2017 (10) TMI 1142 - AT - Income Tax

Unexplained investment in stock - determination of closing stock as on the date of survey - revenue has determined the closing stock which is higher than the value declared by the assessee - Held that - The assessee has not maintained any stock register, therefore, the difference in the closing stock was arrived by applying the GP ratio as well as through physical verification. In the absences of stock register, the revenue had no option except to resort to determine the closing stock after applying the GP ratio. In the instant case, we find that the ld. CIT(A) has given the finding with regard to the GP ratio which comes to 12.81%, therefore, in our considered view, the closing stock, as determined by the AO at the rate of 13%, is correct and reasonable. The plea taken by the assessee that the goods worth of ₹ 3,37,288/-, was received prior to the date of survey but in this regard, we find that no such entry was recorded in the books of accounts. Had this been a genuine purchase, in our considered opinion, it must have entered in the accounting books of the assessee. Therefore, we are of the view that the claim of the assessee that the goods were purchased prior to the date of survey and these were subsequently returned back to these parties due to low quality material does not sound good. In view of the above discussion, we do not find any infirmity in the order of the lower authorities, hence this ground of appeal of the assessee is dismissed.

Issues Involved:
1. Validity of CIT(A)'s order
2. Addition of ?5,11,114/- as unexplained investment in stock
3. Applicability of Section 68 vs. Section 69 of the IT Act, 1961
4. Non-maintenance of stock register and its implications
5. Discrepancy in stock valuation and gross profit rate

Detailed Analysis:

1. Validity of CIT(A)'s Order:
The assessee argued that the CIT(A)'s order dated 12.08.2011 was arbitrary, illegal, and void ab-initio. The Tribunal, however, did not find any merit in this contention and upheld the CIT(A)'s order.

2. Addition of ?5,11,114/- as Unexplained Investment in Stock:
The primary issue was the addition of ?5,11,114/- as unexplained investment in stock. During a survey conducted under Section 133A, the physical stock was valued at ?48,67,936/-, while the closing stock as per the books was ?18,58,635/-, leading to a discrepancy of ?30,09,301/-. The assessee submitted purchase bills amounting to ?24,98,187/- which were not recorded in the books, reducing the discrepancy to ?5,11,114/-. The assessee further claimed that goods worth ?3,37,288/- were returned after the survey, but this claim was not accepted by the AO due to lack of supporting evidence.

3. Applicability of Section 68 vs. Section 69 of the IT Act, 1961:
The CIT(A) observed that the addition should fall under Section 69 (unexplained investments) rather than Section 68 (cash credits). The Tribunal agreed with this view, stating that the mere wrong mention of the section does not vitiate the valid addition.

4. Non-maintenance of Stock Register and Its Implications:
The assessee did not maintain a stock register, which led the revenue to determine the closing stock by applying the gross profit (GP) ratio. The Tribunal found this approach reasonable in the absence of a stock register.

5. Discrepancy in Stock Valuation and Gross Profit Rate:
The assessee contended that the GP rate should be 14% instead of 13% as applied by the AO. However, the CIT(A) found that the actual GP rate based on the audited trading account was 12.81%, and thus the AO's application of a 13% GP rate was correct. The Tribunal upheld this finding, noting that the assessee's claim of goods worth ?3,37,288/- being received before the survey and returned after the survey was not supported by any reliable evidence.

Conclusion:
The Tribunal dismissed the appeal, upholding the addition of ?5,11,114/- as unexplained investment in stock and confirming the CIT(A)'s order. The Tribunal found no infirmity in the lower authorities' actions and concluded that the application of a 13% GP rate was reasonable and the claim of goods returned was not substantiated. The appeal was dismissed, and the order was pronounced in the open court on 30/08/2017.

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