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Additions made for undervaluation of stock are unsustainable where books of accounts are not rejected & no adjustment is made to opening stock of subsequent AY: ITAT

2019-TIOL-1641-ITAT-DEL

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘B’ NEW DELHI

ITA No. 1940/Del/2016
Assessment Year: 2009-10

MAHASHAKTI ENGINEERING COMPANY
C/o AKHILESH KUMAR, ADVOCATE, CHAMBER NO.206-07
ANSAL ‘SATYAM’, RDC RAJ NAGAR, GHAZIABAD
PAN NO:AAOFM9129J

Vs

DEPUTY COMMISSIONER OF INCOME TAX
CIRCLE-21(1), NEW DELHI

R K Panda, AM & Kuldip Singh, JM

Date of Hearing: July 15, 2019
Date of Decision: July 22, 2019

Appellant Rep by: Shri Akhilesh Kumar, Adv.
Respondent Rep by: 
Ms Ashima Neb, Sr. DR

Income Tax – Undervaluation of stock – Wrong valuation of scrap.

The assessee a partnership firm engaged in the business of manufacturing of sugar mill machinery and its parts, filed return for relevant AY. During the course of assessment proceedings, the AO observed from the purchase and sale register that the closing stock was undervalued by the assessee. He noted that the last sale was done by the assessee on 25th March, 2009 and purchases made by the assessee on or after 25th March, 2009 was of Rs.1,00,49,794/- from different vendors while the value of closing stock of raw material, work-in-progress and consumables declared by the assessee was only Rs. 31,48,341/-. According to the AO, all the purchases made after the last sale must be included in the closing stock. He, therefore, asked the assessee to produce the raw material/register and reason for the difference. It was stated by the assessee that it had purchased the goods through challans and bills were received afterwards. Since the assessee failed to produce the challans and no stock records were maintained by the assessee, the AO held that all the purchases made after 25th March, 2009 were available with the assessee and had to be included in the closing stock. He, therefore, made addition of Rs.69,01,453/- on account of undervaluation of closing stock. On appeal, CIT(A) upheld the action of the AO.

On appeal, Tribunal held that,

Whether addition for undervaluation of stock can be made if books of account are not rejected and no adjustment is made to the opening stock of the subsequent year – NO : ITAT

++ admittedly, no defect has been pointed out by the AO in the books of account except doubting the valuation of closing stock. It was found the VAT authorities have scrutinized the records and have accepted the purchase, sales and closing stock without any mistake. The rate of net profit declared by the assessee at 2.43% for the impugned assessment year is higher than the rate of net profit declared in the immediately preceding four years. Further, the counsel for the assessee during the course of hearing had demonstrated that the goods were received through challans earlier whereas the invoices were raised later and were entered in the books of account. Since the AO in the instant case has not made any adjustment to the opening stock of the subsequent year and for assessment year 2012-13, no addition has been made in the order passed u/s 143(3) and the books of account were never rejected, therefore, the impugned addition should not have been made on account of valuation of closing stock. Their is merit in the argument of the counsel that when the profit of the subsequent year is higher than the profit of the current year, there was no point on the part of the assessee to suppress its valuation of closing stock which would have become opening stock of the subsequent year;

++ Gujarat High Court in the case of CIT vs. Shakti Industries, has held that where the books of accounts were not rejected, addition of amounts shown in the audited accounts is not sustainable. The Madras High Court in the case of CIT vs. Smt. Sakuntala Devi Khetan has held that unless and until the competent authority under Sales Tax Act differs or varies with closing stock of assessee, return accepted by said authority is binding on income-tax authorities and the Assessing Officer, in such a case, has no power to scrutinize return submitted by the assessee. There is merit in the argument of the counsel that considering the size of business of the assessee it is not possible to receive 20% of the material in five days as against 80% of material in the whole year. Thus it was held that the CIT(A) is not justified in sustaining the addition of Rs.69,01,453/- on account of undervaluation of closing stock. Following the same reasoning, the addition of Rs.91,963/- on account of finished stock is also deleted.Assessee’s appeal partly allowed

ORDER

Per: R K Panda:

This appeal filed by the assessee is directed against the order dated 20th March, 2015 of the CIT(A)-13, New Delhi relating to assessment year 2009-10.

