2012 (2) TMI 303 - AT - Income Tax

Additions on account of undervaluation of Stocks - Held That - Sales of 40,000 pieces of HUB PH/Type, sales have been reflected in stock register, assessee has not been able to fully substantiate his argument and, therefore, taking into consideration the totality of the circumstances, the addition of Rs.7,60,000/- (40000 pieces x Rs.19/- ) is confirmed, out of the addition of Rs.8,17,050/- and the relief allowed is Rs.57050/- is justified. Dis-allowances to the tune of 7,53,949 as CIT(A) has not given any categorical finding - Held That - Assessee had been following consistent method of accounting for valuing at cost or market value, whichever is less, and also most of the items in the closing stock are out of the opening stock and, whatever, items had been purchased, they have been sold and thus, the AO was not justified to adopting the rates which have been mentioned in the stock register in an adhoc manner. Thus, the assessee is entitled to relief of a sum of Rs.7,53,949/- . AO disallowed interest as advances were given without any business expediency - Held That - In view of S.A.Builders(Supreme Court), held that the advances were made for commercial use, hence impugned disallowance was deleted.

Summary

Issues:
1. Addition of Rs.8,46,815/- on account of undervaluation of stock
2. Deletion of addition of Rs.7,53,949/- due to alleged under-valuation of closing stock
3. Deletion of addition of Rs.43,600/- under Section 36(1)(iii) of the Income-tax Act, 1961

Analysis:

Issue 1:
The Revenue challenged the deletion of the addition of Rs.8,46,815/- made by the AO on account of under-valuation of stock. The CIT(A) confirmed an addition of Rs.7,60,000/- out of the total addition, granting relief of Rs.57,050/-. The CIT(A) found that the assessee consistently followed a method of accounting for valuing at cost or market value, whichever is less. The CIT(A) upheld his findings based on the material presented and submissions made, dismissing Ground No.1 of the Revenue.

Issue 2:
The Revenue contested the deletion of the addition of Rs.7,53,949/- from the total addition, claiming the CIT(A) did not provide evidence that the Last In First Out (LIFO) method was consistently followed by the assessee. The CIT(A) found that the assessee had been following a consistent accounting method and that the AO's adoption of rates from the stock register was unjustified. Consequently, the addition was deleted, and the Revenue's challenge was dismissed.

Issue 3:
Regarding the addition of Rs.43,600/- made under Section 36(1)(iii) of the Act, the AO disallowed interest on advances given without business expediency. The CIT(A), following the Supreme Court's decision in a relevant case, ruled that the advances were made for commercial purposes, thus deleting the disallowance. The CIT(A) found commercial expediency in the advances, leading to the dismissal of the Revenue's challenge on this issue.

In conclusion, the appeal of the revenue and the Cross Objections filed by the assessee were dismissed, with the findings of the CIT(A) being upheld on various grounds, including the valuation of stock and disallowance under Section 36(1)(iii) of the Income-tax Act, 1961.