DR. SAPHAL SHETTY,BANGALORE vs. ACIT, PONDICHERRY

आदेश /O R D E R

PER G. PAVAN KUMAR, JUDICIAL MEMBER:

Since the issues involved in these appeals are common in nature, these appeals are clubbed, heard to together, and disposed of by a common order for the sake of convenience.

The assessee is carrying on dental equipments material business from earlier years and made purchases from various sources within country and imported equipments from Japan, Korea, Italy, Germany etc. The assessee is liable for tax audit u/s.44AB and tax audit report was filed with original return. In the survey operations Revenue found that assessee is maintaining inventory of stock transactions on computer tally systems �3,49,15,795/- on comparison with the Trading account for the assessment year 2003-2004 were closing stock is valued at �2,60,91,111/- hence there was a difference of � 88,24,684/-. In the assessment proceedings, the ld. Authorised Representative submitted information called for and also explained the difference between stock as

per the computer tally system and manual stock register is due to non – reconciliation or omission of entries for replacement of damaged goods, old damaged unused stock, validity expired stock and samples items. And the tally accounting software takes into consideration financial value of the products and not quantitative units of purchase return or goods which are replaced. The difference in value of stock occurred because of omission to pass financial entries whenever stocks are moved out on the above contingences in the nature of damaged or obsolete warranty replacements, unsold items and free samples gifts.

Further made a categorical finding by adding the difference between the closing stock as per computer tally and stock reported in manual register �88,24,684/- as unexplained investments u/sec 69 of the Act. The ld. Assessing Officer also estimated gross profit @24.73% on presumption of earning profit on stock difference at 21,50,575/- and completed assessment u/s.143(3) r.w.s 147 of the Act vide order dated 28.12.2007 and assessed income at �2,52,65,358/-. Similarly for the assessment year 2004-2005, the ld. Assessing Officer made an addition of �42,74,654/- as rectified by order dated 13.03.2008 and also sales promotion expenses of �9,00,000/-. Aggrieved by the orders of the Assessing Officer assessee filed an appeal before the Commissioner of Income Tax (Appeals).

Further the ld Authorised Representative emphasized that financial entries are required to be passed in the books of accounts for outgoing of stocks on account of warranty claims, obligations, damaged goods, obsolete goods. Due to innumerable items, it was practicably not possible to maintain day to day stock account but for the valuable products stock tally as per the tax audit report was filed with statement of reconciliation in the assessment proceedings. Further, there was is dispute about the suppression of sales or any asset acquired out of such income. The Assessing Officer has made similar addition for the assessment year 2004-2005. The assessee also raised grounds on validity of reopening of assessment and filed a letter with Assessing Officer on 18.09.2006 requesting for the reasons for the issuance of notice u/s.148 of the Act and relied upon Apex Court decision GKN Drive Shafts (India) Ltd vs. ITO 259 ITR 19. But no reasons were provided for initiation of proceedings u/s.147/148 of The Act by the ld.Assessing Officer during the pendency of assessment proceedings. The ld. Authorised Representative argued that there is no suppression of stocks as explained above and further Assessing Officer has rejected explanatory statements without application of mind. The Assessing Officer on suspicion and surmises has added the difference of stock as unexplained investment u/s.69 of the Act. Similarly, for the assessment year 2004-05, the ld.AO added �42,74,654/- of the Act and sales promotion expenses.

4.1 The ld. Commissioner of Income Tax (Appeals) on the Ground of validity of assessment provided copy of reasons for reopening of assessment recorded by the Assessing Officer dated 10.08.2006 and also called for the explanations, objections from the assessee. In compliance to directions assessee filed written submissions dated 2.7.2014 with supporting legal decisions on validity of reopening of assessment. The ld.CIT(A) after perusing reasons of the Assessing Officer written submissions and also verified the statements recorded during the assessment proceedings has concluded that the reopening is legal in the eyes of law and rejected the ground of reopening with observations at page 4 para.3.1.2 of the order as under:-

