2016 (2) TMI 456 - AT - Income Tax

Partnership Firm Case: ITAT Mumbai limits stock shortage addition. Re-examine deduction disallowance.

M/s Green World Dept. Stores Versus Income Tax Officer, Mumbai

The Appellate Tribunal ITAT Mumbai ruled in a case involving a partnership firm that the addition relating to a stock shortage should not be enhanced ... Enhancing addition relating to discrepancy in stock - Held that:- First of all, stock shortage of ₹ 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 ₹ 30.00 lakhs made by it was wrong. Hence, we are of the view that the admission of ₹ 30 lakhs made by the assessee cannot be given credence in the facts and circumstances of the case. Disallowance of deduction u/s 40(b) - Held that:- 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. Issues:1. Enhancement of addition relating to discrepancy in stock.2. Disallowance of deduction u/s 40(b) of the Act.Issue 1: Enhancement of addition relating to discrepancy in stockThe case involves a partnership firm engaged in trading that underwent a survey operation revealing a stock shortage. The assessing officer accepted the income surrendered by the assessee but was revised by the Ld CIT under section 263. The Ld CIT enhanced the addition, leading to an appeal challenging the revision order. The Ld CIT(A) presumed the stock discrepancy as 'Excess Stock,' but the tribunal found it to be a shortage. The tribunal applied a Gross Profit rate of 29.6% on the shortage, rejecting the higher rate suggested by the Ld DR. The tribunal concluded that the additional income surrendered by the assessee was adequate to cover the deficiencies identified by the survey team, thus rejecting the higher enhancement made by the Ld CIT(A).Issue 2: Disallowance of deduction u/s 40(b) of the ActThe Ld CIT(A) upheld the disallowance of the deduction claimed u/s 40(b) of the Act. The tribunal directed the AO to re-examine this issue by considering the partnership instrument, book entries, and explanations from the assessee. The tribunal set aside the Ld CIT(A)'s decision on this matter and returned it to the AO for further review. Ultimately, the appeal by the assessee was treated as partly allowed for statistical purposes, with the judgment pronounced on 15.12.2015.This detailed analysis of the legal judgment from the Appellate Tribunal ITAT Mumbai highlights the issues of enhancement of addition relating to stock discrepancy and the disallowance of deduction u/s 40(b) of the Act. The tribunal's decision, based on the facts and arguments presented, showcases a thorough examination of the case to ensure a fair and just outcome.