TaxTMI 
TaxTMI 
TaxTMI 
2025 (9) TMI 77
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....024. In that condonation petition ld. AO pleaded that he was busy with additional pressure of work related to pending SLPs to be filed which were over hundred in number. Thus, he could not attend the work of the filling of the appeal in due time. 2.1 On the other hand, ld. AR of the assessee did not raise any objection to the prayer of the ld. AO. 2.2 We have heard rival contentions. As we note that the reasons advanced by the ld. AO in the prayer was that he was under pressure of filling 100 plus SLPs and therefore, he could not attend to the work of filling the present appeal in time. We note that though the appeal is to be filed within 60 days' time and the appeal filed was reasoned to be delayed that the ld. AO was busy. We consider the peculiar facts of the case and condone the delay but at the same time expect that revenue should be vigilant while adhering to the timeline for filling of the appeal. 3. As is evident that the cross appeal relates to one assessee, involving the same assessment year and it deals with the one order of the Assessing Officer as well as one order of ld. CIT(A). We have heard the parties on the same day and by way of this consolidated order p....
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....on the facts and in the circumstances of the case the ld CIT(A) is wrong, unjust and has erred in law in confirming lump sum disallowance of Rs. 300000/- made by the Id AO out of travelling, repairs & other expenses u/s 37(1) and 38(2) of the IT Act, 1961 on account of alleged un-verifiability thereof and/or not being incurred wholly/exclusively for business purpose 3. The appellant craves permission to add to or amend to any of grounds of appeal or to withdraw any of them." 4. First, we deal with the appeal filed by the revenue in ITA no. 693/JP/2024. The brief facts as culled out from the records are that return of income declaring 'Nil total income' was filed by the assessee on 30.9.2015. Upon filing of the ITR the case was selected for scrutiny and notice u/s 143(2) & 142(1) were issued from time to time and served upon the assessee. Books of accounts were produced which were examined on test check basis by the ld. AO. The assessee is engaged in the business of Manufacturing & Trading of Sarees, Salwar Suites and Dress Materials. 4.1 In the case of the assessee a survey u/s 133A of the Act was carried out on the business premises of the assessee on 26.11.2014 ....
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....ed reply opposing the addition and explained as to why there was the alleged difference. The reply along with the documents furnished by the assessee were given thoughtful consideration by ld. AO, however, it was found that the claim of the assessee that stock was matching completely and there was no difference / variation in the stock reported on its accounting software (Tally) with that of stock reported on its inventory software (MISSBS) as well as physical inventory was not considered as acceptable due to the reasons as indicated in the order of the assessment, which reads as under :- "First of all vide para 3 of the reply to Q. No. 1 of show cause the A/R contended that how the figure of Rs. 31,38,42,649/- was derived. During the course of hearing dated 21.12.2017 A/R Shri R.K. Bhatra and Shri Virendra Dhadhich was confronted with Annexure-A-8 page no 70 and 71 wherein the details of stock inventory were provided. As per this document the following description is written by Shri Rajesh Jain "this report is generated by me from MISSBS software and data base of ZSPL on the basis of barcode. This represents the stock position of all stores/ factory of ZSPL as on....
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....date of survey stood at Rs. 31,24,00,586/-, which is very close to the physical inventory found during the survey. (f) However, the trading results of the assessee are prepared on the basis of the accounting software and not on the basis of inventory software. The inventory reflected by the assessee in trading account prepared as on 31.03.2015 is short by Rs. 1,98,88,536/-. (g) It is relevant to add here that since, nssessee is maintaining stock records and the trading results are not based on reverse calculation of gross profit ratio. The claim of the assessee that, if the wage expenses of Rs. 1,98,88,536/- is considered as direct expense the stock on the date of survey will increase by that same amount i.e. Rs. 1,98,88,536/- and the Gross profit will remain same, cannot be accepted as it is against the facts of the case and contrary to the accounting principles. In view of these observation ld. AO noted that the stock is undervalued/ understated by Rs. 1,98,88,536/-. Ageing of Stock Item Assessee also claimed that, it is their usual practice to value stock at 100% of cost if purchased in same year, 90% of cost if purchased in immediate....
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.... purpose of business u/s 37(1) and 38(2) of the Act. As such, the expenses incurred were not proved wholly for business purpose. Considering that observation, a lump-sum disallowance of Rs. 3,00,000/- was made in respect to the abovementioned expenses by ld. AO. Accordingly, income was assessed at total income of Rs. 2,56,84,080/- u/s 143(3) of the Income Tax Act, 1961. 5. Aggrieved by the order of Assessing Officer, assessee preferred an appeal before the ld. CIT(A). Apropos to the grounds so raised the relevant findings of the ld. CIT(A) are reiterated here in below: "Decision [for the stock valuation addition] 4.2 I have considered the facts of the case and written submission of the appellant as against the observations/findings of the AO in the assessment order for the year under consideration. After carefully going all the above the point wise discussion is as under; * The issue is related to excess stock found during the course of survey. * During the course of survey the physical stock was calculated and valued at Rs 31,38.42.649/-. * The survey team had also valued the physical stock as per inventory software (MISSBS) maint....
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....sification. * Now to verify this, it is necessary to check whether the appellant had taken this wages expenses in earlier/last year because the survey team had taken GP rate of 28.11% from last year. * On verification of trading account prepared by survey team, the direct expense had taken into consideration for the year under consideration are as under; Factory expense 5948689 Job work 31506463 Amrapur Ind exp 157152 Kartarpura Ind Exp 1946688 Carriage inward 40556 Consumable stores 86269 Factory Misc Expenses 150000 * The survey team had taken GP 28.11% from last year to prepare the trading account on tally software on the date of survey. The last year (i.e. for AY 2014- 15) the GP was Rs 14,13,17,765/- and turnover was Rs 50,27,70,697 which leads to GP at 28.11%. * In last AY (i.e. for AY 2014-15) the direct expenses had taken into trading account was as under: Consumable stores 17938745 Wages Expenses 28231875 Labor welfare exp 654671 Factory water and Electricity expense 1539141 Factory Mis. Exp 1850711 Job work 64321583 Repair & Maint. 626620 Factory rent....
