through the above findings of the ld CIT(A) and observed that ld CIT(A) after taking into account correct valuation methodology and policy as per accounting standards, ICDS and prevailing accounting customs, has deleted almost 50% addition made by the assessing officer. We note that there is no any purchase by the assessee during the year, and the sale made by the assessee is out of opening stock only. In the closing stock, only the opening stock items were there, hence assessing officer has rightly caught the mistake of the assessee for under valuation of closing stock. We note that ld CIT(A) made the computation of closing stock by adopting average rate per carat, which is a superior approach as compared to the approach adopted by assessing officer. We accept the above approach adopted by ld CIT(A). However, we do not find any further superior approach, than the approach so adopted by ld Keshri Export CIT(A), because ld CIT(A), by following accounting standards, ICDS and accounting principles, granted the partial relief to the assessee. Thus, in our opinion, the assessee does not deserve further relief on the basis of the plea that assessing officer ought to have rejected books of accounts to make addition on account of under valuation of closing stock. On a careful reading of the order of Ld.CIT(A) the findings thereon, we do not find any valid reason to interfere with the decision and findings of the Ld.CIT(A), hence we dismiss the appeal of the assessee. The ratio of decisions relied by ld. counsel for the assessee not applicable on the facts of present case. In our view, the rejection of entire books of account was not warranted, when the assessing Officer find fault in the valuation of stock only.

In the result, appeal filed by the assessee is dismissed.