GREEN WORLD DEPT. STORES,MUMBAI vs. I.T.O.23(2)(3), MUMBAI

The facts relating to the case are stated in brief. The assessee is a partnership firm engaged in trading of readymade garments, accessories etc. The department carried out a survey operation u/s 133A of the Act at the premises of the assessee on 5.11.2004. During the course of survey operations, the survey team took the inventory of physical stock available with the assessee. The Survey team also estimated the book stock by adopting the Gross profit rate of 29.6%. It was noticed that there was shortage of stock to the tune of Rs.37,87,811/-. When this was pointed out, the assessee surrendered a sum of Rs.30.00 lakhs at the time of survey operations. The assessee had also renovated the shop and hence he submitted to the survey team that the difference, if any, in the estimation of renovation expenses vis-à-vis expenses accounted should be considered as included in the offer of Rs.30.00 lakhs. Subsequently, the assessee filed a retraction letter dated NIL before the assessing officer claiming that the stock worth Rs.9,35,000/- was transferred to the sister concern of the assessee named M/s Small World. From the order of Ld CIT(A), we notice that the assessee has filed the above said retraction letter along with the return of income filed on 31.10.2005. Subsequently, the assessee filed another letter dated 30.11.2007, wherein he agreed to offer a sum of Rs.18,52,108/-, which was worked out by the assessee as under:- (a) Difference in stock (shortage) 37,87,811 (b) Less:- Transfer to M/s Small World 9,35,703 (c) Revised difference in stock 28,52,108 (d) Less:- Offered in M/s Small World 10,00,000 (e) Income surrendered now 18,52,108 The assessing officer originally completed the assessment on 26.12.2007 accepting the income of Rs.18,52,108/- surrendered by the assessee. The same was revised by Ld CIT u/s 263 of the Act on 12.02.2010, since the AO did not properly examine the income surrendered by the assessee during the course of survey operations as well as the stock difference noticed therein. The Ld D.R submitted that the appeal filed by the Tribunal challenging the revision order of Ld CIT has since been dismissed.

The assessing officer passed the assessment order dated 26.11.2010 u/s 143(3) r.w.s. 263 of the Act, wherein he added the amount of Rs.30.00 lakhs surrendered by the assessee. The AO also restricted the deduction u/s 40(b) of the Act in respect of remuneration to the partners, to the amount actually claimed by the assessee in the return of income. In the appellate proceedings, the Ld CIT(A) enhanced the addition to Rs.37,87,811/- i.e. to the extent of difference in stock. It is pertinent to note that the Ld CIT(A) has, initially, presumed that the difference in stock relates to “Excess Stock”. The Ld CIT(A) also confirmed the order of the AO with regard to the deduction claimed u/s 40(b) of the Act.

With regard to the first issue, the ld. AR submitted that the ld. CIT(A) has enhanced the addition without giving notice of enhancement to the assessee. He further submitted that the ld.CIT(A) confirmed the addition to the extent of Rs.37.87 lakhs by presuming that the discrepancy in stock was related to surplus stock. He submitted that the survey team has found out only shortage in stock. He submitted that the shortage of stock normally means that the assessee has sold the goods outside the books and hence normally the Gross Profit (GP) realised on sale of stock would be assessable to tax. In support of this contention, the ld. AR placed reliance on the decision rendered by the Hon’ble Andhra Pradesh High Court in the case of Rajnik & Co. vs. ACIT (AP) (251 ITR 561). He further submitted that the GP rate has been determined at 29.6% and the same should be applied on the shortage of stock.

The ld. AR further submitted that the survey team has found out excess stock of Rs.9.35 lakhs in the sister concern named M/s Small World and the assessee has explained the same as transfer of stock from the assessee’s firm to the sister concern. Accordingly, he submitted that the said transfer should be taken into consideration. He submitted that the Gross profit worked out on the shortage of stock @ 29.6% works out to Rs.11.20 lakhs only, where as the assessee has offered additional income of Rs.18.52 lakhs. He submitted that the assessee offered the amount of Rs.30.00 lakhs without understanding its implications on the net profit and hence the said admission should not be given cognizance of. By placing reliance on the decision of Hon’ble Supreme Court rendered in the case of Pullangode Rubber Produce Co. Ltd. vs. State of Kerala and another (1973) 91 ITR 18 (SC), the ld. AR submitted that the Hon’ble Supreme Court has held that it is open to the assessee to show that the admission made is incorrect. Accordingly he submitted that the surrender of Rs.18.52 lakhs made by the assessee in the original assessment proceedings is very much reasonable in the facts and circumstances of the case and accordingly prayed that the same should be directed to be sustained in the place of Rs.37.87 lakhs enhanced by the Ld CIT(A).