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.... * Stock Ageing Effect * It is pertinent to mention here that the stock as on date of survey in quantitative terms was not disputed as it was the same as found in the books. The dispute is only related to valuation of stock as per tally software and as per MISSBS software * For financial reporting and accounting purpose the appellant uses accounting software-Tally but the appellant maintains MISSBS inventory software for keeping records of inventory. The Survey Team valued the stock as per MISSBS inventory software at Rs 31,24,00,586/- * The inventory details/valuation taken from MISSBS software are subject to adjustment for ageing effect and determination of Net realizable value of the stock which provides inventory to be valued at lower of cost and Net Realizable Value(NRV) as per AS-2. The value of the stock which is recorded in Tally software is at net realizable value because the same is lower than the cost * The Appellant is valuing its stock by making necessary adjustment of stock ageing in its stock valued at 100% of cost price on MISSBS inventory software. The appellant had stated that even during the course of survey as well as duri....
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....on date of survey is concerned which is not correct. * While preparing trading account, the opening stock was valued at Net Realisable Value (NRV), thus the closing stock as per tally software was also calculated at NRV at 28,66,09,180/-. It shows that the actual difference calculated by the AO for making addition was the difference between the physical stock valued from MISSB software and the physical stock valued at NRV in tally, which is not a correct method. When the AO had valued the stock physically from MISSB software, then the AO have to take value of stock in trading account as per cost shown in MISSB software. * In simple words while preparing the trading account from tally software, the AO is taking stock value as per Net realizable value i.e. the cost reduced by ageing effect, but while calculating the stock physically, the AO is taking the value as per MISSB software where actual stock cost is taking without considering the reduced cost due to ageing effect. Thus, due to this ageing effect, the difference is explained. * It is pertinent to mention here that there is no dispute on the quantity. * The assessee had himself valued the St....
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.... 7,83,550/- as mentioned on page no.8 of AS-12 but not considered in the final stock sheet (Page No. 24 of AS- 12), the correct total of the stock sheet at page no.24 of Annexure-12 comes at Rs. 85,85,268/-. Thus, there was difference of Rs 10,66,150 (Rs. 9651418 - 85,85,268/-) on account of totaling mistake/omission as explained above, which is apparent from the stock sheet summary prepared by the survey authorities. * The above argument of the appellant in respect of totaling mistake of Rs 10,66, 150/- is found to be correct and acceptable. * Other Difference * The appellant had argued that the remaining insignificant amount of Rs. 375,913/- deserves to be ignored having regard to possibility of human error, voluminous nature of the inventory and estimations adopted by the department. * The argument of the appellant is not acceptable as all the possible human error had already been considered * Thus, the arguments for difference of Rs 3,75,913/- is not acceptable. 4.3 Thus, considering the above discussion out of total addition of Rs 3,43,11,672/- the addition for Rs 3,75,913/- is hereby confirmed and the major part of additio....
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....re in these expenses cannot be ruled out. The A.O has made a reasonable disallowance of Rs. 1,00,000/- out of the total claim of Rs. 45,35,803/- by the appellant 20. Therefore, the disallowance made by the AO is hereby confirmed. Hence, the ground of appeal is dismissed. * Considering the above facts and circumstances of the case, a lump-sum disallowance of Rs. 3,00,000/- is made in respect of the above-mentioned expenses is hereby confirmed. The ground of appeal on this issue is hereby dismissed." 6. Felling dissatisfied with the above findings of the ld. CIT(A), revenue has preferred the appeal ITA No. 693/JPR/2024. Assessee has also filed an appeal in ITA no. 631/JPR2024 challenging the above finding of the ld. CIT(A), on the issue where the ld. CIT(A) did not favor the assessee. At the time of hearing of the appeal both the parties supported the finding of the lower authorities as are favourable to them. 7. Revenue through ld. DR supported grounds of appeal by filling the following written submission and the same are reproduced herein below: "1. In this case, the assessee filed his return of income on 30.09.2015 and thereafter, the case was selected for ....
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....s around these two issues. 4.1 The findings of the AO & Ld. CIT(A) are discussed as below:- Ground of Appeal No. 1 "Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition of Rs. 1,98,88,536/- made on account of value of stock found without appreciating the fact that during the assessment proceedings, the assessee claimed that, wages paid to labour in the tally was recorded as indirect expense, however, the same is direct expense and therefore, the closing stock will increase by Rs. 1,98,88,536/- and hence added to the total income of the assessee." AO's findings: i) In the first place, assessee claimed that, wages paid to labour in the Tally was recorded as Indirect Expense. However, the same is Direct Expense. Therefore, if the same is considered as direct expenses the closing stock will increase by Rs. 1,98,88,536/-. This reply of the assessee was found not only vague but contrary to the facts of the case of the assessee by the AO as this view is against the accounting principles. ii) Assessee was maintaining stock records and there exist a method based on which Sale....
