2018 (1) TMI 1107 - AT - Income Tax

Tribunal overturns addition based on stock variance, directs re-examination by AO

M/s. Baroda Moulds and Dies. Versus ACIT Cent. Circle – 1, Baroda.

M/s. Baroda Moulds and Dies. Versus ACIT Cent. Circle – 1, Baroda. - [2018] 62 ITR (Trib) 168 Issues Involved:1. Addition on account of difference in stock found during the search.2. Addition by applying gross profit rate on the difference in stock found during the search.3. Restriction of additions by the Commissioner of Income-Tax (Appeals).Issue-wise Detailed Analysis:1. Addition on Account of Difference in Stock Found During the Search:The assessee contested the addition of Rs. 35,23,941/- made by the CIT(A) on account of the difference in stock found during the search. The search conducted under Section 132 of the I.T. Act, 1961, revealed an excess physical stock of Rs. 60,91,883/- compared to the stock recorded in the books of account. The partner of the firm admitted to Rs. 60 lakhs as undisclosed investment in the unaccounted excess stock during the search. However, the appellant argued that the addition was made solely based on the partner's statement recorded under Section 132(4) and that no incriminating materials were found to support the addition. The appellant provided a reconciliation statement showing that the discrepancy was due to counting errors during stock-taking. The Tribunal noted that the CIT(A) and AO did not consider this reconciliation and relied solely on the partner's statement. The Tribunal set aside this issue to the AO to examine the reconciliation statement and decide the matter as per law.2. Addition by Applying Gross Profit Rate on the Difference in Stock Found During the Search:The assessee also contested the addition of Rs. 8,04,163/- by applying a gross profit rate of 22.82% on the difference in stock found during the search. The AO initially applied a 26% gross profit rate, which the CIT(A) reduced to 22.82%. The appellant provided a detailed quantitative reconciliation showing that the undisclosed stock was semi-finished goods and hence not recorded in the books of accounts. The Tribunal observed that the AO and CIT(A) did not acknowledge this reconciliation and relied on the partner's statement. The Tribunal allowed this ground of appeal, noting that the appellant's profit in the year under consideration was higher than in previous years, indicating that the gross profit rate applied by the AO was not justified.3. Restriction of Additions by the Commissioner of Income-Tax (Appeals):The Revenue contested the CIT(A)'s decision to restrict the addition of Rs. 60,91,883/- to Rs. 35,23,941/- and the addition of Rs. 15,83,890/- to Rs. 8,04,163/-. The Tribunal noted that in the connected appeal (ITA No.2809/Ahd/2013), the matter was set aside to the AO for re-examination. Consequently, the Tribunal dismissed the Revenue's appeal, as the issues were already addressed in the assessee's appeal.Conclusion:The Tribunal set aside the addition on account of the difference in stock and the addition by applying the gross profit rate to the AO for re-examination, considering the reconciliation statements provided by the assessee. The Tribunal dismissed the Revenue's appeal, as the matters were already addressed in the assessee's appeal. The order was pronounced in the Court on 22nd January 2018 at Ahmedabad.