2. The grounds of appeal No.1 and 2 raised by the assessee read as under:-

“1. Because ld. CIT(A) erred in sustaining the addition of Rs. 74,90,738/- (69,01,453+91,963+4,97,322) , on a/c of under valuation of closing stock,

a) merely because invoices of raw material etc. of Rs. 69,01,453/- are booked in the end of year against the material read, earlier despite verifying all the evidences as per detailed enquiries by him on the claim and recorded wrong findings in stating that claim is not substantiated and purchases are unaccounted etc.

b) without appreciating the facts on record addition of Rs. 4,97,322/- on a/c of estimation of scrap and of Rs. 91963/- on a/c of valuation of finished goods.

2. Because ld. CIT(A) further failed in appreciating that no defect in stock records/book of accounts was found by him beside the accounts are not rejected by AO and stock records were under the control/inspection of excise authorities which are also accepted by Vat authorities with declared closing stock and order is perverse.

3. Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of manufacturing of sugar mill machinery and its parts. The manufacturing process of these machinery items and parts involves cutting of MS sheet, angle, channel etc., and welding/fabrication/assembling of various items as per specification and design of the customers, which takes approximately one to six months to manufacture certain items. It filed its return of income on 30th September, 2009 declaring an income of Rs.15,67,050/-. During the course of assessment proceedings, the Assessing Officer observed from the purchase and sale register that the closing stock was undervalued by the assessee. He noted that the last sale was done by the assessee on 25th March, 2009 and purchases made by the assessee on or after 25th March, 2009 was of Rs.1,00,49,794/- from different vendors while the value of closing stock of raw material, work-in-progress and consumables declared by the assessee was only Rs.31,48,341/-. According to the Assessing Officer, all the purchases made after the last sale must be included in the closing stock. He, therefore, asked the assessee to produce the raw material/register and reason for the above difference. It was stated by the assessee that it has purchased the goods through challans and bills were received afterwards. Since the assessee failed to produce the challans and no stock records were maintained by the assessee, the Assessing Officer held that all the purchases made after 25th March, 2009 are available with the assessee and has to be included in the closing stock. He, therefore, made addition of Rs.69,01,453/- on account of undervaluation of closing stock. Similarly, the Assessing Officer made addition of Rs.91,963/- on account of valuation of closing stock of finished goods.

4. The Assessing Officer further noted that the assessee has shown 47365 Kgs. of closing stock of scrap valued @ Rs.16 per Kg. (plus 8.24% ED). The Assessing Officer asked the assessee to explain the reason as to why huge quantity of scrap has been accumulated and no sale of scrap has been made during the year. It was explained by the assessee that the total scrap shown in the books is not totally scrap and still usable in the manufacturing process. The scrap declared is actually the small cut-piece of iron sheets which are generated during the manufacturing process and is used as and when required for making the small parts. Therefore, the scrap is not sold and accumulated for future use. The assessee also produced the stock register of scrap only for the last year as against three years asked by the Assessing Officer. The Assessing Officer, therefore, rejected the valuation of scrap by the assessee and held that out of the total scrap declared by the assessee, 70% of the scrap which comes to 35,523 Kgs. is raw material and valued the same @ Rs.30 per Kg and made addition of Rs.4,97,322/-. Thus, the Assessing Officer made addition of Rs.74,90,738/- to the total income of the assessee on account of valuation of closing stock of raw material, finished goods and scrap.