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....appellant is found to be correct that Wages expense of Rs 1,98,88,536/- was not taken in trading account prepared for the year under consideration. ii) Now to further strengthen this issue, it is necessary to compare the figures of year under consideration and preceding years as per Ld. CIT(A) which is as under:- Particulars As on 31.03.2014 Till the date of survey 26.11.2014 As On 31.03.2015 Sales 50,27,70,697 25,69,22,781 43,14,00,149 Employee Welfare & Other Benefits 3,12,26,312 3,80,72,334 3,06,06,813 Ratio of Sales to Employee Welfare & Other Benefits 6% 15% 7% Wages Expenses 2,82,31, 875 1,98,88,536 3,94,53,369 Correct Employee Welfare & Other Benefits 3,12,26,312 1,81,83,798 (38072334-19888536) 3,06,06,813 Ratio of sales to Correct Employee Welfare & Other Benefits 6% 7% 7% iii) The argument of the appellant is on merit that from the bare perusal of the table it is evident that wages expenditure of Rs. 1,98,88,536/- was inadvertently classified under head "Employee Welfare and other benefit". Because of which total direct expense of Rs. 3,80,72,334/- recorded under head" Emp....
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....same is not found tenable due to following reasons:- (a) On the date of the survey the physical stock was valued at Rs. 31,38,42,649/- The valuation has been done keeping in view both net realizable value of the stock and the cost that would have been incurred by the assessee. Therefore, any difference due to ageing will automatically be subsumed in the valuation so made. (b) Further, assessee has not brought even a single instance on record to show that the physical inventory taken on the date of survey was not in accordance to its net realizable value. (c) It is relevant to mention here that, assessee neither challenged the valuation of physical inventory nor comments or reconciliation was made or w.r.t. the physical inventory taken at the time of survey. (d) In view of the above it is clear that that, argument put forward by the assessee is not only vague but also not corroborated with any documentary evidence. ii) Therefore, the same is not acceptable and thus, the stock is undervalued/ understated by Rs. 1,29,81,073/-. Ld. CIT(A)'s findings: i) Further for the year under consideration i.e. AY 2015-16, the AO ha....
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....nd P&L a/c." It is important to note that, it was the assessee who was duty bound to prepare and provide all these records to the authorities. From the above instances, it can be inferred that the Ld. CIT(A) had passed this very order without appreciating the facts of the case. 2. As per assessee's paper book page 10, significant accounting policies and notes to accounts clause (d) of accounting policies, following is the extract in regard to the valuation of inventories: "Valuation of Inventories: The inventories are valued as under: Finished goods, stores & spares are valued at lower of cost and net realisable value. The cost comprises of cost of purchases cost of conversion and other costs including appropriate production overheads incurred in bringing such inventories to their present location. Cost for the purpose of valuation is computed on first in first out basis. Raw material and components held for use in the production of inventories are valued at cost, if finished goods in which they will be incorporated are expected to be sold at or above cost, if there is a decline in the price of material/components and it is ....
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....or provided any comments or made any reconciliation w.r.t. the physical inventory taken at the time of survey. Also, no justifiable evidence either at the time of survey or at the time of assessment was submitted to support the claim of lower value of stock by comparing it to the net realizable value. Net realizable value is derived by subtracting estimated costs of completion and the estimated costs necessary to make the sale from the estimated sale price. The assessee when pleading for NRV lower than the actual cost needs to provide proofs of such argument and prove the direct nexus with sale of those specific items in near future. However, no such sales correlation was either provided or even discussed by the assessee. There is a technical mechanism to derive NRV as enumerated above as per AS-2 and no one can bypass the same with some convenient and illogical basis and disguise in the name of method of valuation of inventories. The method adopted by the assessee is such that the item that is 364 days old is valued at 100% of cost and item that is 366 days old is valued at 90%, this is some vague mechanism and not acceptable as this mechanism is baseless, absurd....
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....rend. Thus, those 2 years could be compared. However, in the year under consideration i.e. the year of survey which is subject matter of this appeal, not only the sale declined drastically by more than 14%, but the company's resultant profit is also negative. Thus, making it non comparable to previous years. The assessee was engaged in the business of trading and manufacturing, no break up of these two activities were provided by the assessee and thus, not considered by the Ld. CIT(A) while making the comparison and leading to wrong conclusions in his order. 4. Stock valuation took places at the business premises of the assessee. Both the departmental as well the assessee's representative were present, at the time of physical inventory, both mutually verified the stock and determined the value of stock accordingly. The valuation of inventory derived at the time of physical verification is consented by the assessee by approving the documents prepared under his supervision. Had there been any issue in regard to the valuation of inventory being the NRV lower than the actual cost, the same would had been objected on the spot by the assessee or at the time of recording ....
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....hod to derive net realizable value. As regards the making addition for wages the assessee had not furnished details of wages so as to justify the claim of adding the same in the stock valuation. Thus, ld. AO based on the detailed finding recorded in the assessment order made the addition is correct and that contention were ignored by the ld. CIT(A) and thus, the relief granted by the ld. CIT(A) without considering the finding of the ld. AO and therefore, he supported the order of the ld. AO. As regards the appeal of the assessee, he strongly supported the orders of the lower authorities to the extent favour it. 8. In support of the appeal so filed by the assessee and against the grounds of the appeal raised by the revenue ld. AR of the assessee filed a detailed submission which is reproduced herein below: Brief facts of the case: 1. The Appellant is private limited company engaged in business of manufacturing & trading of sarees, salwar suites and dress materials. The Appellant filed its return of income on 30.09.2015 declaring total income at Rs. Nil for the year under consideration. 2. The Appellant Company is regularly valuating its inventory ....
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....Company. While making valuation of physical inventory, the survey team, without giving effect to the facts that the valuation of the inventory is being done at "cost or net realizable value", whichever is lower, arrived at the value of physical stock for Rs. 31,38,42,649/- by taking reference to the bar-coded mapped valuation on the basis of internal inventory software called MISSBS, which was Rs. 31,24,00,586/-. Thus, there was no significant difference between the inventory found physically and recorded in inventory software though the value recorded in the inventory software was without considering the ageing effect, which department officials did not consider. Moreover the Ld. AO has also failed to consider that such difference was also on account of wrong classification wages expenses in accounting software-Tally. The wages expenses was debited under head "Employee Benefit Expense" for Rs. 1,98,88,536/-, however, they remained classified as "Indirect Expenses", in Tally. In other words, though it was direct expenditure, but was wrongly classified/accounted as indirect expenses in Tally-Software, and were included in the figures of Employee Welfare and Others Benefit expense am....
