2012 (9) TMI 34 - AT - Income Tax

Addition made during assessment u/s 143(3) of amount surrendered by assessee in respect of unexplained stock and cash during the survey - Revenue contended that assessee must honour his surrender - Held that - It is assessee s contention that closing stock mentioned in Trading A/c includes the stock surrendered at the time of survey. It is AO s contention that the surrender is over and above this closing stock. It is observed that there is a big variance in the valuation of stock by both sides and both sides have failed to substantiate their respective claims, hence there is need to estimate profit. We find that the net profit shown by the assessee is 548570.47 after depreciation and interest which is about 2.54 % of gross sales. As discussed above the book results cannot be accepted as the valuation of stock shown by the assessee is not based on any sound accounting principle and AO s version cannot be accepted for want of any independent findings, considering the facts in totality and in the interest of justice and fair play, we direct the AO to take net profit rate at 5 % When profit is estimated than all the related expenses are deemed to be allowed and further independent additions of expenses is not called for. W.r.t deduction u/s 80G, it is observed that receipt is given by organisation, registered and eligible for grant of 80G deduction, hence AO is directed to allow deduction u/s 80G.

Summary

Issues:
1. Correctness of findings of CIT [A] deleting additions made by AO.
2. Discrepancy in stock valuation and cash surrender during survey.
3. Assessment of gross profit margin and valuation of stock.
4. Disallowance of expenses and donation claimed by the assessee.

Analysis:
1. The Revenue challenged the CIT [A]'s decision to delete additions of 14.30 lacs made by the AO. The survey revealed a stock valuation discrepancy, with the assessee surrendering unexplained stock and cash. The AO added 14.30 lacs to the returned income, which the CIT [A] later deleted, citing that additions were based on a tentative trading account, not the audited one.

2. The survey operation highlighted a stock valuation difference of Rs. 14 lacs, with an arithmetical error corrected to Rs. 11,29,447. The assessee justified the difference during assessment, claiming the surrendered stock was included in the closing stock. However, the AO rejected this, adding the surrendered amount to the returned income, leading to the appeal.

3. The assessment of the gross profit margin involved conflicting claims regarding the inclusion of surrendered stock in the closing stock. The audited trading account showed a closing stock of Rs. 45,75,273, with the assessee arguing it included the surrendered stock. The Tribunal analyzed the valuation methods, noting discrepancies in stock valuation by both parties. Unable to substantiate claims, the Tribunal estimated the net profit rate at 5% of sales, resulting in sustained additions to cover discrepancies.

4. The assessee's appeal addressed the disallowance of expenses under various heads, including a donation claimed. The Tribunal allowed the appeal, estimating net profit at 5% of gross sales, deeming related expenses allowed. Additionally, the Tribunal directed the AO to allow the donation claimed under section 80G, as the organization was eligible for deduction.

This comprehensive analysis covers the key issues addressed in the judgment delivered by the Appellate Tribunal ITAT, Mumbai, providing a detailed overview of the legal proceedings and decisions made.