2012 (4) TMI 476 - HC - Income Tax

Rejection of Audit report u/s 142(2A) by the AO - Undervaluation of closing stock - it is submitted that there was a change in method of valuation of closing stock. In this connection, she has drawn our attention to the table noted by the Assessing Officer, who has held that the closing stock was bifurcated into three categories; finished goods, semi finished goods and goods under process - assessee has, before us, filed a chart giving year-wise details of the closing stock from the assessment year 1997-98 to 2005-06 in respect of finished goods, semi finished goods, goods under process and raw material. The said chart indicates that the closing stock was exported or was sold in different time spans in each year - Assessing Officer did not interfere/reject the valuation of the closing stock made by the assessee @ 90%, 74% and 60% of the sale value for finished, semi finished and goods under process - Considering the volume of business and numerous items involved, the assessee has been valuing the finished goods, semi finished goods and goods in progress on the basis of sale price of these items sold in the subsequent year after deducing a particular margin, which has been uniformly followed by the assessee in the earlier and the subsequent years - for assessment year 2003-04, an assessment order was passed on 31st March, 2006 and in the said assessment order no addition whatsoever was made to the closing stock but the method adopted by the assessee for the said assessment year was same - Decided in favor of the assessee Regarding addition of Rs.25,80,879/- made by the AO on account of travelling expenses - Assessing Officer had disallowed the entire expenditure of Rs. 25,80,879/- The tribunal while partly deleting the disallowance held that the expenses were incurred for purpose of business under Section 37 - Held that tribunal has estimated and disallowed 20% of the foreign travel expenditure on the ground that it may not have been incurred wholly and exclusively for the purpose of business - Decided in favor of the assessee Regarding addition u/s 40A(2)(b) of the Act on the ground that excessive/unreasonable expenditure was incurred on getting garments fabricated from associate concerns, namely, R.A. Exports and Sensational Exports - Held that the disallowance had been made mainly on the basis of some technical defaults noted by the A.O. The assessee has satisfactorily explained the absence of GRN or challans, which were not required as the work was being done at the factory premises of the assessee - Assessing Officer did not conduct any investigation or verification into the reasonableness of the said expense with reference to payment made to third parties or fair market charges payable for similar nature of work - Decided in favor of the assessee Regarding rejection of book of accounts - High Court has clearly observed that absence of stock register, in a given situation, may not per se lead to an inference that the accounts were incomplete or false but this issue has to be examined keeping view the other factors, which include fall in gross profit rate - Held that the contention of the Revenue that stock register was not maintained and the relevant column of the auditor‟s report record indicate absence of the stock register, justify rejection of the books of accounts, cannot be accepted - Decided in favor of the assessee

Issues Involved:

1. Valuation of closing stock.
2. Disallowance of travel expenses.
3. Addition of profit margin on sale of raw material to sister concerns.
4. Rejection of books of accounts and application of gross profit rate.
5. Payments to contractors and related disallowances.

Detailed Analysis:

1. Valuation of Closing Stock:

The primary issue revolved around the valuation of the closing stock by the assessee. The Revenue contended that the assessee had changed the method of valuation, leading to an under-valuation of Rs. 1,49,28,900/-. The Assessing Officer (AO) had directed a special audit under Section 142(2A) of the Income Tax Act, 1961, and based on the audit report, rejected the closing stock declared by the assessee. The CIT (Appeals) confirmed this addition, but the tribunal deleted it, stating that there was no change in the method of valuation. The tribunal found that the assessee did not maintain a stock register on a daily basis but undertook physical stock inventory at the end of the financial year, valuing finished goods at 90% of sale value, semi-finished goods at 74%, and goods under process at 60%. The tribunal concluded that the method was systematic, reasonable, and consistently followed in earlier and subsequent years, rejecting the Revenue's contention as baseless and factually incorrect.

2. Disallowance of Travel Expenses:

The AO disallowed Rs. 25,80,879/- of travel expenses incurred by Deven Chachra, related to the partners of the firm, on the grounds that the expenses were not substantiated as business expenses. The tribunal, however, held that Deven Chachra was an employee with relevant qualifications and responsibilities, and the expenses were incurred for business purposes. The tribunal noted that similar expenses were allowed in earlier and subsequent years and estimated that 20% of the expenses might not have been incurred wholly and exclusively for business, thus disallowing only that portion. The Revenue's contention that the tribunal's findings were perverse was rejected, as no substantial question of law arose.

3. Addition of Profit Margin on Sale of Raw Material to Sister Concerns:

The AO added Rs. 1,14,60,996/- on the grounds that the assessee should have charged a profit margin on raw material sold to sister concerns. The tribunal deleted this addition, noting that the transfers were made on commercial expediency, and there was no provision in the Act to make such an addition for lower sale consideration. The tribunal also found no evidence of tax evasion or that the assessee received any money over and above the stated consideration. The Revenue's challenge was dismissed as the tribunal's findings were based on material evidence and were not perverse.

4. Rejection of Books of Accounts and Application of Gross Profit Rate:

For the assessment year 2000-01, the AO rejected the books of accounts due to the non-production of a stock register and other discrepancies, applying a gross profit rate of 32%. The CIT (Appeals) and the tribunal deleted the addition, noting that the assessee's books were audited, and the gross profit rate had substantially increased compared to earlier years. The tribunal found that the reasons for rejecting the books were not justified and that the AO had not unearthed any suppression of production, stock, or profit. The tribunal's findings were upheld, with no substantial question of law arising.

5. Payments to Contractors and Related Disallowances:

The AO disallowed Rs. 83,48,292/- paid to contractors, including related concerns, as bogus expenses. The tribunal deleted the disallowance, noting that the payments were made for labor supplied for stitching jobs at the assessee's factory premises, and the absence of GRN or challans was satisfactorily explained. The tribunal found no evidence that the payments were excessive or that the transactions were not genuine. The tribunal's findings were based on material evidence, and the Revenue's contention that the findings were perverse was rejected.

Conclusion:

The tribunal's findings on all issues were based on material evidence and reasoning, and the Revenue's contentions were found to be baseless and factually incorrect. The appeals were dismissed, with no substantial question of law arising for consideration.

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