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....facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition of Rs. 1,98,88,536/- made on account of value of stock found without appreciating the facts that during the assessment proceedings, the assessee claimed that, wages paid to labour in the Tally was recorded as indirect expense, however, the same is direct expense and therefore, the closing stock will increase by Rs. 1,98,88,536/- and hence added to the total income of the assessee. 2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition of Rs. 1,29,81,073/- made on account of value of stock found without appreciating the facts that assessee claimed that it is usual practice to value stock at 100% of the cost if purchased in same year, 90% of cost if purchased in immediate preceding year and 80% of cost for all previous year stock, thus, the difference to the extent of Rs. 1,29,81,073/- is nothing but ageing effect only. However, on the sate of survey, the physical stock was valued at Rs. 31,38,42,649/- and valuation was done keeping in view net realizable value of the stock and the cost that would have been incurred by t....
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....not supported with any documentary evidence. 14. The Ld. AO alleged and given incorrect observation that since the valuation has been done keeping in view both net realizable value of the stock and cost that would have been incurred by the Appellant. Therefore, any difference due to stock ageing effect will automatically be subsumed in the valuation so made by the Appellant. 15. The Ld. AO alleged that the claim of the Appellant that wages paid to labour were not included while reporting the closing stock under TALLY software is contrary to the facts of the case. On the basis of above allegations, the Ld. AO alleged that Appellant has undervalued the stock. SUBMISSIONS 16. At the very outset it is humbly submitted that the Ld.AO without considering the facts and circumstances of the case mechanically passed the impugned assessment order, wherein he has made the impugned addition of Rs. 3,43,11,672/-to the total income of the Appellant, merely on assumption and presumption of facts that the Appellant undervalued its stocks. 17. That the basis of the impugned addition of Rs 3,43,11,672/-made by the Ld. AO was on account of differe....
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....s. 1,98,88,536/- * Other difference of Rs. 14,42,063/- Stock Ageing Effect: 1,29,81,073/- 21. The Appellant maintains MISSBS inventory software for keeping records of inventory. Further, for financial reporting and accounting, accounting software- ___________________ Tally is used, for which inventory details/valuation are taken from MISSBS software subject to adjustment for ageing effect and determination of Net realizable value of the said stock, in accordance with accounting standard- 2 which provides that inventory is required to be valued at lower of cost and net realizable value. 22. It is humbly submitted that the Appellant is valuing its stock by making necessary adjustment of stock ageing in its stock valued at 100% of cost price. For calculating the stock ageing effect, at first, cost price of its inventory is derived. For purpose of arriving at cost price of its stock the Appellant is regularly maintaining all inventory records in MISSBS software, wherein complete details of inventory are available at cost price. After ascertaining valuation based on cost price of the product as maintained in inventory software-MISSBS, for the....
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....nventory at low or cost and "net realizable value" is well recognized method under Accounting Standards -2("AS-2"), which deals with the accounting principle of valuation of inventories. 26. In this context, it is important to discuss the relevant portion of AS-2, which is as reproduced herein below: Accounting Standards-2: Valuation of inventories Para 5. inventories should be valued at the lower of cost and net realizable value. The cost of inventories should comprise all costs of purchase, cost of conversion and other costs incurred in bringing to their present location and condition. On the bare perusal of the above, it is evident that the inventories should compulsory be valued at lower of the following: * Cost price * Net realizable value 27. It is mandatory to follow AS-2 for valuation of inventory at the time of valuation of inventory. Further, it is humbly submitted that Ld. AO has not pointed out any discrepancies in valuation of inventory basis AS-2 followed by the Appellant as the same had been consistently and regularly followed by Appellant. 28. The Appellant has regularly followed valuation of fi....
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....would impact past assessment as well as income of subsequent years also. In support of the contention raised above reliance can be placed to judicial pronouncements: J.N. Marshall & Co. v. Commissioner of Income-tax [2004] 134 Taxman 711 (Bombay) On facts, it could not be disputed that out of last 45 years, the assessee had been following that method for about 43 years to the knowledge of the department. That, out of these 43 years also, the department had accepted that method of valuation in large number of years and to accept the department's contention at this stage and that too, for assessment year 1987-88 might result in practical difficulties, not only for the assessee, but also for the department. The department had not suggested any alternate method. However, if any of the methods submitted by the department was accepted at this stage and that too, for the relevant assessment year, then even the Assessing Officer would have to undertake an impossible task of rewriting the opening stock right from assessment years 1986-87, 1987-88 and 1989-90, which would ultimately result in an exercise in futility. Secondly, the assessee had submitted that the method of v....
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....lassified as indirect expenses under the head "Employees Welfare & Other Benefits" and included in total Employees Welfare & Other Benefits of Rs. 3,80,72,334/- reflected in profit & loss account. 35. The Ld. AO was not justified in rejecting the explanation of the Appellant, that such reconciliation difference in accounting software-Tally arose because of wrong classification/grouping of wages expenses amounting to Rs. 1,98,88,536 under head "Employees Welfare & Other Benefits" which otherwise is part of trading account. Had the amount of manufacturing wages for Rs. 1,98,88,536/- transferred to trading account, the stock valuation would have been increased by the same. Accordingly, there would be neutral effect on profit. 36. It is imperative to mention here that, wages expenses are required to be classified under appropriate head. These facts are even admitted by the Ld. AO, which is evident from the Assessment order. Reliance is placed on statement of the Ld. AO as reproduced herein below "since, the sale price of an item is only a markup on cost of that item, it is necessary to have ascertained cost of that item first. Had the assessee not considered ....