‘’3.1.2 I find from the reasons recorded that the AO had enough reasons to believe that the income had escaped assessment within the meaning of section 147 of the I.T. Act. The AO was fully satisfied that there was escapement of income before the issue of notice u/s.148 of the I. T. Act. The AO had fully applied his mind on the issues of escapement of income. Therefore the grievance of the AR of the appellant is misplaced. I find from the records that appellant was fully aware of the escapement of income during the course of reassessment proceedings. I find from the records that the Assessing Officer vide letter dated 21.11.2006 had requested the appellant to take copies of the Impounded materials and furnish the written submissions thereafter. Thereafter, the appellant filed written submissions vide letter dated 27.11.2006 for A.Y. 2004-05 and vide letter dated 5.12.2007 for A.Y. 2003-04 to the AO after taking the copies of the impounded material. Subsequently, a statement was also recorded from M.Rakshith Setty POA for Dr.Saphal Setty on 12.12.2006 questioning the discrepancy in the stock shown as per stock summary taken from tally account data and stock declared by the appellant in the return of income and also in respect of personal expenses. From the above events it is crystal clear that the. appellant was fully aware of the reasons recorded for reopening of the assessment. Had it not been so, the appellant would not have participated fully in the process of reassessment and also would not have referred to the issues relating to suppression of closing stock and claim of personal expenses. Therefore, it is not correct that the appellant was not provided with the reasons for reopening of assessment before the completion of reassessment proceedings. As I stated earlier the reasons for reopening of assessment was already provided by the undersigned on 10.6.2014 to the AR of the appellant. The powers of the CIT(Appeals) are coterminous with the powers of the AO in the matters of assessment. For a moment if it is assumed that the reasons for reopening of assessment was not provided by the AO in writing to the appellant, the furnishing of the reason for reopening to the appellant by the under signed on 10.6.2014 should be treated as sufficient compliance of the requirement of furnishing reasons to the appellant. Moreover, the Hon'ble High Court of Madras in the case of CIT v. C.Palaniappan reported in[2011] 241 CTR [Mad] 207 held that the proceedings would not become void in the eye of law, simply because AO had not supplied the reasons for reopening of assessment to the appellant. In view of the facts and circumstances of the case, I am of the considered view that the AO is legally correct in reopening the assessment. The grounds of appeal relating to the issue of reopening are rejected’’.

5. The second ground raised by the assessee on difference of stock �88,24,084/-. The ld.CIT(A) considered the material filed and dealt with the explanations filed by Shri.Rakshit Shetty at Page No.6 of the order as under:-

In their reply dated 27.11.2006, it is stated that the assessee has maintained :- ‘’………………. Manual stock book for some of the major products dealt and stock figure generated by the software cannot be considered as stock register and part of books of account for the following reasons:- a) All the sales quantities were not routed through this register. b) Goods sent for promotion are also not recorded. c) The quantity of damaged stock and warrant replacements are not recorded in the tally stock register. d) There are many clerical errors like, wrong posting of quantity etc e) Practically, it not viable and difficult to feed all the sales data into the computer. It is further stated that taking into account the retail trading of dental equipments and volume of transactions, tallying of quantity is a laborious job and consumes lot of time and the assessee is unable to provide quantitative details at this point of time. It is stated that the quantitative details of major items are already filed alongwith the Tax Audit Report’’.

The ld. Authorised Representative submitted that the assessee has furnished correct stock details in the return of income based on physical verification at the year end and also explanations for not passing financial entries in the books of accounts. The ld. Commissioner of Income Tax (Appeals) also relied upon statement of Shri. Ganesan, the manager at Pondicherry clarifying the transaction between the Head Office and branches of the Business on invoice value of stocks as recorded in tally package. The stock of inventory of higher value tallied exactly with stock as per tally package and assessee provided complete information about the physical inventory of stocks and also explained reason for not passing entries in the tally package due to obsolete and old stock which remained with the assessee over the years. The assessee filed a copy of the financial statements to support the quantity of stocks.

But the Assessing Officer alleged the sale of stock in the financial year 2002-2003. The assessee has incurred �9,00,000/-towards share of dealers expenses, recorded in the books of accounts and filed statement, confirmation of cheques and also certificate of claim of expenditure by group M/s. Confident Dental Equipment Ltd. who has hosted the event.

Having examined the material facts, legal decisions, documents and evidence, the ld.CIT(A) upheld the action of the Assessing Officer by confirming the addition of stocks for the assessment year 2003-04 and 2004-2005 and sales promotion expenses as personal in nature for the assessment year 2004-05 and partly allowed the appeal by directing the Assessing Officer to delete the addition of estimated gross profit �21,50,575/- for the assessment year 2003-04. Aggrieved by the order of the Commissioner of Income Tax (Appeals), the assessee assailed an appeal with the Tribunal.

147/148 of the Act till completion of assessment. But the ld. CIT(A) has held the reassessment proceedings as valid. The assessee relied on following decisions challenging validity of assessment bad in law and void ab-initio and liable to the quashed.

