DEPUTY COMMISSIONER OF INCOME TAX, GANDHINAGAR CIRCLE, GANDHINAGAR, INCOME TAX OFFICE, GANDHINAGAR vs. ROYAL CASTOR PRIVATE LIMITED, SIDDHPUR

"ी िस"ाथ" नौिटयाल, "ाियक सद" एवं "ी मकरंद वसंत महादेवकर, लेखा सद" के सम$। ] ] BEFORE SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER AND SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER आयकर अपील सं / Year : 2020-21 The DCIT Royal Castor Private Limited बनाम Gandhinagar Circle At Khali / 4th Floor, Block No.14 Ta. Siddhpur v/s. Udhyog Bhavan, Sector-11 Sidhpur – 384 151 (Gujarat) Gandhinagar – 382 011 "थायी लेखा सं./PAN: AABCR 3051 J (अपीलाथ%/ Appellant) (&' यथ%/ Respondent) Assessee by : Shri Rushin Patel, AR Revenue by : Shri A.P. Singh, CIR-DR सुनवाई की तारीख/Date of Hearing : 04/11/2024 घोषणा की तारीख /Date of Pronouncement: 06/11/2024 आदेश/O R D E R

PER MAKARAND V. MAHADEOKAR, AM:

2.1. Multiple notices u/s. 142(1) were issued to seek clarifications, especially concerning the exponential increase in the cost of goods traded from the prior year. While partial responses were received, a complete justification for the cost increase remained unaddressed. Based on this perceived non-cooperation, the AO concluded that the reasonable allowable increase in the cost of traded goods should align with the 6.5% turnover increase. Accordingly, an addition of Rs.20,86,87,570 was made by disallowing the excess cost of goods.

2.2. Aggrieved by the order of AO, the assessee filed an appeal before the CIT(A), arguing that the AO improperly correlated the cost of traded goods with the company’s overall turnover, ignoring that traded goods and manufactured goods follow distinct business cycles. The assess stated that the opening stock from FY 2018-19, which accounted for Rs.20.57 crores The DCIT vs. Royal Castor Pvt.Ltd. Asst. Year : 2020-21 constituted a significant portion of the cost of goods for FY 2019-20 and should have been considered in the analysis.

2.3. The CIT(A), after examining the financial records and submissions, agreed with the assessee. The CIT(A) held that the AO’s correlation method was inappropriate, as it ignored the high opening stock of traded goods carried forward from the previous year. The CIT(A) further held that the AO should have focused on the purchase value of Rs.22.10 lakhs rather than attributing the entire amount of Rs.20.86 crores to inflated purchases. Consequently, the CIT(A) deleted the addition made by the AO, concluding that it lacked merit and disregarded essential accounting principles.

3.1. During the course of hearing before us, the Departmental Representative relied on the order of AO asserting that the absence of a The DCIT vs. Royal Castor Pvt.Ltd. Asst. Year : 2020-21 detailed explanation from the assessee during assessment justified the AO’s approach.

4.1. We reproduce hereunder the statement of cost of goods sold as it is appearing in the Note No. 20 of the audited financial statements for the A.Y. 2020-21:- Sr. Particulars Rs. (Lakhs) No. 1 Opening Stock of Goods Traded 2057.09 2 Add: Purchase of Goods Traded 22.1 3 High Sea Purchases 50.52 Total 2129.71 4 Less: Closing Stock of Goods 0 Traded COST OF GOODS TRADED 2129.71 5 4.2. We note that the assessee provided all the details during the appellate proceedings confirming that the cost increase stemmed predominantly from the opening stock value carried forward from the previous year, an accounting fact that the AO overlooked. The AO’s method, which applied the turnover growth rate to the cost of traded goods, lacked a direct nexus, as there was no direct relationship between turnover and the cost of traded The DCIT vs. Royal Castor Pvt.Ltd. Asst. Year : 2020-21 goods in this case. As evidenced by the financial statements, the substantial opening stock value should have been the focal point for determining the cost of goods traded. While the AO did issue several notices, the denial of due consideration to submitted stock records reflects a procedural oversight, undermining the validity of the disallowance.

4.3. In view of the above findings, we uphold the CIT(A)’s order in deleting the disallowance of Rs.20,86,87,570/-. The AO’s disallowance lacked factual and procedural foundation, as the addition was based on an inappropriate correlation and did not consider key factors such as opening stock.