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..... Employee Welfare & other benefits 31226312/- 3,80,72,334/-^3 30603813/- 3. Ratio of Sales to Employee welfare and other Benefit 6% 15% 7% 4. Wages expenses 28231875/- 1,98,88536/-^4 39453369/- 5. Correct Employee Welfare and other benefit Expenses 31226312/- 18183798/- (3,80,72,334-1,98,88,536) 30603813/- 6. Ratio of Sales to corrected Employee Welfare and Benefit Expense 6% 7% 7% From the bare perusal of the table it is evident that wages expenditure of Rs. 1,98,88536/- was inadvertently classified under head "Employee Welfare and other benefit". Because of which total direct expense of Rs. 3,80,72,334/- recorded under head " Employee Welfare and other Benefit" are seen to be comparatively higher than that of actual direct expenses of Rs. 3,06,03,813/- for the year under consideration. Also, the error of wrong classification is also evident from the fact from comparison of correct ratio of Employee Welfare and Other Benefit Expenses to Sales, which is seen to be at 15% (at Sr No. 3), as against the actual ratio of 7% ( at Sr No. 6), which is consistent and in line with the past history. The signific....
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....ering the stock of "plain fabric and sarees" of Rs. 7,83,550/- as mentioned on page no.8 of AS-12 but not considered in the final stock sheet (Page No. 24 of AS-12), the correct total of the stock sheet at page no.24 of Annexure-12 comes at Rs. 85,85,268/-. 44. Thus, there was difference of Rs 1,066,150 (Rs. 9651418 minus 85,85,268/-) on account of totaling mistake/omission as explained above, which is apparent from the stock sheet summary prepared by the survey authorities available at page no. 19 of PB. The remaining insignificant amount of Rs. 375,913/- deserves to be ignored having regard to possibility of human error, voluminous nature of the inventory and estimations adopted by the department. 45. In view of the above, it is evident that the impugned valuation of the stock done by department was not correct as the same was based on eye estimation also. Therefore, the addition of Rs. 14,42,063/- deserves to be deleted. 46. In view of the above, the difference is duly explained and summarized in following table for better understanding and ready reference: Particulars Tally MISSBS Stock valued by Department* Stock Valued on 26.11.2014 ....
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....Singh Circle was 38771713/- (PB No. 21), the same value of the stock is also reflected in stock summary mentioned in the assessment order at page no. 2. 50. The above fact is also supported from statement of Mr. Rajesh Jain, wherein he also stated that valuation has been arrived at taking report from MISSBS software. The Ld. AO on page no 6 of impugned order, has also stated and confirmed that the details of arriving at the valuation of the stock, was report of stock generated by Shri Rajesh Jain from the MISSBS software. In this context, relevant extract of statement of the Shri Rajesh Jain is reproduced herein below: "this report is generated by me from MISSB software and data base of ZSPL on the basis of barcode. This represents the stock position of all stores/factory of ZSPL as on 26.11.2014 for flagship store" 51. It is evident from the above that the basis of arriving at the valuation of the inventory was inventory records maintained under MISSB software only and accordingly, there was no significant difference in stock as per books as well stock as physically found and valued at the time of survey. To support this fact, stock valuation as per MISS....
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....formation gathered during the course of survey may be considered while finalizing the assessment but the same is not conclusive. The Ld. AO is the only person who is required to compute the income on the evidence produced before him. When the evidence was produced before the Ld. AO due consideration and weightage should also be given to the evidences submitted by Appellant, which clearly established that there was only reconciliation difference in stock valuation and no any under valuation of stock. 56. The Ld. AO only choose to rely on findings of the survey team and has passed the impugned order without independent application of his mind. 57. It is humbly submitted that closing stock of previous year become opening stock of subsequent assessment year, for example, closing stock of 31.03.2014 became the opening stock of FY 2014-15, i.e. AY 2015-16. The Ld. AO has duly accepted the opening stock of AY 2014-15. Similarly, closing stock as on 31.03.2015 has been duly accepted, which has been carried forward to AY 2016- 17. Therefore, if the version of Ld. AO for undervaluation of stock as on 26.11.2014 is accepted, this would disturb the chain of assessments. There....
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....on is the same and accepted by the Department. Thereafter, each and every purchase and sale is vouched which is verifiable, therefore, for this reason also, in our considered view, the AO was not justified in making any addition on account of difference in valuation of closing stock. ASSISTANT COMMISSIONER OF INCOME-TAX V.RAM SAHAI WOOL COMBERS (P.) LTD.[2002] 120 TAXMAN 84 (CHD.) (MAG.). The assessee had been consistently following the method of accounting of debiting the entire purchases of machinery spare parts to profit and loss account and such a method had been accepted by the revenue in earlier years. Assuming that if there was some stock of spare parts available with the assessee as at the end of the year, similar stock would be available at the opening day of the accounting year for which adjustment had to be given to correctly arrive at total income of the previous year as per section 4, which levies a charge on income of that particular year. Accordingly, if only addition on account of closing stock of spare parts was made without making adjustment of value of spare parts which must be available in the opening stock, it would give a highly distorted figure of pr....
