2018 (11) TMI 1251 - AT - Income Tax

Addition on account of stock valuation difference - AO has made addition to the closing stock on the basis of the valuation of the closing stock of runner riser made by the sister concern of the appellant - AO observed that assessee has not given reasonable basis at all for changing the valuation of the stock - Held that - As the valuation of the assessee was backed by the trade tax order as well as data derived from appellant s audited accounts we do not find any justification for sustaining the addition on account of under valuation of closing stock. Further, the addition has been made by AO only based on the valuation made by sister concern in its that case. It was also not known whether the valuation of stock made in that particular concern was on the basis of cost or net realizable value whichever is less. Merely because some other assessee has valued the stock at different figure, addition in the hands of the another person cannot be made without finding out that what is the cost of the goods purchased by that assessee as well as the net realizable value in the hands of that assessee. Therefore, in absence of any such finding by AO in the assessment order on in the remand proceedings, we do not find any infirmity in the order of the CIT (Appeals) in deleting the above addition. Decline in gross profit rate - Held that - The book results have been discarded by the learned assessing officer despite there is comparative yield and burning loss in consonance with earlier financial years. On the reading of the order of learned assessing officer, it is apparent that without rejecting the books of accounts the book results have been enhanced by the learned assessing officer. If the assessing officer wanted to reject the books of accounts of the assessee then it is mandatory that he should have pointed out latent, patent, and glaring defects in the books of accounts. In absence of it the addition to the gross profit cannot be sustained. Over and above the books of accounts are audited and there is no finding of the assessing officer that system of accounting followed by the assessee is such which does not result into deducing the correct financial result there from. In view of this we uphold the order of the learned commissioner appeals in deleting the addition on this account. Addition on account of unverifiable expenses - Held that - commissioner appeals upheld the addition on principle basis however, he found that it is on the higher side and therefore he restricted it to ₹ 50,000 out of ₹ 1 lakh disallowed by the learned AO. Even otherwise, we are of the view that those expenses should have been disallowed for which assessee failed to produce cogent evidence. Such instances should have been noted by the learned assessing officer and disallowance to that extent should have been made. The disallowance made by the learned AO is merely based on estimation. Such ad hoc disallowance as such cannot be sustained. No infirmity in the order of the learned commissioner appeals in deleting the addition of ₹ 50,000. Addition under section 68 - Held that - It is apparent that during the course of appellate proceedings the learned CIT appeal has obtained to remand report from the assessing officer on the various submission and details furnished by the assessee. Same were also confronted to the assessee and obtained the rejoinder to the remand report. The assessee has submitted the detail chart mentioning the name and address of all the parties along with the permanent account number and amount of credit balance with the assessee company. The confirmations were also filed. Even otherwise when AO has allowed the creditors to continue without disallowing the purchases made from those creditors, part of which is transferred to the security deposit account, it is unusual to state that the genuineness of the creditors are not established. AO has accepted the genuineness of the purchases from this parties. In view of this, we do not find any infirmity in the order of CIT (Appeals) by deleting the above addition. - Appeal decided against revenue

Summary

Issues Involved:

1. Addition on account of valuation of closing stock.
2. Addition on account of low Gross Profit (G.P.).
3. Addition on account of unverifiable expenses.
4. Addition under section 68 of the Income Tax Act, 1961 as unexplained unsecured loans.

Issue-wise Detailed Analysis:

1. Addition on account of valuation of closing stock:

The Assessing Officer (AO) made an addition of ?1,16,047 to the closing stock based on the valuation of the closing stock of Runner Riser made by the assessee's sister concern. The AO observed that the assessee did not provide a reasonable basis for changing the valuation of the stock. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the stock was valued at net realizable value and backed by the trade tax order and data from the assessee’s audited accounts. The Tribunal upheld the CIT(A)’s decision, stating that the valuation should be based on the assessee’s own data and not merely on the valuation of another entity without proper comparison. Hence, the addition was not justified.

2. Addition on account of low Gross Profit (G.P.):

The AO made an addition of ?5,00,000 due to a decline in the Gross Profit rate from 18.11% to 17.82%. The AO did not find the explanations provided by the assessee convincing. The CIT(A) deleted the addition, reasoning that the books of accounts were verified, and the sales and purchases were fully verifiable and in conformity with the yield and process loss of earlier years. The Tribunal upheld the CIT(A)’s decision, emphasizing that without pointing out specific defects in the books of accounts, the addition based on a mere decline in G.P. rate was unsustainable. The books were audited and no issues were found with the accounting system.

3. Addition on account of unverifiable expenses:

The AO made an addition of ?1,00,000 due to unverifiable expenses but the CIT(A) restricted the addition to ?50,000. The Tribunal noted that the addition should be based on specific instances where the assessee failed to produce evidence, rather than an arbitrary estimation. The Tribunal upheld the CIT(A)’s decision to restrict the addition to ?50,000, finding no infirmity in the partial deletion.

4. Addition under section 68 of the Income Tax Act, 1961 as unexplained unsecured loans:

The AO made an addition of ?1,08,02,164 under section 68, citing unexplained unsecured loans as the assessee failed to prove the genuineness of the loans. The CIT(A) deleted the addition, noting that the amounts were transferred from sundry creditors to a security deposit account, and the identity and creditworthiness of the parties were established. The Tribunal upheld the CIT(A)’s decision, stating that the identity of the creditors was not in doubt as purchases were made from them, and the genuineness of the transactions was established. The AO had accepted the purchases from these creditors, making it inconsistent to doubt the genuineness of the transferred amounts.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)’s decisions on all counts. The additions made by the AO were found to be unjustified based on the facts and circumstances presented. The Tribunal emphasized the importance of proper verification and evidence before making additions to the assessee’s income. The order was pronounced in the open court on 22/11/2018.