Assessee's Appeal Allowed: Disallowances under Section 40A(3) Deleted, Stock Discrepancies Addressed

The Tribunal allowed the appeal filed by the assessee, deleting the disallowances under section 40A(3) and the additions related to stock discrepancies, except for the addition related to consumable stock. The order was pronounced in the open court on 04.12.2017.

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Issues Involved:

1. Sustaining addition of Rs. 64,726 on account of payments made for freight of goods to different truck drivers.
2. Retaining addition of Rs. 5,27,503 on account of investment in building, discrepancies in stock, and other deficiencies found during the survey.

Issue-wise Detailed Analysis:

1. Sustaining Addition of Rs. 64,726 for Freight Payments:

The assessee contended that the payments amounting to Rs. 64,726 were made on three occasions (26.04.2008, 12.05.2008, and 14.07.2008) to truck drivers for transportation of goods, who insisted on cash payments. The genuineness of these payments was not doubted, and the purchases were accepted with the help of books of accounts. The assessee relied on the decision of ITAT, Amritsar Bench, in the case of ITO, Jammu Vs. Sh. Atul Gupta Rajouri, where it was held that genuine payments should be seen from the businessman’s perspective rather than the tax collector’s.

The Tribunal found that the payments exceeded Rs. 20,000 on three occasions and were made to truck drivers who generally insist on cash payments. The Central Board of Direct Taxes (CBDT) Circular No. 220 dated 31.05.1977 clarified that no disallowance under section 40A(3) should be made if the payment could not be made through banking channels due to exceptional circumstances. The Tribunal noted that the genuineness of the payments was not doubted, and in view of the exceptional circumstances, the disallowance under section 40A(3) was deleted.

2. Retaining Addition of Rs. 5,27,503 for Investment in Building, Stock Discrepancies, and Other Deficiencies:

- Empty Drums: The assessee claimed that empty drums amounting to Rs. 12,750 did not belong to it as they were returnable and received along with chemicals. This fact was verified, and the addition of Rs. 12,750 was found unjustified.

- Consumable Stock: The survey found consumable stock amounting to Rs. 1,11,740, which the assessee had not declared in the stock statement. The Tribunal upheld the addition as the assessee was bound to pass entry in the profit and loss account relating to expenses of consumable stores after reducing the closing stock of consumable stores.

- Finished Goods Valuation: The survey team valued the stock based on selling prices, whereas the assessee argued it should be valued at cost price. The Tribunal found that the stock included damaged and cut pieces, which were not saleable. The assessee had explained the difference in valuation to the Assessing Officer, who did not verify the claim and made the additions. The Tribunal noted that the valuation of stock as on 31.03.2009 was not doubted by the Assessing Officer and should have been applied for arriving at the value of the stock. The Tribunal deleted the additions related to obsolete/damaged stock (Rs. 3,00,820), overvaluation of stock (Rs. 2,12,873), and valuation of drums (Rs. 12,750), totaling Rs. 5,26,443, which was almost equal to the addition of Rs. 5,27,503.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, deleting the disallowances under section 40A(3) and the additions related to stock discrepancies, except for the addition related to consumable stock. The order was pronounced in the open court on 04.12.2017.

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