5. In appeal, the ld.CIT(A) upheld the action of the Assessing Officer by observing as under:-

“4.3. The reasons recorded by AO, submission of the appellant and the facts on record are considered. The appellant attempted to give various explanation regarding purchases made on or after the sale for the relevant accounting year is closed. However, the theory of purchases made after 25.03.2009 is not substantiated by any documentary evidence. The explanation regarding control of Central Excise Authorities and maintenance of RG – 1 is not adequate to negate the fact that there is unaccounted purchase and undervaluation of stock. The Ld. AO verified all the books of accounts including the RG-1 and came to the conclusion that the purchases made on or after 25.03.2009 should have been reflected in the closing stock. The appellant also failed to explain the accounting entries to show how the purchase made during the year are reflected in the books of accounts which are again included in the purchases made on or after 25.03.2009. Regarding valuation of finished goods, the onus is on the appellant to produce necessary documentary evidence regarding cost of the product which was not discharged. Undervaluation of closing stock as included in the scrap is based on the explanation given by the appellant. As per the explanation of the appellant, the quantity of scrap is very high as some of the scrap is reusable and accumulated for future use. In that case the estimation of value of closing stock on the basis of purchase of raw material is justified. In these facts and circumstances, the addition made for the undervaluation of stock is confirmed and the grounds of appeal are dismissed.”

6. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.

7. The ld. counsel for the assessee strongly challenged the order of the CIT(A) in confirming the addition made by the Assessing Officer on account of valuation of closing stock of raw material, finished goods and scrap. He submitted that the assessee maintained Excise register for purchase and sale. The books of account are not rejected and accepted by the Assessing Officer as well as the CIT(A). The VAT authorities have assessed the assessee without any defect either in the books of account or on account of purchase or sales etc. Referring to various pages of the paper book, the ld. counsel for the assessee drew the attention of the Bench to the purchases which were received earlier through challans, but, were entered subsequently in the books of account. He submitted that although the challans were produced before the Assessing Officer as well as the CIT(A), however, they have not addressed this issue and the Assessing Officer has erroneously alleged that the challans were not produced . So far as the observation of the CIT(A) that the purchases made after 25th March, 2009 are not supported by any bills and vouchers is concerned, he submitted that the same is also erroneous since the purchases were never doubted by anybody and their doubt is only about the receipt of material against such purchases through challans. He submitted that although the ld.CIT(A) has thoroughly examined the books of account which were produced before him along with the invoices etc., however, he has not appreciated the facts properly. Further, if the version of the Assessing Officer and CIT(A) are accepted, then, 20% of the material were purchased in the last five days as against 80% material purchased in the whole of the year is neither practicable nor possible. Referring to paper book 186, he submitted that trading results/closing stock was always accepted since inception and the current year GP is higher than the preceding years. He submitted that net profit of this year i.e., 2009-10 is 2.43% as against 0.84% for assessment year 2008-09, 1.27% for assessment year 2007-08, 1.84% for assessment year 2006-07 and 1.94% for assessment year 2005-06. Further, the current year closing stock should be the opening stock of the subsequent year and the closing stock of the current year has been accepted as the opening stock of subsequent year as declared. Further, although the case for assessment year 2012-13 was under scrutiny, however, no addition has been made on account of undervaluation of closing stock. He further submitted that the assessee had no advantage by showing lesser closing stock in current year as in the subsequent years the assessee has declared more profits.

