2020 (3) TMI 172 - AT - Income Tax

Tribunal deletes excess stock additions, emphasizes proper valuation methods

The tribunal allowed the appeal, deleting additions for excess stock and unverifiable purchases. It criticized lower authorities for not considering the ... Valuation of stock by departmental approved valuer - valuation of stock by registered valuer - valuation of stock at cost or net realizable value - addition on account of excess stock based on higher valuation - treatment of purchases as unverifiable for non-production of suppliers - obligation on assessing officer to verify suppliers - deletion of additions where quantity matches books and purchase evidenceValuation of stock by departmental approved valuer - valuation of stock by registered valuer - valuation of stock at cost or net realizable value - addition on account of excess stock based on higher valuation - deletion of additions where quantity matches books and purchase evidence - Whether the addition on account of excess stock, made on the basis of valuation by the Departmental Approved Valuer, is sustainable where the assessee produced a registered valuer's report and documentary evidence of purchases which remove quantity discrepancy - HELD THAT: - The Tribunal found that during survey the Departmental Approved Valuer had valued the stock at a market/sale rate producing a large excess compared to book stock; the assessee pointed out defects in that valuation (incorrect assumed purity and higher stone rates) and filed a registered valuer's report. The AO accepted unrecorded purchase bills by giving credit to the extent shown, but applied valuation methodology based on current sale rates rather than cost (or realisation whichever is less) thereby inflating the excess. No discrepancy was found in the physical quantity of stock vis-a -vis books and the unrecorded purchase bills; some stock also related to opening stock. The CIT(A) rejected the registered valuer's report solely on delay in filing it with the ADIT, which the Tribunal held was not a valid basis to discard the report's material contents. Because the Departmental Valuer applied higher market/sale rates instead of cost and the quantity matched on verification, the addition founded only on the higher valuation could not be sustained and was rightly deletable. [Paras 2]Addition on account of excess stock based solely on the Departmental Approved Valuer's higher valuation is deleted.Treatment of purchases as unverifiable for non-production of suppliers - obligation on assessing officer to verify suppliers - deletion of additions where quantity matches books and purchase evidence - Whether purchases treated as unverifiable by the AO for want of production of suppliers by the assessee can sustain an addition where documentary confirmations, PAN, addresses and proof of payment through banking channels were furnished and no conclusive finding of fraud was recorded - HELD THAT: - The Tribunal noted that the assessee produced confirmations from the suppliers with PANs, addresses and bank payment records. The AO had requested production of the parties for verification on test check basis but did not point to any defect in the documentary evidence and made no conclusive finding that the purchases were not genuine. The Tribunal held that suppliers are not under the direct control of the assessee and non-production by them cannot justify treating transactions as unverifiable; the AO should have summoned or investigated the suppliers himself if further verification was required. Further, since stock examination disclosed no quantity discrepancies, suspicion based solely on non-production was insufficient to sustain the addition. Accordingly the addition treated as unverifiable purchases was arbitrary and deleted. [Paras 3]Addition on account of unverifiable purchases is deleted.Final Conclusion: The Tribunal allowed the assessee's appeal for Assessment Year 2015-16 and deleted the additions made by the AO-both the addition on account of excess stock founded on the Departmental Approved Valuer's higher valuation and the addition treated as unverifiable purchases. Issues Involved:1. Valuation report of the departmental valuer.2. Objections raised by the assessee regarding valuation.3. Addition on account of excess stock found during the survey.4. Addition on account of unverifiable purchases.Issue-wise Detailed Analysis:1. Valuation Report of the Departmental Valuer:The assessee contested the valuation report prepared by the Departmental approved valuer, arguing that it was based on incorrect facts and incorrect rates for various items of jewellery. The Departmental valuer assumed a 22-carat gold purity for all items, whereas the actual purity varied between 4, 9, and 17 carats, with only a few items being 22 carats. Additionally, the valuer mistakenly valued yellow sapphire olka (pukhraj) as diamond polka, leading to inflated valuations. The assessee pointed out these discrepancies immediately after the survey and submitted a valuation report from a Registered Valuer, which was not considered by the AO or CIT(A).2. Objections Raised by the Assessee Regarding Valuation:The assessee's objections included the incorrect assumption of gold purity and the misclassification of gemstones. Despite these objections being raised promptly, neither the Investigation Wing nor the AO verified the correctness of the facts highlighted by the assessee. The CIT(A) dismissed the valuation report of the Registered Valuer citing a delay in submission, which the tribunal found unjustified since the report was prepared shortly after the Departmental valuer's report and the delay in submission did not alter the material facts.3. Addition on Account of Excess Stock Found During the Survey:The AO made an addition of Rs. 1,17,80,068 based on the valuation of excess stock found during the survey. The assessee argued that after considering unrecorded purchase bills amounting to Rs. 1,11,26,742, there was no significant variation in stock quantity. The tribunal noted that the Departmental valuer used current market rates or rates from sale bills instead of cost price, which is contrary to standard accounting practices. The tribunal found merit in the assessee's argument that the valuation difference was due to higher rates applied by the Departmental valuer and not due to actual excess stock. Consequently, the addition was deemed unjustified and was deleted.4. Addition on Account of Unverifiable Purchases:The AO treated purchases amounting to Rs. 12,66,540 as unverifiable because the assessee could not produce the suppliers for verification. The assessee provided confirmations, PAN details, addresses, and proof of payments through banking channels for these purchases. The tribunal held that the AO should have used his authority to summon the suppliers or verify their existence through other means rather than penalizing the assessee for non-production of the suppliers. The tribunal emphasized that non-production of parties alone cannot render purchases unverifiable, especially when documentary evidence supports the transactions. Therefore, the addition for unverifiable purchases was also deleted.Conclusion:The tribunal allowed the appeal of the assessee, deleting the additions made on account of excess stock and unverifiable purchases. The judgment emphasized the importance of proper valuation methods and the necessity for the AO to verify facts before making additions. The tribunal criticized the lower authorities for not considering the Registered Valuer's report and for relying on the Departmental valuer's inflated valuation. The order was pronounced in the open court on 18/02/2020.