2017 (5) TMI 1783 - AT - Income Tax

Under valuation of Stock valuation - valuation of the product sold by the assessee which was sarees - addition based on statement recorded during survey - only discrepancy noted by survey team was regarding valuation of stock and when that was confronted to the Director, he accepted that the stock was under valued in the books - HELD THAT - As rightly taken note by the Ld. CIT(A), the length of each saree is approximately at 6.5 meters and nobody prevented the survey team from taking the measurement of each sarees. On this plea rejecting the purchase bills produced by the assessee was not correct and the CIT(A) has rightly held that the AO had also not found any defects in the books of account which were examined in the course of survey and also in the course of assessment proceedings. The Ld. CIT(A) has also noted that the AO has verified the purchases and sales by issue of notices u/s. 133(6) and 131 of the Act. CIT(A) rightly held that the survey team failed to bring any evidence of any concealed income or under valuation of stock and, therefore, in the light of the retraction made by the assessee and the statement given before the survey team, without any material, the addition made cannot stand the scrutiny of law. CIT(A) rightly took note of the fact that the AO has not pointed out any specific item of stock or entry which is not entered into the books of account. As we noted earlier, the survey team could not point out that there was any excess stock or unrecorded stock found either during survey or during the assessment proceedings. The sole basis of making the addition was based on the statement recorded during survey on 28.03.2011 and 131 statement recorded on 12.04.2011 which cannot be the basis for making the addition when the facts remain that the assessee has retracted the statement. As in the case of Pullangode Rubber Produce Co. Ltd. 1971 (9) TMI 64 - SUPREME COURT held that the assessee should be given opportunity to say that admission is incorrect or does not say the correct state of facts. Since the assessee has produced the books of account as well as the purchase bills which have been verified by the AO, the addition made by the AO has rightly been deleted by the Ld. CIT(A). CIT(A) has also took note of the fact that the rate of net profit and gross profit declared by the assessee is higher than that of the results of the earlier years and in 2006-07 the department has accepted the net profit and gross profit offered by the assessee and since the net profit and gross profit is higher than that of the earlier years, we do not find any justification in making the addition, therefore, we do not find any infirmity in the order of the Ld. CIT(A) and, therefore, we dismiss this ground of appeal of revenue. Disallowance of sum paid to the customers - difference in the letter heads of both the parties when compared with that of the initial reply given by the said parties to the AO - HELD THAT - We note that the AO partly disallowed the discount allowed to Awatram Sons and Pooja Sarees on the ground that from the initial reply the AO got from the said parties he could not verify the veracity of the claim made by the assessee. However, when the assessee was confronted with the said fact, the assessee confronted the said parties who after verification of their books handed over the confirmation of the discount given by the assessee which was duly produced by the assessee before the AO. However, the AO did not accept the said confirmation from the parties on the ground that there were difference in the letter heads of both the parties when compared with that of the initial reply given by the said parties to the AO. We note that the AO has not doubted the sales to the said parties. However, he doubted the genuineness of the confirmation given taking note of the different letter heads used by the said parties. When the AO confronted the assessee with the initial reply, the AO got from the said parties u/s. 133(6) of the Act, the assessee in turn confronted the said parties and once they had issued confirmation after verification which has been placed before the AO, the AO ought to have verified the veracity of the said confirmation letter if he has any doubt by calling the said parties before him or by deputing the Inspector to find out the veracity of the letter heads, rather than disbelieving the confirmation letter only on the basis of surmises and conjectures which cannot stand the scrutiny of law and, therefore, the Ld. CIT(A) has rightly deleted the addition which warrants no interference from our part and, therefore, we dismiss the revenue s ground of appeal.

Summary

Issues Involved:
1. Deletion of addition on account of undisclosed closing stock.
2. Deletion of disallowance of discount payments to customers.

Detailed Analysis:

1. Deletion of Addition on Account of Undisclosed Closing Stock:
The primary issue revolves around the deletion of an addition of Rs. 3,33,17,953/- made by the Assessing Officer (AO) due to alleged undisclosed closing stock. During a survey conducted under Section 133A of the Income-tax Act at the assessee's premises, the physical inventory of sarees was valued at Rs. 4,34,99,660/-, whereas the books of account reflected a closing stock value of Rs. 1.65 crores. The Director of the company acknowledged the discrepancy, attributing it to unexplained stock, and initially admitted to an additional income of Rs. 2.70 crores. However, during assessment, the assessee reported a closing stock of Rs. 1,38,56,400/-. The AO, not satisfied with the reconciliation provided, computed the closing stock at Rs. 4,59,39,353/- and treated the difference of Rs. 3,33,17,953/- as undisclosed stock.

Upon appeal, the CIT(A) deleted the addition, and the revenue contested this decision. The Tribunal noted that the survey team did not reference the quantity of sarees in the assessee's books during the survey, focusing instead on valuation discrepancies. The Tribunal agreed with the assessee that the quantity of stock tallied between the physical inventory and the books, with the only difference being in valuation. The Tribunal emphasized that stock should be valued at cost or market rate, whichever is lower, and that the AO's reliance on the Director's statement during the survey was misplaced. The Tribunal cited the Supreme Court's decision in Kader Khan (352 ITR 480) that statements made during surveys cannot be the sole basis for additions. The Tribunal upheld the CIT(A)'s deletion of the addition, noting the lack of evidence for concealed income or undervaluation of stock and the proper verification of purchase bills by the AO.

2. Deletion of Disallowance of Discount Payments to Customers:
The second issue pertains to the deletion of a disallowance of Rs. 9,22,557/- related to discounts paid to customers. During assessment, the AO issued notices under Section 133(6) to verify transactions and found discrepancies in the accounts of M/s. Awatram & Sons and Pooja Sarees. The AO noted that the initial replies from these parties did not match the transactions recorded by the assessee, leading to the disallowance.

The assessee provided letters from the parties, addressed to the JCIT, cancelling the receipt of discounts. The AO rejected these letters due to differences in letterheads compared to the initial replies. The CIT(A) deleted the disallowance, and the revenue appealed. The Tribunal noted that the AO did not doubt the sales to these parties but questioned the genuineness of the confirmation letters based on letterhead differences. The Tribunal held that the AO should have verified the veracity of the confirmation letters by calling the parties or deputing an inspector, rather than disbelieving them based on conjectures. The Tribunal upheld the CIT(A)'s deletion of the disallowance, finding no infirmity in the order.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions to delete the addition for undisclosed closing stock and the disallowance of discount payments to customers. The Tribunal emphasized the need for evidence-based assessments and proper verification of claims, rather than reliance on statements made during surveys or conjectures.