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....t giving effect to stock ageing. Even otherwise by relying on the said valuation,there exist no significant difference in valuation report of stock as per MISSBS and physical valuation as reported by survey team. 61. It is humbly submitted that impugned addition was on account of survey conducted on 26.11.2014, the records found in the middle of the assessment year under consideration was the basis on which the Ld. AO made the impugned addition. However the Ld. AO failed to pay due heeds to the facts that true trading result is only ascertainable at the end of financial year, wherein closing stock is taken at that time as there is no practice prevalent to account for closing stock in the middle of the accounting year in Tally, this also raises doubt on the survey proceedings and accounting entries of closing stock as on date of survey in accounting software. The Ld. AO mechanically proceeded on the basis of accounting records available at the time of survey, without appreciating that wages expense were wrongly classified under head "Employee Welfare and Other Benefit " and were not considered in trading account. 62. In view of the above, the actions of the Ld. AO ....
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....n so made". 65. In this regard it is humbly submitted that it is not practically possible to valuate the stock with ageing effect in MISSBS software, as before arriving at that figure, cost price/cost reports of the product is required to be derived. cost price of the product can only be ascertained in valuation report of the inventory prepared through internal inventory software-MISSBS, which was basis for survey officials also. Moreover, if it is assumed but not accepted that stock ageing effect is automatically subsumed in valuation of stock as per MISSBS, accepting such proposition will be contrary to stand taken by Ld. AO itself, as he himself accepted opening stock after adjustment of ageing effect. Therefore, this allegation of Ld. AO is answered and controverted. 66. Event otherwise it is not possible to value the inventory by giving effect to stock ageing through MISSBS because there is no enabled feature in the MISSBS software for making necessary adjustment of stock ageing on inventory so valued. It was to overcome this problem and for the purpose of financial reporting the Appellant makes the necessary adjustment pertaining to stock ageing separately o....
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....he said sheet works out to Rs. 85,85,268/-. Therefore, there is a difference of Rs. 10,66,150/- accordingly, the survey team of the department has valued the stock in excess by this amount. For ready reference, a reconciliation statement of the said figure is also enclosed herewith. E(i) It is pertinent to mention here that, wages expenses are required to be classified under appropriate heads. These facts are even admitted by the learned AO, which is evident from the assessment order. Reliance is placed on finding of the learned AO at Page No. 11 para 5.3.3 (C) of the assessment order. The finding is reproduced herein below :- "since, the sale price of an item is only a markup on cost of that item, it is necessary to have ascertained cost of that item first. Had the assessee not considered the wages expenses as costing of such items before hand it would have not been able to determined the sale price". Further, perusal of the above finding, it is evident that the learned AO on one hand has admitted the facts that wages expenses are necessarily to be considered for determining sales value of the stock. However, on other hand the learned AO has not allowed ....
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.... incurred wholly/exclusively for business purpose. 68. At the outset it is humbly submitted before your goodself that the Ld. AO has grossly erred in making lump sum disallowance of Rs. 3,00,000/- in relation to travelling repairs and other expenditures, merely on the assumption that the Appellant has incurred the expenses not wholly and exclusively for the purpose of business. 69. In this regard it is pertinent to discuss the relevant provision of section 37(1) of the Act which is reproduced herein below: Section 37:General. 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". 70. From the bare perusal of the Section 37 it is evident that there are two cases wherein deduction u/s 37(1) is not allowed: * Expenditure incurred is capital in nature. * Expenditure incurred is personal in nature o....
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....aryana) It was noted that the disallowance was made on ad hocbasis without there being any material to justify such disallowance. No specific instances of expenditure had been pointed out which may disentitle the assessee's claim for site expenses. The findings on appeal were affirmed by the Tribunal. No error of law or perversity could be shown by the revenue in the aforesaid finding which may warrant interference. [Para 9] As regards to disallowance telephone and main expenses, the Commissioner (Appeals) had concluded that the audited books of account along with vouchers were produced by the assessee and thereafter the Assessing Officer had failed to show that the said expenditure was not for business purposes. Further, the disallowance was made on ad hocbasis without there being any material which would justify that the amount had been spent for personal use of the directors. The aforesaid findings were confirmed by the Tribunal. [Para 11] Gurudev Singh v. Assistant Commissioner of Income-tax [2017] 88 taxmann.com 741 (Cuttack - Trib.) 10. When the return of income has been filed with supporting account and audit report in Form No. 3CB dul....
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....imesh Sadhu v. ACIT in ITA 11/Kol/2013 Dated 12.11.2014 Assistant Commissioner of Income-tax, Circle-1 v. Ganpati Enterprises Ltd [2013] 32 taxmann.com 262 (Delhi - Trib.) Before first appellate authority, assessee has furnished details of the expenses. The assessee has also pointed out that in Assessment year 2004-05 an ad hoc disallowance of Rs. 5,00,000 was made by the Assessing Officer and it was confirmed by the Commissioner (Appeals) but the Tribunal has deleted the disallowance. The assessee has further pointed out that in assessment year 2005-06 also an ad hoc disallowance of Rs. 1,45,000 was made which was restricted to 90,000 by the Commissioner (Appeals) but the Tribunal has deleted the disallowance. In assessment year 2006-07 also, ad hoc disallowance of Rs. 2,00,000 was made and, it was restricted to 1,00,000 by the Commissioner (Appeals) but the Tribunal has deleted the disallowance. The first appellate authority has gone through all these details and, thereafter, observed that Assessing Officer has not discussed the details of expenses and how assessee fail to prove the genuineness of the expenses. The scheme of Act does not authorize Assessing Offi....
