2014 (1) TMI 1075 - AT - Income Tax

Valuation-of-stock found during the survey - Held that - No admission made in a statement recorded u/s 133A on oath during survey can be relied as evidence against the maker or the assessee - In the immediate two preceding assessment years, the assessee's trading records were accepted by the Department - The closing stock as on 31-03-2007 as accepted by the Department was ₹ 80,01,286/- , the opening stock taken by the assessee of ₹ 80,01,286/- is to be treated as accepted figure - During survey no other incriminating document / loose paper, showing unrecorded purchases or unrecorded expense or sales, was found - There is no corroborative evidence in the possession of the Revenue to substantiate the impugned undisclosed income - The closing stock taken by the assessee at ₹ 2,61,77,707/- as on 31-03-2008 gives gross profit rate of 76.02% - If the closing stock considered by the AO is added in the trading account as on 31-03-2008, the gross profit rate would become 268% and this figure seems to be just impossible to be treated as a gross profit rate under any circumstance in such type of business and particular keeping in view the past history of the assessee. Stock has been increased by tampering the inventory-sheet by changing the quantity of stock items as pointed out by the hand-writing / forensic experts in their reports - The reports of hand-writing experts have not been considered either by the AO or by the ld. CIT(A), although, one such report was obtained by the AO himself - The entire survey proceeding was vide-graphed but despite repeated requests neither a copy of the same was supplied to the assessee nor it was used by the Department - The assessee also got a report from another hand-writing expert - As per the report of the expert appointed by the Department, it has been observed that there are manipulation in the inventory-sheet but thereafter he has qualified those mistakes/ manipulations as bonafide mistakes, by doing so, the expert has exceeded his jurisdiction - Moreover, in the report of expert got by the assessee also, such tampering with the stock inventory have been pointed out - There has been mistakes in taking stock position by the Revenue and the impugned inventory cannot be treated as a sacrosanct document - Certain cuttings and over-writings have been noticed in the inventory sheets - There are mistakes in the inventory which may be intentional or otherwise - The assessee should not be allowed to suffer by the mistakes committed by the survey team. The valuation of the inventory taken on the tag price after reducing the discount and the deduction for gross profit rate or alleged cost price has been worked out after reducing discount and deduction on account of gross profit rate is much higher than the actual sale price of the some items - This shows that neither physical counting of stock nor valuation of stock was done properly, it was based on pure estimation - Discount given @ 20% seems to be on lower side whereas this discount in assessee's case and in the case of other assessees carrying on similar business is between 40% to 50% - If this ratio in taking inventory is applied on all items of inventory, there will be no excess stock. The AO was not having any valid material for making impugned addition except for the statement on surrender which we have held as unreliable in view of the legal position - The entries in the books of account are presumed to be true and correct unless proved otherwise in view of the provision of Section 34 of the Evidence Act, 1881 - The AO has accepted the books of account of the assessee and he has not rejected them, at all - He has even not invoked the provision of 145 (3) of the Act - The declared results should have been accepted without any variation, especially when the assessee's trading results are better as compared to the immediate past year - There are numerous reasons for the rise in the gross profit rate in any year - When the AO accepted lower gross profit rates in the past and in future then this inference is found to be not justified - Rather the AO must be satisfied that in the year of survey, the assessee has been forced to declare much high rate of profit, more than other assessment years. The AO has accepted the trading results declared by the assessee - The working of the stock as per books of account as on the date of survey should have been based on gross profit rate of the year in which survey took place, more specifically on 28-01-2008 after expiry of 10 months of the commencement of the financial year under reference and out of total turnover of around ₹ 2.49 crores the sales of more than ₹ 2.02 crores (more than 81%) had already been shown and declared - The impact of the profit earned on such sales @ 76.02% should have been given to arrive at the actual stock as on the date of survey - The AO should have applied the gross profit rate of 76.02% as against 28.12% - Partly allowed in favour of assessee.

Summary

Issues Involved:
1. Evidentiary Value of Statements Recorded During Survey
2. Valuation of Excess Stock
3. Rejection of Books of Account
4. Allowance of Discount and Gross Profit Rate
5. Adjustment for Stock on Approval

Issue-wise Detailed Analysis:

1. Evidentiary Value of Statements Recorded During Survey:
The tribunal held that statements recorded under Section 133A of the Income Tax Act, 1961, during a survey cannot be relied upon as evidence against the assessee. The statements made during the survey are not on oath and do not have evidentiary value as per the Supreme Court's decision in CIT vs. Khader Khan Son. Therefore, the addition made solely based on such statements was not justified.

2. Valuation of Excess Stock:
The tribunal found that the valuation of excess stock was not conducted correctly. The stock was valued at the tag price, and the gross profit rate of 28.12% from the previous year was applied. However, the tribunal noted discrepancies in the inventory sheets, including over-writings and alterations, which were confirmed by handwriting experts. The tribunal concluded that the stock valuation was based on pure estimation and not on actual physical verification. The tribunal also noted that the gross profit rate for the year under consideration was 76.02%, and the discount rate should be 40% instead of 20%.

3. Rejection of Books of Account:
The tribunal observed that the Assessing Officer (AO) did not reject the books of account maintained by the assessee, which were duly audited under Section 44AB of the Act. The AO did not invoke the provisions of Section 145(3) of the Act, which is necessary to reject the books of account. Therefore, the declared results should have been accepted without any variation, especially when the trading results were better than the previous years.

4. Allowance of Discount and Gross Profit Rate:
The tribunal allowed a discount rate of 40% on the total inventory found during the survey, as against the 20% allowed by the AO. The tribunal also directed the application of the gross profit rate of 76.02% for the year under consideration, instead of the 28.12% applied by the AO. This adjustment was necessary to arrive at the actual stock value as on the date of the survey.

5. Adjustment for Stock on Approval:
The tribunal accepted the assessee's claim that certain goods were received on approval and were not included in the books of account as the bills were not received by the date of the survey. The tribunal allowed a set-off for such goods amounting to Rs. 38,60,871/-, as accepted by the Commissioner of Income Tax (Appeals) (CIT(A)).

Conclusion:
The tribunal partly allowed the appeal of the assessee and dismissed the appeal of the Revenue. The tribunal directed the AO to re-compute the excess stock by applying a 40% discount and a gross profit rate of 76.02%, and to consider the stock on approval as allowed by the CIT(A). The tribunal emphasized that this decision was based on the peculiar facts of this case and should not be treated as a precedent for other cases.