8. So far as addition of Rs.91,965/- on account of undervaluation of finished goods and Rs.4,97,322/- on account of under valuation of scrap is concerned, the ld. counsel for the assessee drew the attention of the Bench to the order of the Tribunal in the case of M/s Mahashakti Machines Pvt. Ltd., sister concern of the assessee, vide ITA No.2823/Del/2010, order dated 29th April, 2011, wherein under identical circumstances, the addition made on account of valuation of scrap by the Assessing Officer which was upheld by the CIT(A) has been deleted by the Tribunal. So far as the addition of Rs.91,965/- on account of valuation of finished goods is concerned, the ld. counsel for the assessee strongly opposed the order of the Assessing Officer and CIT(A). Relying on various decisions, the ld. counsel for the assessee submitted that no addition can be made to closing stock without making adjustment to opening stock. Referring to the decision of the Hon’ble Supreme Court in the case of CIT vs. Dynavision Ltd. (2012) 348 ITR 380 (SC) = 2012-TIOL-61-SC-IT, he submitted that the Hon’ble Supreme Court in the said decision has held that where the assessee had been consistently following the method of valuation of closing stock and the Assessing Officer revalued the closing stock without making any adjustment to opening stock, any addition on account of under valuation of closing stock was unjustified. Referring to the decision of the Hon’ble Madras High Court in the case of CIT vs. Smt. Sakuntala Devi Khetan (2013) 352 ITR 484 (Mad) = 2013-TIOL-226-HC-MAD-IT, he submitted that the Hon’ble High Court in the said decision has held that unless and until the competent authority under Sales Tax Act differs or varies with closing stock of assessee, return accepted by said authority is binding on income-tax authorities and the Assessing Officer, in such a case, has no power to scrutinize return submitted by assessee. Similar view has been expressed by the Hon’ble Madras High Court in the case of CIT vs. Anandha Metal Corpn. (2005) 273 ITR 262. Referring to the decision of the Hon’ble Delhi High Court in the case of CIT vs. Superior Crafts (2013) 353 ITR 101 (Del) = 2012-TIOL-235-HC-DEL-IT, he submitted that the Hon’ble Delhi High Court in the said decision has held that no addition on account of closing stock or trading results is possible if the books of account are not rejected and when the GP is higher. He also relied on the following decisions for the above proposition:-

(i) CIT vs. Pashupati Nath Agro Food Products, ITA No.165/2010 = 2017-TIOL-730-ITAT-ALL, order dated 04.05.2017 (All); and

(ii) CIT vs. Shakti Ind. (2013) 36 Taxmann.com 16 (Guj).

9. He accordingly submitted that the order of the CIT(A) in sustaining the addition made by the Assessing Officer on account of valuation of closing stock of raw material, finished goods and scrap is uncalled for.

10. The ld. DR, on the other hand, heavily relied on the order of the Assessing Officer and CIT(A). She submitted that acceptance of purchase and sale and closing stock by the VAT authorities is not sufficient for accepting the valuation of closing stock for income-tax authorities. She submitted that the assessee is not maintaining any cost records and no documents were produced before the Assessing Officer or CIT(A) to their satisfaction to substantiate the valuation. Therefore, either the order of the CIT(A) be upheld or the mater may be restored to the file of the CIT(A) or Assessing Officer as the case may be.

11. We have considered the rival arguments made by both the sides and perused the orders of the lower authorities and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer made an addition of Rs.69,01,453/- to the total income of the assessee on account of undervaluation of closing stock on the ground that the assessee has not accounted for the purchases made after the last date of sale of 25th March, 2009. Since, according to the Assessing Officer, the purchases made from different vendors after the 25th March, 2009 was Rs.1,00,49,794/- and the assessee has declared the closing stock of raw material, WIP and consumables at Rs.31,48,341/-, therefore, the Assessing Officer made addition of Rs.69,01,453/- which has been upheld by the CIT(A). It is the submission of the ld. counsel for the assessee that the products are excisable items and the assessee is maintaining the purchase and sales register i.e., RG-23, Part I, RG-1 etc., and the books of accounts were audited and no mistake has been pointed by the auditors or the VAT authorities who have assessed the assessee and since the accounts were never rejected by the lower authorities, therefore, no addition can be made on account of undervaluation of closing stock. It is also the submission of the ld. counsel for the assessee that in subsequent year the assessee has declared higher income and will not get any benefit by undervaluing its closing stock which becomes the opening stock of the subsequent year. It is also his submission that when the books of account are not rejected and no addition has been made on account of valuation of closing stock in assessment year 2012-13 in the order passed u/s 143(3) and net profit rate declared by the assessee during the year is higher than the last four years, therefore, no addition is called for on this account.