On the contrary, the ld. DR submitted that the assessee himself has admitted in the Statement that the GP rate is about 38 to 40% in the case of branded goods. He further submitted that the assessee has not maintained any stock register and the said position has also been admitted by the assessee in the statement taken from the partner of the firm. Despite admitting that the assessee has been earning GP rate 38 to 40%, the assessee has been declaring GP of around 30% only in its books of account. With regard to the query as to whether the shortage of stock can be considered as sales outside the books, the Ld D.R agreed that the same may be considered to be so. However, he submitted that the GP should be estimated at the rate of 40%, if the assessee’s plea is accepted by the Tribunal. The ld. DR further submitted that the assessee could not substantiate his claim that there was transfer of stock from the assessee’s M/s Small World and hence the said claim should be rejected. He further submitted that the assessee itself has surrendered a sum of Rs.30.00 lakhs and hence the addition should be sustained to the extent of Rs.30.00 lakhs.

We heard the parties and perused the record. It is an admitted fact that the survey team as found out “Shortage of stock” only and not excess stock as presumed by Ld CIT(A). The shortage of stock would normally be presumed as sales made outside the books, in which case, the gross profit arising there from is required to be added to the total income. Accordingly, we are of the view that there is merit in the submissions made by the Ld A.R in this regard. We notice that the discrepancy in stock was arrived by the survey team by adopting GP rate at 29.6% only. Hence, at this stage, it may not be proper to alter the GP rate, as suggested by the ld. DR. Accordingly, we proceeds to dispose of this issue by taking the GP rate of the assessee at 29.6%. The ld. AR submitted that the GP rate is affected by many factors since the assessee is dealing in garments, which is badly affected by change in fashion. Hence the assessee would be constrained to sell certain old fashion items at heavy discount and hence the average rate of GP worked out at around 30% only. This explanation of the assessee also appears to be plausible and hence we proceed to adopt the Gross profit rate @ 29.6%.

The working relating to stock difference is given in Question no.39 in the statement taken from the partner of the assessee. We notice that the stock shortage of Rs.37,87,811/- represents cost of sales, which is 70.4% of the sales value. By grossing up the same to 100%, the sales value should have stood at Rs.53,80,413/-. Hence, the Gross Profit that should have been realized by the assessee should stand at Rs.15,92,602/- (Rs.5380413/- (-) Rs.3787811/-). Accordingly, we are of the view that the addition relating to GP on the stock shortage may be made to the extent Rs.15,92,602/-. However, we notice that the assessee himself has surrendered a sum of Rs.18,52,108/-, which is more than the GP worked out above. Hence, under these set of facts, we are of the view that the additional income of Rs.18,52,108/- surrendered by the assessee is adequate enough to cover up the deficiencies noticed by the survey team.

The ld. DR submitted that the assessee himself has surrendered a sum of Rs.30 lakhs in the statement taken from him and hence, the addition should be sustained at least to that extent. On the contrary, the ld. A.R submitted that the admission made by assessee is an extremely important piece of evidence but the same is not conclusive. The ld.A.R submitted that the assessee, in the retraction letter, has clearly stated that it has admitted the amount of Rs.30 lakhs without properly understanding the liability that may arise on account of stock discrepancy. The ld. AR further submitted that the shortage of stock would at the most give rise to addition towards GP and hence, the admission of Rs.30 lakhs made with the assessee without understanding all the implications should be ignored. The Ld A.R also placed reliance on the decision rendered by the Hon’ble Supreme Court in the case of Pullangode Rubber Produce Co. Ltd (supra).

We find merit in the submissions made by the ld. AR. First of all, stock shortage of Rs.37.87 lakhs has been arrived on estimated basis i.e. book stock has been estimated by adopting GP ratio of 29.6%. There is also merit in the submissions of the assessee that the effect of stock shortage was not properly understood by the partner of the assessee firm. We have earlier noticed that the additional income surrendered in the original assessment proceedings is more than the Gross profit that should have been earned on sale of Stock shortage. Hence, we are of the view that the assessee has proved that the admission of Rs.30.00 lakhs made by it was wrong. Hence, we are of the view that the admission of Rs.30 lakhs made by the assessee cannot be given credence in the facts and circumstances of the case.

The next issue relates to disallowance of claim made u/s 40(b) of the Act. After hearing the parties, we are of the view that this issue should be examined afresh by the AO, by duly considering the instrument of partnership, entries made in the books of accounts and explanations that may be furnished by the assessee. Accordingly, we set aside the order of ld. CIT(A) on this issue and restore the same to the file of the AO. 12. In the result, the appeal file by the assessee is treated as partly allowed or statistical purposes.