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....e him to make his representation. In the absence of a notice of the kind and such reasonable opportunity, the order passed becomes wholly vitiated. Thus, it is but essential that a party should be put on notice of the case before any adverse order is passed against him. This is one of the most important principles of natural justice. It is after all an approved rule of fair play. The concept has gained significance and shades with time. When the historic document was made at Runnymede in 1215, the first statutory recognition of this principle found its way into the "Magna Carta". The classic exposition of Sir Edward Coke of natural justice requires to "vocate, interrogate and adjudicate". In the celebrated case of Cooper v. Wandsworth Board of Works (1863) 143 ER 414, the principle was thus stated: "Even God did not pass a sentence upon Adam, before he was called upon to make his defence. "Adam" says God, "where art thou? hast thou not eaten of the tree whereof I commanded thee that thou shouldest not eat". 76. In view of the above, facts and circumstances of the case and in light of settled legal position discussed, impugned disallowance of Rs. 3,00,000/- deserve....
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....n which basis, the learned CIT (A) decided the appeal of the assessee company were available with the learned AO." 10. To support the contention so raised in the written submission, reliance was placed on the following evidence / records: Sr. No Document Title Page No. 1. Copy of return of income filed u/s 139(1) of Income Tax Act, 1961("Act") before the income tax officer, Jaipur for AY 2015-2016 1 2. Copy Audit report for the AY 2014-2015 2-16 3. Copy of Stock reconciliation chart between Tally and MISSBS 17 4. Copy of Stock Summary sheet 18 5. Copy of final stock sheet prepared by survey authorities of stock available at Kartapura Indus Area 19 6. Copy of stock sheet prepared by survey authorities of stock of plain fabric and sarees available at Kartarpura Indus Areal 20 7. Copy of stock details as per MISSBS and physical valuation made by survey authorities of stock available on 3Rd Floor at Narainsingh circle 21 8. Copy of profit and loss account extracted at the time of survey 22 9. Reconciliation Chart of physical stock found during the course of survey with stock as per Balance sheet ....
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....al raised by the revenue that, revenue has challenged the finding of the ld. CIT(A) on the three additions made by the ld. AO. 13. We shall be dealing ground no. 1 raised by the revenue and in that ground revenue object to direction of the ld. CIT(A) while directing the ld. AO to delete the addition of Rs. 3,43,11,672/- to the income of the assessee-appellant on account of alleged difference in value of stock found at the time of survey u/s 133A of the Act as undisclosed investment. While accepting the contention ld. CIT(A) erred considering valuing of stock as per books of accounts (as per tally) wages/job charges etc. of Rs. 1,98,88,536/- were required to be considered while correcting the valuation of stock. Revenue further challenges that ld. CIT(A) should not have considered the effect of valuation on account of ageing of stock valuation amounting to Rs. 1,29,81,073/- not reflected in inventory software maintained by the appellant-assessee. Lastly the revenue challenges that residual difference of Rs. 14,42,063/- was considered as insignificant while considering the inventory of Rs. 32 crores. 14. The brief facts related to the issue on hand as emerges from the order of ....
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....ssee in his statement recorded u/s 131 on 26.11.2014. Further, the said procedure has also been acknowledged by Shri Arun Palawat in his statement recorded u/s 131 dated 26.11.2014. Ld. AO noted that perusal of the statement shows that the Sale Prices is determined by inflating the cost of that item by a certain percentage. It is relevant to mention here that the percentage is also fixed based on the type of trade i.e. for wholesale there is a fixed percentage and for retail percentage is different. Since, Sale Price of an item is only a markup on cost of that item, it is necessary to have ascertained cost of that item first. Had assessee not considered the wages expenses as costing of such items beforehand it would have not been able to determine the sale price. Therefore, the claim of assessee that wages paid to labour were not included while reporting the closing stock in its accounting software was considered as contrary to the fact. Even ld. AO noted that, in the parallel inventory software (MISSBS) maintained by the assessee stock on the date of survey stood at Rs. 31,24,00,586/-, which is very close to the physical inventory found during the survey and accordingly ld. AO did....
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....,150 Other difference Rs. 3,75,913 Total Difference Rs. 3,43,11,672 16. As is evident from the record, the valuation of stock on "Tally software" by applying last year GP rate at 28.11% and did reverse calculation of stock. So while preparing the trading result, closing stock of last year was considered as opening stock and then as the actual sale made by the assessee. Thereafter, actual purchases so made is required to be shown on the debit side of the trading account along with the necessary expenditure incurred to bring the closing stock at their reported level. After doing so generally the regular gross margin earned by the assessee is reported and thereby the closing stock amount derived as balance credit. That is how, the survey team derived the stock as per accounting software (Tally) at Rs. 27,95,30,977/-. The appellant-assessee contended that while debiting direct expenses in trading account, the survey team had not taken the wages expenses Rs 1,98,88,356/- incurred during the year which was classified as Indirect Expenses under the head "Employee Welfare & Other Benefits" total of Rs 3,80,72,334/- and further that had the amount of manufacturing wages fo....
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....ring wages for Rs 1,98,88,356/- transferred to trading account, the stock valuation as per tally software would have increased by the same and the difference up the extent of Rs. 1,98,88,536/- required to be considered as explained. Thus, we do not find any infirmity in finding of the ld. CIT(A) so recorded and thereby the ground taken by the revenue has no leg to stand and thereby we confirm the finding of the ld. CIT(A) while directing to delete the addition of Rs. 1,98,88,536/-. As regards the second limb of explanation of the assessee that ageing difference of stock as is regularly followed by the assessee was not considered. Before we proceed to go into the merits of the dispute it was noted that there was no dispute on quantitative records maintained and verified by the survey team, and was found to be in accordance with the software maintained by the assessee, but the dispute which revenue has taken up about the valuation of that stock. As is experienced by the revenue during the survey that the assessee using Tally software for financial reporting and accounting purpose but at the same time assessee-appellant maintains MISSBS inventory software for keeping records of inv....