11.1 We find some force in the above arguments of the ld. counsel for the assessee. Admittedly, no defect has been pointed out by the Assessing Officer in the books of account except doubting the valuation of closing stock. We find the VAT authorities have scrutinized the records and have accepted the purchase, sales and closing stock without any mistake. The rate of net profit declared by the assessee at 2.43% for the impugned assessment year is higher than the rate of net profit declared in the immediately preceding four years. Further, the ld. counsel for the assessee during the course of hearing had demonstrated before us that the goods were received through challans earlier whereas the invoices were raised later and were entered in the books of account. Since the Assessing Officer in the instant case has not made any adjustment to the opening stock of the subsequent year and for assessment year 2012-13, no addition has been made in the order passed u/s 143(3) and the books of account were never rejected, therefore, we are of the considered opinion that the impugned addition should not have been made on account of valuation of closing stock. We further find merit in the argument of the ld. counsel that when the profit of the subsequent year is higher than the profit of the current year, there was no point on the part of the assessee to suppress its valuation of closing stock which would have become opening stock of the subsequent year.

11.2 The Hon’ble Gujarat High Court in the case of CIT vs. Shakti Industries (supra) has held that where the books of accounts were not rejected, addition of amounts shown in the audited accounts is not sustainable. The Hon’ble Madras High Court in the case of CIT vs. Smt. Sakuntala Devi Khetan (supra) has held that unless and until the competent authority under Sales Tax Act differs or varies with closing stock of assessee, return accepted by said authority is binding on income-tax authorities and the Assessing Officer, in such a case, has no power to scrutinize return submitted by the assessee. The relevant observation of the Hon’ble High Court at para 7 and 8 of the order reads as under:-

“7. This Court in the above said decision had found that unless and until the competent authority under the Sales Tax Act differs or varies with the closing stock of the assessee, the return accepted by the Commercial Tax Department under the TNGST Act is binding on the Income Tax Authorities and the Assessing Officer, therefore, has no power to scrutinise the return submitted by the assessee to the Commercial Tax Department and accepted by the said authorities. Further, it is observed therein that the Assessing Officer has no jurisdiction to go beyond the value of the closing stock declared by the assessee and accepted by the Commercial Tax Department. In this case, admittedly, the assessee had placed the sales tax return before the Assessing Officer in respect of the assessment years 1998-99 to 2001-02. Therefore, sufficient materials are placed before the Assessing Officer in respect of those assessment years viz., the sales tax returns filed by the assessee and accepted by the authorities.

8. The Tribunal, therefore, rightly found that the Department could not have made the addition merely on the basis of the statement of third parties. Consequently, the Tribunal set aside the order of the first appellate authority and directed the Assessing Officer to adopt the figures of turnover finally asessed by the sales tax Authorities and apply the G.P. rate accordingly. We find that the order passed by the Tribunal following the order passed by this Court in Anandha Metal Corporation case is perfectly in order and does not warrant any interference.”

12. We also find merit in the argument of the ld. counsel that considering the size of business of the assessee it is not possible to receive 20% of the material in five days as against 80% of material in the whole year. In view of the above discussion, we are of the considered opinion that the ld.CIT(A) is not justified in sustaining the addition of Rs.69,01,453/- on account of undervaluation of closing stock. Following the same reasoning, the addition of Rs.91,963/- on account of finished stock is also deleted.

12.1 So far as the addition of Rs.4,97,322/- on account of valuation of scrap is concerned, we find identical issue had come up before the Tribunal in the case of sister concern of the assessee, namely, M/s Mahashakti Machines Pvt. Ltd. (supra), wherein the Tribunal deleted the addition made by the Assessing Officer and sustained by the CIT(A) by observing as under:-

