2019 (1) TMI 588 - AT - Income Tax

Rejection of trading results - invocation of section 145(3) qua the disposal through sale of its opening stock, resulting in a trading loss - Held that - The stock with the assessee has been assessed to yield only 60% of the wholesale (cost) price, for the principal (RIC) to have in fact compensated the assessee for the anticipated loss of the balance 40% thereof. This compensation, duly accounted for by the assessee, though, would not alter our algorithm or the loss under consideration (Rs. 39.33 lacs), as the same is being reckoned on gross loss basis, i.e., the difference between the cost of the unreturned goods lying with the assessee, i.e., as claimed, and their value as realized on sale, again, as claimed, both of which remain unchanged at ₹ 44.88 lacs and ₹ 5.55 lacs respectively. The aforesaid assessment, duly accepted by and between the parties, i.e., in settling their accounts on the closure of business relationship or termination of the franchise agreement, can only be regarded as a fair assessment of such loss and, thus, a proper basis for ascertaining the same for tax purposes. There is in fact no evidence with the Revenue which suggests or indicates the assessee to have realized the stock to any extent, over cost price. Further, no doubt the MoU states the compensation to be out of stock with the assessee as on 31.08.2012. It is, however, apparent that the same only refers to the stock left with the assessee after return back, for which credit stands allowed to it by the principal in full, i.e., at cost. Rather, if not so, the assessee, on the contrary, stands to gain by being compensated for this stock, already sold by it and, thus, no longer with it as on 31.08.2012, which apparently is the relevant date for compensation. As it appears, the assessee has not reported the cash sales (up to 31.08.2012) to its principal. The loss, arise as it does in respect of the assessee s opening stock, so that it has in fact arisen earlier to the current year, on account of factors that are normal incidences of the retail trade, i.e., represents business loss of the preceeding years, accounted for in the current year. Though, therefore, strictly speaking, not allowable for the current year, we yet consider it admissible as the said loss is in fact recoverable under the franchise agreement from the principal upon determination, as indeed compensated for by it. The observation by the ld. CIT(A) that the brand Reebok carries a high premium in the market and, therefore, could not possibly be disposed through street hawkers, also merits acceptance, particularly when juxtaposed with the fact that no serious defects in stock have been pointed out, and coupled with the complete absence of any credible material to show that the said stock had indeed been sold, as claimed, to Thariwalas. The assessee s accounts reflecting stock-in-trade at cost, at which it is allowed credit for by its principal on return, ₹ 44.88 lacs represents the value of the stock left with it at cost. The difference of ₹ 17.55 lacs; the principal determining the same at ₹ 27.33 lacs, remains unexplained. The realizable value of the stock is at 60%, i.e., ₹ 16.398 lacs, as against ₹ 5.553 lacs by the assessee, whose claim, thus, can be said to be proved to the extent of ₹ 10.932 lacs (Rs.27.33 lacs - ₹ 16.398 lacs), i.e., out of the total loss of ₹ 39.33 lacs claimed by the her. The assessee, accordingly, instead of being assessed at a profit of ₹ 4.99 lacs, as by the Revenue, would stand to be allowed a loss of ₹ 10.932 lacs and, accordingly, gets a relief for ₹ 15.922 lacs (i.e., ₹ 4.99 lacs ₹ 10.932 lacs). Here it may also be relevant to mention, and even as observed by the Bench during hearing, that a proper adjustment to the assessee s returned income in this respect would warrant an add back (disallowance) of the loss claimed, followed by reduction of the loss assessed (or a further add back of the profit sustained), and which also explains the aforesaid figure of ₹ 15.922 lacs. We refer to the profit sustained even as we have accepted the assessee s claim for loss, to whatever extent, only for completeness of the stated algorithm. An assessment at a profit of ₹ 50, for example, as against the claimed loss of ₹ 100, would warrant an addition for ₹ 150 to an assessee s returned income. We state so as we observe that this has not been followed in computing the assessee s income, resulting in a mismatch between the income as assessed and its computation; the Revenue failing to make disallowance for the loss not accepted by it, implicit in the rejection of accounts and assessment at a profit @ 10%. The ld. counsel for the assessee, Sh. Kalra, would, upon this being observed by the Bench during hearing, object, stating that the same can only be the subject matter of the Revenue s appeal. We are afraid, we could not disagree more. The question is of giving effect to the income assessed, i.e., the income as determined in assessment (or, as further modified in appeal) nothing less and nothing more, and has nothing to do with the Revenue s non-existent appeal. The Revenue s appeal, where so, could only be qua the acceptance of the purchase return by the ld. CIT(A), as against it as not by the AO, impacting the volume of the stock that could be regarded as available with the assessee, and has nothing to do with the computational flaw afore-referred. The mistake, which is in the nature of an arithmetical anomaly, could be rectified u/s. 154. How could we, however, be oblivious to or overlook a glaring mistake staring us in the face, and which therefore stands brought to the fore. In fact, we would be failing in our duty were we not to do so. How could, one may ask, the assessee be allowed relief of ₹ 15.922 lacs, i.e., pursuant to our order, where no disallowance of loss has been made by the Revenue in the first place; the afore-said figure including the claim of loss at ₹ 10.932 lacs. The assessment at a profit, firstly, itself implies absence of loss, so that there is no question of the loss claimed having been accepted (by the Revenue), a part of which in fact stands allowed by us, i.e., in deciding the issue discerned as arising for adjudication. The Tribunal is even otherwise not confined to the ground/s raised before it, though is bound to, as we have, hear the parties in the matter (rule 11 of the Appellate Tribunal (Income-tax) Rules, 1963). We could further dwell on the scope of a tax appeal as well as the powers of the tribunal; the law on which is well-settled, but do not consider it necessary to do so in-as-much as we have not traveled outside the issue arising for adjudication, and what stands highlighted here is a simple arithmetical mistake in computation. Addition being the difference in account with M/s. Goshies Apparels (P.) Ltd., one of the allies of RIC, through which, among others, the business was being transacted by it with the assessee - Held that - While the assessee s accounts reflect a debit balance of ₹ 66,97,987/- in the account of Goshies Apparels (P.) Ltd., that of the said creditor shows a balance of ₹ 63,23,980/- to the assessee s credit. Addition was made on account of the difference (of ₹ 3.74 lacs) being unexplained. We agree with the ld. counsel, Sh. Kalra, that no addition could be made in the instant case even if the said difference is, as is admittedly the case, unexplained. The reason is the lower credit allowed to the assessee by the said creditor. The assessee s accounts reflect a higher debit balance thereto, which only implies a corresponding credit (to, as we suppose, a nominal account) in the assessee s accounts to that extent. There is as such no unexplained credit in the assessee s accounts. No addition, accordingly, under the circumstances, is called for. We decide accordingly.