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....ved from MISSBS software was Rs 21,88,73,000/-, however, after considering the ageing effect, NRV was taken at Rs. 20,54,30,000/-. In the light of those cognisant past practices being followed while preparing the trading results on Tally Software. Considering that being fact while deciding the issue ld. CIT(A) observed as under: * Thus, while preparing the trading a/c on Tally Software during the course of survey, the opening stock was taken at Rs 28,66,09,180/- which was the closing stock of preceding year for which the bifurcation is as under: Stock of Bar Coded Goods kept at Different store and selling Point (Cost arrived from MISSBS software was Rs. 21,88,73,000/- which is reduced by Rs 1,34,40,000/- due to ageing effect) Rs. 20,54,30,000 Stock at factory raw material, semi-finished/ finished goods Rs. 8,11,79180 Total Rs. 28,66,09,180 * Therefore, the closing stock of preceding year was valued at Rs. 20,54,30,000/- as on 31.03.2014 after considering ageing effect of Rs. 1,34,40,000, which has not been disputed by the AO while passing assessment order for AY 2014-15 and accepted this ageing effect of Rs 1.34 cr. All such figures are tak....
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....he opening stock in tally software as on date of survey, the reduced value of opening stock up to Rs 1,34,40,000/- was taken. However the appellant had valued this ageing effect as on date of survey i.e. on 26.11.2014 was of Rs 1,29,81,073/-, in valuation of inventory resulting in reduced value of Stock as per tally software. * As stated above, the appellant has regularly followed valuation of finished goods at lower of cost or net realizable value after following stock ageing effect and the AO had passed the assessment order for AY 2012-13, 2013-14 and AY 2017-18 and had accepted the ageing effect while calculating the stock. * Considering the above discussion, the arguments and contention of the appellant is found to be correct and the reconciliation / difference of Rs 1,29,81,073 is hereby explained due to ageing effect on valuation of stock. At the time of hearing ld. DR did not find any fault with the observations of the ld. CIT(A) and on the facts placed on record upon which ld. CIT(A) has given his finding in favour of the assessee-appellant, the decision cannot go in favour of the revenue, without pointing out that how that finding is incorrect or incon....
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....nored and should be deleted. Second addition confirmed by the ld. CIT(A) is the amount of lump sum disallowance for an amount of Rs. 3,00,000/- made by the ld AO out of travelling, repairs & other expenses u/s 37(1) and 38(2) of the IT Act, 1961 on account of alleged un-verifiability of those expenses and not being incurred wholly/exclusively for the business of the assessee. The facts relating to these two grounds being already discussed herein above while dealing with the appeal of the revenue and therefore, the same are not repeated to avoid duplication but will deal with it when it required to do so while decided grounds of appeal of the assessee. 18.1 As regards the first ground taken by the assessee, same is related to the addition sustained by the ld. CIT(A) being the amount of excess stock found during the course of survey. As discussed herein above the physical stock was calculated and valued at Rs 31,38.42.649/-. Survey team had also valued the physical stock as per inventory software (MISSBS) maintained by assessee at Rs. 31,24,00,586/-. Whereas the physical stock as per accounting software (Tally) was worked out at Rs. 27,95,30,977/-. Ld. AO made addition of exces....
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.... of the business of the assessee. In support of the grounds so raised, it has been argued that the provision of section 37(1) does not provide allowability of the expenditure in part based on the surmises and conjectures and without specifying the specific fault on the part of the assessee. Ld. AO has not identified as to which of the expenses and for what amount was not considerable as for the purpose of the business. The expense pickup were conveyance expenses, repairs and maintenance expenses, vehicle running and maintenance expenses and show room miscellaneous expenses. As is clear from the heading of the expenses itself that all expenditure are expressly demonstrate it nature and once the expenditure is duly recorded in books supported by bills and vouchers no lump sum addition can be sustained in the corporate entity. Even if the same is not for the purpose of the business the same is for the employee welfare and are also considered as allowable and part of perquisite and thereby also stands allowable. Therefore, we do not concur with the finding of the lower authority and the same are directed to be deleted. While arriving at this conclusion we get support from the decision ....
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....tal job work charges paid amounting to Rs. 2,51,80,655/- and this exercise of the AO appears without any justification and was not proper. When all the three recipients did claim that they have received the amount for the work done on behalf of the respondent-assessee, then by and large there was no occasion for the AO to disallow the same and if or any reason the AO was not satisfied with reference to the income shown by the recipients in their respective hands, adverse inference at least could not have been made in the hands of the assessee and if at all then, the AO, assessing the assessee ought to have forwarded such information to the AO, assessing those recipients and action, if deemed proper, could have been taken in their respective hands rather than observing here in the case of the respondent-assessee that the sub-contractors have not shown proper income or the income is disproportionate to the receipts. Therefore, we feel that such an observation and ultimate conclusion by the AO to disallow the adhoc amount was not correct and rightly accepted by both the appellate authorities. 14. In so far as the disallowance out of the Soil testing and surveying expenses is ....
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....003 and when he has been proved to be an asset for the company, in our view, the CIT(A) rightly deleted the said disallowance which was upheld by the ITAT and we also see no reason in interfering with the same. In our view, on the face of overwhelming evidence on record, salary of Rs. 24 lac cannot be said to be excessive or unreasonable and the revenue has not been able to make out as to whether the salary paid to Shri Viswas Jain was not as per the fair market value as provided u/s 40A(2)(a) and 40A(2)(b) of the IT Act. 16. Certainly, aforesaid section provides that the AO, if he is of the opinion that such expenditure is excessive or unreasonable, having regard to the legitimate business needs of the company and the benefit derived by assessee, is not proper, has a chance to disallow any amount over and above which he feels appropriate but the opinion should be formed objectively from the point of view of a prudent businessman and after taking into account the statutory criteria and all relevant circumstances and should not be influenced by immaterial considerations. Therefore, the AO, in our view, has been influenced by extraneous considerations and has not properly ap....