2002 (2) TMI 1281 - AT - Income Tax

Summary

Issues Involved:
1. Preparation of inventory and quantification of stocks.
2. Valuation of stocks.
3. Discrepancy between stock as per books and physical inventory.
4. Method of stock valuation during search.
5. Rejection of stock registers maintained by the assessee.
6. Denial of natural justice to the assessee.
7. Legality and correctness of the authorities' action.
8. Difference in opinion between the Accountant Member and the Judicial Member on the method of stock valuation.

Issue-wise Detailed Analysis:

1. Preparation of Inventory and Quantification of Stocks:
The primary dispute in the appeals revolves around the preparation of inventory and quantification of stocks during a search conducted on the premises of the assessees. The Revenue authorities did not find any valuable asset or papers and proceeded to inventorize the stock, which the assessees disputed. The assessees argued that the inventory was based on estimations and hypothetical calculations without physical weighment, leading to a significant discrepancy between the stock as per books and the inventory prepared by the searching party.

2. Valuation of Stocks:
The method of stock valuation adopted by the Revenue authorities was contested. The assessees maintained that the valuation was not based on physical weighment but on estimations, which were inaccurate. They argued that iron and steel, being heavy materials, required physical weighment using cranes and weighbridges, which was not done. The Revenue, however, claimed that the valuation was scientific and near accurate, based on detailed inventory and rough working sheets.

3. Discrepancy Between Stock as per Books and Physical Inventory:
There was a notable discrepancy between the stock as per the books of account and the physical inventory prepared by the Revenue authorities. The assessees contended that the stock as per the books, regularly checked by the Central Excise authorities, should be accepted as correct. The Revenue, on the other hand, argued that the discrepancy indicated unaccounted purchases and sales, warranting additions to the assessees' income.

4. Method of Stock Valuation During Search:
The method of stock valuation during the search was a significant point of contention. The assessees argued that the authorities should have adopted physical weighment, the most accurate method, instead of estimations. The Revenue maintained that the adopted method was the next best available, considering the practical constraints of physically weighing large quantities of heavy materials.

5. Rejection of Stock Registers Maintained by the Assessee:
The assessees argued that the rejection of stock registers, regularly inspected and authenticated by the Central Excise authorities, was unjustified. They contended that the authorities did not find any omissions or defects in the stock registers, and the estimation method adopted was incorrect and unscientific.

6. Denial of Natural Justice to the Assessee:
The assessees claimed that natural justice was denied as the Commissioner of Income-tax approved the draft assessment orders without giving them an opportunity to be heard. However, this point was not considered fatal by the Tribunal.

7. Legality and Correctness of the Authorities' Action:
The Tribunal found the action of the authorities in estimating the stock without physical weighment to be legally untenable and factually incorrect. The Tribunal emphasized that the accounts maintained in the course of business should be accepted as correct unless proven otherwise. The authorities failed to provide satisfactory reasons for rejecting the stock books and resorting to estimation.

8. Difference in Opinion Between the Accountant Member and the Judicial Member:
The Accountant Member held that the authorities were not justified in estimating the stock without physical weighment, especially when the assessees maintained regular books of account checked by the Central Excise authorities. The Judicial Member, however, opined that the method adopted by the Department, though not wholly scientific, was the next best possible approximation under the circumstances. The Third Member agreed with the Accountant Member, emphasizing that no addition could be made based on the sampling method of stock verification as per the jurisdictional High Court's decision.

Conclusion:
The Tribunal directed the Assessing Officer to accept the stocks disclosed by the assessees as per the stock registers maintained and regularly checked by the Central Excise authorities. The appeals were allowed, and the additions made based on the estimated stock valuation were deleted.