“7. We have carefully considered the rival submissions in the light of the material placed before us. We find substance in the submission of learned AR that there was no material to come to a finding that any excess scrap was generated during the year under consideration. It was only an inference drawn by the Assessing Officer on the basis of scrap generation figures of subsequent years. In our opinion, that could give rise to a suspicion, but in the absence of any material to show that any excess scrap was generated during the year under consideration, it cannot be said that any addition was called for particularly in the facts of the case when it is the case of the assessee that it has been maintaining stock register with respect to manufacturing and also for generation of scrap. It is observed that the trading result of the assessee have been accepted by the Assessing Officer and no addition whatsoever has been made on that account, in the absence of any material to suggest that any excess scrap either was generated during the year under consideration or any excess scrap was sold by the assessee during the year under consideration, we find no justification in the upholding of the addition by the CIT(A). Finding substance in the submission of learned AR, we delete the addition in its entirety.”

13. Respectfully following the decision of the Tribunal in the case of sister concern of the assessee, we delete the addition on account of valuation of scrap. Grounds of appeal No.1 and 2 of the assessee are accordingly allowed.

14. Ground No.3 raised by the assessee reads as under:-

“3. Because ld. CIT(A) erred in sustaining the lump sum additions of Rs. 2,29,551/-, out of various heads which were made with general remarks without a single instance of any specific exp. even after detailed examination by both the ld. lower authorities.”

15. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings made addition of Rs.2,29,551/- out of various expenses incurred by the assessee such as car running and maintenance expenses, tour and travel, miscellaneous expenses, food and tea expenses, repair and maintenance expenses, cartage and freight expenses etc., on estimate basis on the ground that vouchers for the expenses were not properly maintained.

16. In appeal, the ld.CIT(A) upheld the action of the Assessing Officer by observing as under:-

“6.3 The reason given by AO, submission of the appellant and the facts on record are considered. The AO disallowed the amount as the appellant failed to produce proper vouchers for these expenses. Thus, there is an element of personal use in these expenses which is not in the nature of business. Against this, the submission of the appellant does not have any merit. To disallow such expenditure of personal in nature, the AO need not go to the rejection of books of accounts which requires higher degree of infirmities in maintaining accounts. At the same time, the nature of expenses disallowed by AO cannot be claimed to have incurred wholly for the purpose of business. In view of this, the estimation of the AO is found to be justifiable hence confirmed. The ground of appeal is dismissed.”

17. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal.

18. The ld. counsel for the assessee submitted that full details were given before the Assessing Officer along with bills, vouchers etc. Not a single defect was pointed out by him. Therefore, in absence of any specific mistake or defect pointed out by the Assessing Officer or CIT(A), the addition is uncalled for.

19. The ld. DR, on the other hand, heavily relied on the Assessing Officer and the CIT(A).

20. We have considered the rival arguments made by both the sides and perused the material available on record. We find the Assessing Officer disallowed an amount of Rs.2,29,551/- out of various expenses on ad hoc basis on the ground that some of the vouchers are improper and some of the expenses are unvouched. We find the ld.CIT(A) sustained the addition the reasons for which have already been reproduced in the preceding paras. It is an admitted fact that the accounts of the assessee are audited and no defects are pointed out either by the auditors or the Revenue. We find the Assessing Officer disallowed the amount on estimate basis on the ground that the vouchers are improper or unvouched. When the vouchers are either not available or improper, the expenses cannot be allowed. It is the settled proposition of law that for allowing any expenditure the onus is always on the assessee to substantiate with evidence to the satisfaction of the Assessing Officer regarding the allowability of such expenditure. Since, in the instant case, the assessee failed to satisfy the Assessing Officer with proper vouchers, therefore, disallowance of expenses on estimate basis is justified. However, the disallowance appears to be on the higher side. Considering the totality of the facts of the case, we are of the considered opinion that an addition of Rs.50,000/- on ad hoc basis under the facts and circumstances of the case will meet the ends of justice. We hold and direct accordingly. The Assessing Officer is directed to restrict the addition to Rs.50,000/-. The ground raised by the assessee is partly allowed.

21. In the result, the appeal filed by the assessees is partly allowed.

(The decision was pronounced in the open court on 22.07.2019)

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