2012 (8) TMI 15 - AT - Income Tax

Addition on account of the excess stock found during the course of survey Held that - Some stock of sarees goes out of fashion and fetches very less value which may have even less than the cost price thereof and no suitable deduction on this count was allowed by the AO while valuing the stock of the assessee - assessee has produced copies of accounts in respect of several creditors which shows that there is already a trade cycle of 2 to 4 months from the receipt of goods to the payment made by the assessee to the creditors - entire addition of Rs.15,00,210/- on account of excess stock found at the time of survey, could not be sustained in the hands of the assessee - addition on account of excess stock found during the course of survey is restricted to Rs.5 lacs as against the addition of Rs.15,00,210/- made by the AO - appeal of the Revenue is partly allowed.

Summary

Issues:
1. Addition of excess stock found during survey
2. Deletion of addition on account of unexplained packing expenses
3. Deletion of addition for interest payment on non-business purposes

Analysis:

Issue 1: Addition of excess stock found during survey
The Revenue appealed against the deletion of an addition of Rs.15,00,210 made by the AO for excess stock found during a survey. The Assessee argued that the stock valuation during the survey was adhoc, and no detailed inventory was provided by the Department. The Assessee contended that stock received on consignment basis was not reconciled properly. The Tribunal noted that the AO did not consider various factors, such as the trade cycle of the business and the nature of fashion goods, while valuing the excess stock. Ultimately, the Tribunal partially allowed the Revenue's appeal, restricting the addition to Rs.5,00,000.

Issue 2: Deletion of addition on account of unexplained packing expenses
The Revenue contested the deletion of an addition of Rs.94,465 for unexplained packing expenses. The Assessee provided a ledger account showing a corrective entry for the expenses, justifying the deletion by the CIT(A). The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this issue.

Issue 3: Deletion of addition for interest payment on non-business purposes
The Revenue challenged the deletion of an addition of Rs.61,169 for interest payment on non-business purposes. The Assessee argued that it had sufficient interest-free funds from trade creditors to cover the interest-free advances made. However, the Tribunal found that the capital and unsecured creditors were insufficient to justify the interest-free loans given to a sister-concern. Relying on precedents, the Tribunal allowed the Revenue's appeal on this issue.

In conclusion, the Tribunal partly allowed the Revenue's appeal regarding excess stock, dismissed the appeal on unexplained packing expenses, and allowed the appeal on interest payment for non-business purposes. The Assessee's cross objection was dismissed, resulting in a partial allowance of the Revenue's appeal.