2013 (8) TMI 815 - AT - Income Tax

Search and seizure - Shortage of stock found during search and seizure - CIT deleted addition made by A.O. - Whether order made by CIT is without any basis - Held that - CIT is giving the basis of his decision that the shortage of finished goods occurred only on account of non inclusion of unfinished jumbo reel/parent reel lying on the floor which was subsequently cut into small reels and entered into RG-1 register against production on 14.07.2009 and 15.07.2009. This basis given by CIT(A) in support of his decision is totally contrary to the facts. If some jumbo reels and parent reels lying on the floor on the date of search i.e. on 16.07.2009 were not included in the inventory of finished goods then how such non inclusion in the inventory of finished goods on the date of search can explain the finished goods as per RG-1 register on 16.07.2009. The basis of Ld. CIT(A) is this that from the inventory of goods, it is clear that inventory of unfinished reels on the floor was not taken in stock as on 16.07.2009. Even if it is correct, it is not relevant for the purpose of explaining the shortage in the stock of finished goods on the date of search because it is admitted position of fact that in the RG-1 register, only finished goods is entered as production and therefore, the search team was required to take stock of only finished goods for the purpose of comparing the available stock of finished goods as compared to book stock of finished goods. There is no basis of exclusion form opening stock of finished goods as on 16.07.2009 because the production on 14.07.2009 and 15.07.2009 is included in the RG-1 register and the same must be available with the assessee on the date of search i.e. 16.07.2009 in the form of finished goods and the same cannot be explained by availability of unfinished goods on the date of search. The exclusion on account of dispatch on 16.07.209 is also without any basis in the facts of the present case when there is no finding given by CIT(A) that such dispatch on 16.07.2009 is before the inventory taken by the search party. Generally, the search is carried in the morning hours and hence, any dispatch on the date of search cannot be before taking the inventory by the search party and in some cases, there can be such dispatch but then this has to be brought to the notice of the search party and evidence may be brought on record about the time of dispatch and the time of taking inventory by the search party and in the absence of any such evidence produced by the assessee, the reconciliation statement is not acceptable - There order of CIT is without any basis and reversed - Decided in favour of revenue.

Summary

Issues Involved:
1. Admission of additional evidence without giving the Assessing Officer (A.O.) an opportunity to comment, violating Rule 46A of the I.T. Rules.
2. Merits of the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)], specifically regarding the deletion of the addition made by the A.O. for the alleged shortage of stock.

Issue-wise Detailed Analysis:

1. Admission of Additional Evidence (Rule 46A Violation):

The Revenue contended that the CIT(A) admitted additional evidence regarding the shortage of stock without giving the A.O. an opportunity to offer comments, which contravened Rule 46A of the I.T. Rules. However, the CIT(A) relied on evidence already presented before the A.O., not new or additional evidence. The Tribunal found merit in the respondent's argument that no fresh evidence was considered by the CIT(A). The decision of the CIT(A) was based on the letter dated 29.10.2009, which was also submitted to the A.O. and reproduced in the assessment order. Thus, the Tribunal rejected the Revenue's ground of Rule 46A violation.

2. Merits of the CIT(A)'s Order:

The CIT(A) deleted the addition made by the A.O. for the alleged shortage of finished goods stock. The A.O. had observed a shortage of 262,997 kgs valued at Rs. 40,42,564 during a search and concluded it represented unaccounted sales. The CIT(A) found that the physical inventory did not account for unfinished rolls and reconciled the stock discrepancies, concluding there was no shortage of finished goods.

The Tribunal scrutinized the basis of the CIT(A)'s decision and found contradictions. The CIT(A) stated that the physical stock inventory was taken on 16.07.2009, while the RG-1 register was seized on 31.07.2009. The CIT(A) claimed that the production on 14.07.2009 and 15.07.2009 was not included in the physical stock inventory, leading to the apparent shortage. However, the Tribunal noted that the RG-1 register should have included finished goods production daily, and the non-inclusion of unfinished rolls in the physical inventory could not explain the finished goods stock as per RG-1 register.

The Tribunal further noted that the reconciliation provided by the assessee was flawed. The reduction of 19337 kg for dispatch on 16.07.2009 lacked evidence showing it occurred before the search inventory. The Tribunal also dismissed the claim of weighment difference of 289 kg as baseless. The Tribunal emphasized that the assessee did not provide necessary evidence, such as the panchnama, to support its claims.

The Tribunal found that the CIT(A)'s order was either without basis or contradictory to the material indicated. The Tribunal concluded that the shortage of finished goods could not be explained by the presence of unfinished goods and upheld the A.O.'s addition. The Tribunal rejected the alternative argument that subsequent sales should be excluded from the next year's total sales, noting the possibility of unaccounted production.

Conclusion:

The Tribunal reversed the CIT(A)'s order and restored the A.O.'s addition of Rs. 40,42,564 for the shortage of finished goods stock, allowing the Revenue's appeal. The Tribunal emphasized the need for proper evidence and consistent reasoning in reconciling stock discrepancies.