2016 (7) TMI 189 - AT - Income Tax

Tribunal affirms CIT(A) decisions, dismisses revenue appeal on closing stock, concealed profit, and flat investment

Assistant Commissioner of Income-tax, Circle-30, Kolkata Versus Samar Kumar Sen

The Tribunal upheld the CIT(A)'s decisions on all three issues, dismissing the revenue's appeal. The additions towards negative closing stock, concealed ... Addition towards negative closing stock - Held that:- We find that the assessee had duly filed the reconciliation statement immediately after the survey and also during the assessment proceedings on 5.12.2011 objecting to the negative stock stated by the ld. AO and also stated that there is positive stock of 819.49 grams on the date of survey and there is no need to make any addition in that regard by filing a detailed reconciliation statement which was ignored by the ld AO. The Ld. CITA had duly considered the reconciliation statement and had granted relief to the assessee. We hold that the assessee is at liberty to file a reconciliation statement pointing out the discrepancies in stocks and other records that were found at the time of survey due to various reasons such as not updating the records properly, incorrect recording of facts, etc. We find that the ld. AO had not considered the explanation submitted by the assessee regarding the reasons for negative stock of Readymade Ornaments, particularly when there was practically no sales in manufactured jewellery despite having made substantial quantity of jewellery and also when he did not try to ascertain the treatment of quantity of gold and broken jewellery as reported by himself in question no. 17 of the statement forming part of the paper book filed before us. Hence the addition cannot be made as an automatic measure. - Decided in favour of assessee Addition made towards concealed profit - Held that:- The method of accounting regularly employed for valuation of stock by adopting Average Cost Price (LIFO method) which is one of the recognized method for valuing stock and which has been consistently followed by the assessee for several years has been discarded without giving any reason by the ld. AO and the valuation of stock of gold was done at market price thereby increasing the profit of the assessee notionally which is without any basis or reasoning. The closing stock as per audited accounts was ₹ 3,25,27,574/- upto the date of survey, whereas the valuation done by the department at market price was worked out at ₹ 4,01,84,320/-. This has resulted in excess valuation of closing stock at ₹ 76,56,746/- thereby notionally increasing the profit of the assessee. It is well settled that though the principle of res judicata does not apply to income tax proceedings, the principle of consistency cannot be given a go by when there is no change in facts and circumstances of the case.- Decided against revenue We also find that the ld. CITA had observed that valuation of stock as per books was taken by the ld. AO at ₹ 2,24,89,465/- , whereas in the stock summary it was ₹ 2,82,93,585/- . The ld. CITA had observed that since this valuation of ₹ 2,82,93,585/- was part of the profit of ₹ 46,26,796/- as reported by the ld. AO , but while working out the profit, he had taken the valuation of stock at ₹ 2,24,89,465/- thereby adding a sum of ₹ 58,04,120 (2,82,93,585-2,24,89,465) as excessive profit without giving any reason. The ld. CITA also found that the depreciation and other deductions should have been given to the assessee to the extent of ₹ 3,57,362/- which was not given by the ld. AO. We find that ignoring the profit and adopting the notional profit arrived by the ld. AO at ₹ 2,48,71,438/- would only result in assessee deriving abnormal profit at 54.76% which is practically not possible in the business of the assessee. CITA had made a fair determination of profit after giving due effect to the discrepancies of the ld. AO in his computation. - Decided against revenue Addition towards unexplained investment in purchase of flat - Held that:- We find that the assessee had disclosed more figure in his audited balance sheet towards purchase of flat at Puri at ₹ 31,94,854/- with clearly explained sources and whereas the figure mentioned in the loose sheet was only ₹ 28,42,938/-. Hence, there is no case for making any addition towards the same - Decided against revenue Issues Involved:1. Deletion of addition towards negative closing stock.2. Deletion of addition towards concealed profit.3. Deletion of addition towards unexplained investment in purchase of flat.Issue-wise Detailed Analysis:1. Deletion of Addition Towards Negative Closing Stock:The first issue is whether the CIT(A) was justified in deleting the addition of Rs. 1,24,61,915/- towards negative closing stock. The assessee, a sole proprietor of 'Senco Jewellery Enterprise,' consistently followed the 'Average Cost' on LIFO basis for stock valuation. During a survey on 24.03.2009, no excess gold was found, and the assessee did not disclose any discrepancies on the spot. The AO found negative stock in the books and treated it as unexplained purchases. The assessee provided a reconciliation statement explaining discrepancies such as unrecorded sales and purchases, errors in entries, and items sent for polishing. The CIT(A) accepted the reconciliation, noting the AO ignored it and did not find any evidence of undisclosed purchases. The CIT(A) directed the deletion of Rs. 1,24,61,915/- and added Rs. 93,103/- for unreconciled stock. The Tribunal upheld the CIT(A)'s decision, citing that the AO's addition was based on suspicion and the statement recorded during the survey had no evidentiary value.2. Deletion of Addition Towards Concealed Profit:The second issue is whether the CIT(A) was justified in deleting the addition of Rs. 2,48,71,438/- towards concealed profit. The survey team computed profit as on 20.03.2009 at Rs. 46,26,796/- and revalued stock at market price, arriving at a net profit of Rs. 2,48,71,438/-. The assessee argued the valuation was incorrect and provided audited accounts showing a net profit of Rs. 91,67,818/-. The CIT(A) reworked the profit, considering discrepancies and depreciation, and directed the AO to adopt a net profit of Rs. 1,10,53,210/-. The Tribunal upheld this decision, noting the AO's rejection of books was mechanical and the assessee's method of stock valuation was consistently followed. The Tribunal also observed the assessee declared a higher profit percentage compared to previous years, and the AO's valuation resulted in an abnormal profit percentage, which was not feasible.3. Deletion of Addition Towards Unexplained Investment in Purchase of Flat:The third issue is whether the CIT(A) was justified in deleting the addition of Rs. 3,51,916/- towards unexplained investment in a flat. During the survey, a loose sheet showed an investment of Rs. 28,42,938/- in a flat, while the assessee disclosed Rs. 31,94,854/- in the books. The AO added the difference as unexplained investment. The CIT(A) deleted the addition, noting the assessee disclosed a higher amount in the audited accounts. The Tribunal upheld this decision, stating there was no basis for the addition as the assessee's disclosed amount was higher.Conclusion:The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all three issues, finding no infirmity in the deletion of additions towards negative closing stock, concealed profit, and unexplained investment in the purchase of a flat. The Tribunal emphasized the importance of considering reconciliations and consistent accounting methods, and the lack of evidentiary value in survey statements.