2. M/s. Synopsys International Ltd vs. DCIT, in Bang/2011, Dated 10.12.2012

3. Tata International Ltd. vs. DICT, in to 3361/ Mum/2009, Dated 29.06.2012.

4. ACIT vs. K.V. Venkataswamy Reddy, in 807,797 & 808/Bang/2009, Dated 21.5.2010.

The ld.AR referred to paper book page 21 to 38 containing the profit and loss account, Balance sheet and other annexures including stock statement to show creditability and feasibility of the business alongwith reconciliation statements for difference in stock and further supported stock tally of closing stock �2,60,91,111/- at Page No.41 paper book.

The ld.AR drew attention to the assessment orders at Page Nos. 45 to 50 of paper book were notices are issued and assessments were completed u/s.143(3) r.w.s 147 of the Act for the assessment years 2000-2001 to 2002-2003 with finding on the valuation of stock at page 2 para 2 of assessment order as under:-

‘’Regarding the excess stock, it is represented that the value of stock became, obsolete, warranty replacements, free gifts, samples, business promotion, validity expired goods etc., The value of the goods & quantity of goods were not recorded in the tally package, which has to be done normally to reduce the stock value. Moreover, the entire stock has been added to the total income in the assessment order for A.Y. 2004-05. As such, the excess stock for this a.y cannot be considered in this year.’’ The ld.AR relied on the letter dated 27.11.200 to Addl. CIT Puducherry pending in submission of information at para 4 of page No.11 of paper book as under:--

‘’You may further note that during the course of survey the assessee’s employees has shown the damaged and expired goods, the inventory of which was taken, and the survey authorities has found; i) no excess stock ii) No omission of purchases and iii) no suppression of sales, under the circumstances additions based on the stock figure generated by a computer software is against law and equity. Since the assessee has declared fair amount of profit and paid fair amount of tax you may consider comparing the profit earned by the any other assessee carrying the similar business. ‘’ The ld. AR emphasized on submissions of assessee as vital and also the Assessing Officer has not made any comments, nor contradict the statement that survey authorities have not found any excess stocks or omissions or suppression of sales. Difference is purely due to various products dealt by the assessee and considered entries passed in tally software. The ld.AR pleaded that assessee does business with foreign companies and due to computerization of accounts, issues of stocks such as replacement, complimentary, demo and warranty claims being no monetary value transactions therefore entries could not be passed. The assessee is also maintaining manual stock register for all major items for preparing financial statements every year. The system of inventory is based on physical stocks after reducing replacement, warranties, obsolete goods from the available inventory and the remaining balance of inventory is valued at cost or net realizable value whichever is less.

This principles of valuation is based upon accounting standards of ICAI for audit purpose and considered in the trading account and Balance sheet. The ld. Authorised Representative also referred to page no.65 of paper book were Reasons for reopening of assessment by the Assessing Officer was provided by ld. CIT(A) in appellate proceedings. It is obligatory on the part of Assessing Officer to furnish the reasons and disposeoff the objections if any filed by speaking order before proceeding with assessment as held by Hon’ble Supreme Court in the GKN Drive Shafts (India) Ltd vs. ITO & Others 259 ITR 19(SC) and contended the order of assessment is bad in law and requires to be cancelled.

7 On the other hand, The ld. Departmental Representative relied on the orders of the lower authorities and submitted that the reasons were provided to the assessee by the ld.CIT(A), as the power of Commissioner of Income Tax (Appeals) are co-terminus with of Assessing Officer as per provisions of law hence re-assessment proceeding are valid and objected to the submissions and pleaded for dismissal of grounds of the assessee.

‘’In the decision cited by the learned Authorised Representative in CIT vs. Videsh Sanchar Nigam Ltd (ITA No.4235 of 2010 dated 20.07.2011), the Bombay High Court has held that re-assessment proceedings were invalid for the reason that the reasons recorded for reopening of the assessment were not furnished despite requests by the assessee till the completion of the assessment. From this decision it is clear that the reasons recorded for initiation of proceedings under section 147/148 of the Act are required to be furnished by the Assessing Officer to the assessee within a reasonable period in order for the assessee to raise its objections at the preliminary stage of proceedings. If the reasons are not furnished to the assessee during the assessment proceedings, then the subsequent furnishing of the reasons after completion of assessment proceedings would serve no purpose and would amount to the assessee being denied its right to raise objections to the validity of proceedings initiated under section 147/148 of the Act. In the light of the findings of their Lordships in this case, it is clear that the completion of assessment/re-assessment without furnishing the reasons recorded by the Assessing Officer for initiation of proceedings under section 147/148 of the Act is not sustainable in law as it is incumbent on the Hon’ble Apex Court in the case of GKN Driver Shafts (India) Ltd. vs. ITO (Supra). The subsequent furnishing of reasons i.e. after completion of assessment would not make good the defect/invalidity with which the initiation of proceedings under section 147/148 of the Act is tainted. Similar view has been held by co-ordiante benches of the ITAT in the case of (i) ACIT vs. K.V. Venkataswamy Reddy of the ITAT, Bangalore in 807, 798 & 808/Bang/2009 dated 21.5.2010 and (ii) Tata International Ltd. vs. DCIT by the ITAT, Mumbai in ITA Nos.3359 to 3361/Mum/2009, dated 29.06.2012’’.

