2019 (6) TMI 388 - AT - Income Tax

Addition being alleged excess value of stock calculated during the course of survey - rejection of books of account - G.P. estimation - HELD THAT - We found that addition was made on the basis of statement of Director. However, later on the director retracted his statements. The assessee company with the help of complete working established that the statements at the time of survey with regard to processing cost was wrong. However, A.O. could not point out any defect or discrepancy in factual working so submitted and which were duly supported by audited accounts. A.O. solely relied only on the statements to make the additions and had no other evidence. Thus there is no merit for the addition made on account of processing rate difference in so far as all processes as envisaged by the department were not carried out on all the finished goods and only the process required by the customers were so carried out. Therefore, actual process cost as arrived in books of account is to be taken for valuation of stock. It is clear from the above chart that even if the tentative quantity taken by the department with the rates as per books of account is taken total stock works out at ₹ 7,87,86,680/- as against the stock as per books of account at ₹ 8,18,90,637/-. Thus, there is shortage of stock as on the date of survey amounting to ₹ 31,03,957/- which can be considered as having been sold but not recorded in the books of account on the date of survey. At the most, the department can add GP earned on such shortage of stock, in so far as the A.O. has not doubted that all the purchases had been recorded in the books of account. Once the purchases is found to be accounted for, addition can be made with respect to G.P. earned on such shortage of stock. The G.P. during the year is 7.48%. - Appeal of the assessee is allowed in part.

Summary

Issues Involved:
1. Addition of ?2,42,69,000/- due to alleged excess value of stock during survey.
2. Validity and evidentiary value of statements recorded during the survey.
3. Justification of processing cost used for stock valuation.
4. Impact of retraction of statements by the assessee.
5. Revenue neutrality of the addition due to stock valuation.

Detailed Analysis:

1. Addition of ?2,42,69,000/- due to alleged excess value of stock during survey:
The primary issue in the appeal was the addition of ?2,42,69,000/- to the income of the assessee based on the alleged excess value of stock found during a survey conducted at the business premises. The survey team valued the stock at ?10,61,59,636/- compared to ?8,18,90,638/- as per the books of accounts. The difference of ?2,42,69,000/- was proposed to be added to the income. The assessee contended that the difference in stock valuation was due to the arbitrary rate of ?462 applied by the survey team, which was significantly higher than the actual processing cost of ?211 as per the books.

2. Validity and evidentiary value of statements recorded during the survey:
The assessee argued that statements recorded during the survey under section 133A of the Income Tax Act do not hold evidentiary value as they are not recorded under oath. The Tribunal referred to the decision of the Hon'ble Madras High Court in CIT Vs. S. Khader Khan Son, which was affirmed by the Supreme Court, stating that statements recorded during a survey have no evidentiary value unless corroborated by other material evidence. The Tribunal observed that the addition was made solely based on the statement of the Director without any corroborative material.

3. Justification of processing cost used for stock valuation:
The assessee provided detailed calculations showing the actual processing cost of ?211, which was significantly lower than the ?462 used by the survey team. The Tribunal noted that the average processing cost taken by the survey team was unjustified and that the actual processing cost should be considered. The Tribunal also observed that the assessee had furnished complete details of the quantity and valuation of inventory as on the survey date, which were not disputed by the AO.

4. Impact of retraction of statements by the assessee:
The Director of the assessee company retracted his statement made during the survey, explaining that the higher processing cost was admitted under pressure. The Tribunal found that the retraction was valid and supported by detailed workings submitted during the assessment proceedings. The Tribunal also referred to the decision of the Hon'ble High Court of Jharkhand in CIT vs. Ravindra Kumar Jain, which held that retraction statements should be considered if they are supported by evidence.

5. Revenue neutrality of the addition due to stock valuation:
The assessee argued that any increase in the closing stock valuation would be revenue-neutral if the same is considered as opening stock in the subsequent year. The Tribunal referred to the decision of the Hon'ble Supreme Court in CIT Vs. Excel Industries Ltd., which held that additions in such revenue-neutral exercises should not be made. The Tribunal concluded that the addition was devoid of merits and should be deleted.

Conclusion:
The Tribunal found that the addition of ?2,42,69,000/- was based solely on the statement recorded during the survey without any corroborative evidence. The actual processing cost of ?211, as per the books of accounts, was justified, and the retraction of the statement by the Director was valid. The Tribunal also noted that the addition was revenue-neutral. Consequently, the Tribunal upheld a minor addition of ?2,32,175/- based on the Gross Profit (GP) earned on the alleged shortage of stock and directed the AO accordingly. The appeal of the assessee was allowed in part.