2015 (9) TMI 60 - AT - Income Tax

Unexplained investment in stock - CIT(A) deleted the addition - Held that - The inventory was drawn by the income-tax authorities on the date of survey with the help of the assessee s employees on 5.12.2003. The same was examined and verified by Shri S.K. Vasudevaji, the Chief General Manager of the assessee-firm who accepted the correctness of the statement so drawn and offered to surrender the excess stock to the tune of ₹ 31.85 lac on the basis of such statement. Not only that, Shri Sudhir Sekhri, a partner in the assessee-firm, attended the office of the AO after a week s time on 12.12.2003. He also did not dispute the valuation of stock recorded in the statement and approved the contents of the statement made by Shri S.K. Vasudevaji. It is beyond our comprehension as to how the valuation of inventory which was made on 5.12.2003 with the help of employees of the assessee company, as approved firstly by its Chief General Manager on the date of survey and then by a partner after a week s time, can be branded as wrong at a later date. It is more so because there is no corroboration of the rates given by the assessee in its later statement showing lower rates. There is no basis for checking the rates given by the assessee in its so-called inventory depicting difference in the rates of items. When the stock statement prepared by the Incometax authorities at the time of survey is pitted against a later one-sided statement with lower rates made by the assessee, we prefer to go with the former. The reason is obvious that it was drawn on the basis of actual verification done and as per the rates given by the employees of the assessee and as affirmed by the Chief General Manager and then the partner of the assessee firm. As such, we refuse to accept the veracity of the statement tendered during the course of assessment proceedings giving lower rates and go with the statement prepared at the time of survey. The impugned order is vacated on this issue and the addition made by the AO to the tune of ₹ 31.85 lac is restored - Decided against assessee. Addition on account of suppressed gross profit - rejection of books of accounts - CIT(A) deleted the addition - Held that - AO categorically asked the assessee to give details about the break-up of closing stock, which the assessee failed to adduce. Once there is no authentication of the value of stock as shown by the assessee, how such valuation can be accepted, more so, when the gross profit rate has sharply declined. No accounts can be said to have been properly maintained unless the figures of opening and closing stock are subject to verification. As the assessee miserably failed to corroborate the value given for closing stock and, further, there was absence of details of accessories/raw materials, semi-finished and finished goods, wastage, etc., we overturn the impugned order upholding the proper maintenance of books of account. Accordingly, the action of the AO in rejecting the books of account is upheld. - Decided against assessee. Unless the facts and circumstances are shown to have undergone change, ordinarily, the gross profit of the immediately preceding year constitutes a good guide for adoption and implementation. When we advert to the facts of the instant case, we find that the AO was more than reasonable in applying GP rate of 20% as against the immediately preceding year s GP rate of 27.84%. The impugned order is vacated and the addition so deleted in the first appeal is restored. This ground is allowed. - Decided against assessee. Disallowance of foreign travelling expenses - Held that - it is seen that the foreign travel expenses were incurred by the assessee on its employees and no foreign travel was undertaken by the partners. In such circumstances, there can be no reason for making any ad hoc disallowance. We, therefore, approve the impugned order in deleting this addition - Decided in favour of assessee.

Summary

Issues:
1. Deletion of addition on account of unexplained investment in stock.
2. Deletion of addition on account of suppressed gross profit.
3. Deletion of disallowance of foreign traveling expenses.

Analysis:

Issue 1: Deletion of addition on account of unexplained investment in stock
The case involved a discrepancy in stock valuation following a survey conducted at the assessee's business premises. The Assessing Officer (AO) made an addition of Rs. 31.85 lakh due to the excess stock revealed during the survey. However, the CIT(A) deleted this addition based on the premise that the difference was in valuation, not in the number of pieces. The ITAT Delhi, after examining the inventory statements and the subsequent explanations provided by the assessee, reinstated the addition. The ITAT emphasized that the valuation done during the survey with the cooperation of the assessee's employees, and approved by the firm's management, should be considered accurate. The lower rates claimed by the assessee later were not substantiated with evidence, leading to the restoration of the addition.

Issue 2: Deletion of addition on account of suppressed gross profit
The second ground pertained to the deletion of an addition of Rs. 49.76 lakh due to suppressed gross profit. The AO rejected the books of account under section 145(3) as the assessee failed to provide detailed quantitative information. The CIT(A) disagreed with the AO and deleted the addition. However, the ITAT Delhi upheld the AO's decision, emphasizing the lack of authentication for the closing stock valuation and the absence of necessary details in the assessee's records. Consequently, the addition was restored based on the decline in gross profit rate and the inadequacy of supporting evidence provided by the assessee.

Issue 3: Deletion of disallowance of foreign traveling expenses
The last ground concerned the disallowance of Rs. 4 lakh out of foreign traveling expenses claimed by the assessee. The AO made an ad hoc disallowance due to the absence of supporting bills/vouchers, which was later deleted by the CIT(A). The ITAT Delhi approved the deletion, noting that the foreign travel expenses were incurred on employees, not partners, and therefore, no ad hoc disallowance was warranted. As a result, the decision of the CIT(A) in this regard was upheld.

In conclusion, the ITAT Delhi partially allowed the appeal, reinstating the additions related to the unexplained investment in stock and the suppressed gross profit while upholding the deletion of the disallowance of foreign traveling expenses.