We find it is apparent from the facts and circumstances, the order of assessment passed u/s.143(3) r.w.s 147 dated 28.12.2007 for the assessment year 2003-2004 was completed without providing reasons for initiation of proceedings u/s.147/148 of the Act either within reasonable time or before completion of assessment and rely on Bombay High Court decision in the case of CIT vs. M/s. Trend Electronics, Income Tax Appeal No.1867 of 2013 dated 16th September, 2015, the lordship has held at para 8 of page 5 as under:-

‘’We find that the impugned order merely applies the decision of the Apex Court in GNK Driveshafts (India) Ltd. (supra). Further, it also follows the decision of the Court in Videsh Sanchar Nigam Ltd.(supra) in holding that an order passed in reassessment proceedings are bad in law in the absence of reasons recorded for issuing a reopening notice under section 148 of the Act being furnished to the assessee when sought for. It is axiomatic that power to reopen a completed assessment under the Act is an exceptional power and whenever revenue seeks to exercise such power, they must strictly comply with the prerequisite conditions viz., reopening of reasons to indicate that the Assessing Officer had reason to believe that income chargeable to tax has escaped assessment which would warrant the reopening of an assessment. These recorded reasons as laid down by the Apex Court must be furnished to the assessee when sought for as to enable the assessee to object to the same before the Assessing Officer. Thus, in the absence of reasons being furnished, when sought for would make an order passed on reassessment bad in law. The recording of reasons (which has been done in this case) and furnishing of the same has to be strictly complied with as it is a jurisdictional issue. This requirement is very salutary as it not only ensures reopening notices are not lightly issued. Besides in case the same have been issued on some misunderstanding / misconception, the assessee is given an opportunity to point out that the reasons to believe as recorded in the reasons do not warrant reopening before the reassessment proceedings are commenced. The Assessing Officer disposes of these objections and if satisfied with the objections, then the impugned reopening notice under section 148 of the Act is dropped /withdrawn otherwise it is proceeded with further. In issues such as this, i.e. where jurisdictional issue is involved the same must be strictly complied with the authority concerned and no question of knowledge being attributed on the basis of implication can arise. We also do not appreciate the stand of the Revenue, that the respondent-assessee had asked for reasons recorded only once and therefore seeking to justify no- furnishing of reasons. We except the sate to act more responsibly.

Considering the judicial precedents and facts the assessment is treated as bad in law and we accordingly quash the assessment and allow the appeal in favour of the assessee.

Since the survey took place in two year from the end of the previous year no declaration was recorded and the Income Tax authorities in survey has not found any excess stock which is not disputed by the Revenue. Basically stocks pilled over from earlier years due to non moving, out of date, damaged, unused goods. The Income Tax Department verified the transaction based on the invoice value, date with the financial statements of respective assessment years. On perusal of the assessment orders, at page nos.45 to 49, no addition was made by the Assessing Officer. It is pertinent to note that the difference in stocks arised due to obsolete stocks, carried forward from earlier years and also omission of entries for warrant replacements, free gifts and samples, business promotions, in the computer tally package but the assessee at the end of the financial year reduced the value of such stock to get accurate quantitative tally. The assessee’s accounts for all the assessment years are audited and certified by the Chartered Accountant and accounts are accepted. Now, the Department cannot say accounts found in the computer is true and correct rather than audited books of accounts. In the absence of physically and excess or shortage of stocks found by the survey authorities. We on the facts and circumstances of the case considering the explanations and the material and submissions of the ld. Authorised Representative direct the Assessing Officer to delete the addition of stock difference for the assessment year 2004-05 and allow the grounds of the assessee.

Prime facie the character of the expenditure incurred for personal use, as assessee could not establish or substantiate genuines of transaction utilized wholly and exclusively incurred for Business purposes. The first appellate authority has examined the evidence available on record vis a vis the explanations made by the assessee. We do not see any reason to interfere with the order of ld. Commissioner of Income Tax (Appeals) non this ground and dismiss the ground of the assessee.

Order pronounced on Friday, the 4th day of December, 2015.