Summary

Issues Involved:
1. Trading loss on the disposal of stock-in-trade.
2. Addition due to difference in account balance with M/s. Goshies Apparels (P.) Ltd.

Issue-wise Detailed Analysis:

1. Trading Loss on the Disposal of Stock-in-Trade:

The primary issue revolves around the trading loss claimed by the assessee due to the closure of its retail franchise business with Reebok. The assessee claimed a trading loss of ?39.33 lacs, asserting that the stock worth ?44.88 lacs was sold to street vendors for ?5.55 lacs. The Revenue, however, assessed a profit of ?4.99 lacs, rejecting the loss claim due to lack of substantiation and proper documentation.

The assessee argued that the stock was returned to the principal, Reebok India Company (RIC), and the remaining unsaleable stock was sold at a throw-away price. The Revenue rejected the assessee's books of account due to the absence of stock registers, bills, and vouchers, and estimated a gross profit (GP) rate of 10% on the balance stock.

The Tribunal observed that the Revenue did not accept the claimed loss due to non-substantiation. The CIT(A) restricted the assessment to the stock left after returns to the principal, amounting to ?44.88 lacs. The Tribunal noted that the purchase return of ?126.18 lacs was already booked in the assessee's accounts, implying no claim for expenditure to that extent.

The Tribunal upheld the invocation of section 145(3) by the CIT(A) due to the unreliability of the assessee's accounts regarding the loss on the sale of stock. The Tribunal emphasized that the burden of proof lies on the assessee to substantiate the loss claim.

The Tribunal found that the assessee did not maintain stock records, making it difficult to verify the closing stock and the claimed loss. The Tribunal also noted discrepancies in the stock figures between the assessee and the principal. The Tribunal concluded that the assessee's claim of distress sale and damaged goods was not substantiated with credible evidence.

The Tribunal determined that the loss claimed by the assessee was not reasonably proved. However, it acknowledged that the principal had compensated the assessee for anticipated losses, allowing a discount of 40% on the wholesale price. The Tribunal accepted this assessment as a fair basis for determining the loss for tax purposes.

The Tribunal allowed the assessee a loss of ?10.932 lacs out of the total claimed loss of ?39.33 lacs, granting a relief of ?15.922 lacs (including the profit assessed by the Revenue).

2. Addition Due to Difference in Account Balance with M/s. Goshies Apparels (P.) Ltd.:

The second issue pertains to an addition of ?3.74 lacs due to a difference in account balance with M/s. Goshies Apparels (P.) Ltd. The assessee's accounts showed a debit balance of ?66,97,987/-, while the creditor's accounts reflected a balance of ?63,23,980/- to the assessee's credit.

The Tribunal agreed with the assessee's counsel that no addition should be made due to the unexplained difference. The Tribunal reasoned that the lower credit allowed by the creditor implied a corresponding credit in the assessee's accounts, resulting in no unexplained credit.

Conclusion:

The assessee's appeal was partly allowed. The Tribunal granted relief for the trading loss to the extent of ?10.932 lacs and ruled that no addition should be made for the unexplained difference in account balance with M/s. Goshies Apparels (P.) Ltd.