2018 (4) TMI 868 - AT - Income Tax

Denying the increase in closing stock - not giving an opportunity of hearing or issuing any show cause notice in this regard or rejecting the audited books of account - Held that - Grievance of the assessee is found to be justified and it is accepted as such. The increase in closing stock claimed by the assessee at ₹ 6 crore is directed to be allowed to the assessee.

Issues Involved:
1. Denial of increase in closing stock claimed by the assessee.
2. Treatment of surrendered income during the survey.
3. Assessment of unrecorded cash advances.
4. Rejection of the investment claim in the Maruti City project.
5. Acceptance of books of account and subsequent discrepancies.

Issue-wise Detailed Analysis:

1. Denial of Increase in Closing Stock Claimed by the Assessee:
The assessee contended that the authorities erred in law and on facts by arbitrarily denying the increase in closing stock of ?6 crore without giving an opportunity of hearing or issuing any show cause notice. The authorities had not rejected the audited books of account. The assessee argued that the amount of ?6 crore was shown in the trading account as an amount voluntarily offered for tax and a corresponding debit entry was shown as an investment in Maruti City as work in progress.

2. Treatment of Surrendered Income During the Survey:
During a survey under section 133A of the Act, the survey party found and impounded incriminating documents, including a ledger indicating cash advances amounting to ?8,00,02,000 from 43 persons, which were not recorded in the regular books of account. The assessee's director surrendered this amount as unexplained/undisclosed income for the relevant year. The assessee filed its return declaring income of ?8,06,36,220, including the surrendered income. Out of this, ?8 crore was introduced in the books as an increase in work in progress (closing stock), and ?2,00,02,000 was disclosed as cash balance in the Cash Book.

3. Assessment of Unrecorded Cash Advances:
The AO framed the assessment at a total income of ?8,00,35,220, as per the income returned by the assessee. However, the AO observed that while the assessee had surrendered the amount based on unrecorded amounts received from 43 persons, it had apportioned and taken it into its closing stock value, increasing it by ?6 crore. The AO treated this as the assessee's undisclosed income under section 68 of the Act and added it to the assessee's income. The AO denied the benefit of closing stock for the assessment year 2011-12 and the opening stock for the assessment year 2012-13 on the grounds that there was no evidence of investment in the value of building construction under progress.

4. Rejection of Investment Claim in Maruti City Project:
The CIT(A) dismissed the assessee's appeal, noting that the director never stated or provided evidence that the amount received was invested in work in progress of the Maruti City project. The certificates from the architect showed investments that did not match the amounts claimed by the assessee. The CIT(A) concluded that the claim of investment of ?6 crore in Maruti City was not supported by evidence and was found to be false based on the certificates filed by the assessee.

5. Acceptance of Books of Account and Subsequent Discrepancies:
The assessee argued that the AO accepted the books of account without rejecting them but disallowed the closing stock increase by estimation. The assessee produced complete books of account and vouchers, which were endorsed by the AO. The AO did not find any discrepancy in the books of account. The assessee also provided a certificate from a registered architect, which was not found to be false. The AO's denial of the ?6 crore investment in work in progress was not supported by valid reasons, and no specific show cause notice was given before denying the benefit.

Conclusion:
The Tribunal found the assessee's grievance justified and directed the increase in closing stock claimed by the assessee at ?6 crore to be allowed. The appeal was allowed, and the order was pronounced in open court on 12/04/2018.

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