2019 (8) TMI 637 - AT - Income Tax

Addition on account of variation in purchase of cloth not shown in the audit report - bona fide mistake - mistake furnishing bills and vouchers in support of the claim that there was a mistake transferring the quantity from purchase to consumption without giving a matching effect n monetary and has revenue neutral effect - HELD THAT - As during the current year the appellant had transferred the stock of 271968 mtr of grey cloth from trading account to manufacturing account of raw materials for consumption. The mistake that has occurred is that while transferring the grey cloth from trading purchase account to raw materials consumption account, the value in monetary terms was not transferred. In effect the raw materials for real consumption account was understated in monetary terms by a figure of ₹ 73,77,7007-whereas the purchase of finished goods, while correct quantitatively, was overstated in monetary terms by an amount of ₹ 73,77,700/-. The raw material consumption purchases have been grouped under schedule K and the purchase of finished goods under trading purchases have been grouped under schedule L. Both these schedules find place on the debit side of the profit and loss account. Therefore, overstating one schedule by certain amount and understating another schedule by the matching amount will not alter the figure of total expenses claimed or debited in the profit and loss account. It is not the case of the assessing officer that the purchases booked by the appellant under trading purchase are bogus or that the raw material consumption for manufacturing is excessive when considered quantitatively. The mistake of transferring the quantity from purchase to consumption without giving a matching effect in monetary terms is a bona fide mistake. Since increase in trading purchases and the reduction in amount of raw materials consumption is occurring on the debit side of the profit and loss account therefore it does not have any cascading effect on the overall expenses claimed or debited in profit and loss account and therefore this mistake, in our considered opinion, is a bona fide and there is no loss to the revenue. In a case, if any bona fide mistake is being committed by an assessee and there is no loss to the revenue . In that case, in our considered opinion, addition cannot be made. Therefore, we hold that ld. CIT(A) has passed reasoned and detailed order and it does not require any kind of interference at our end. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of the addition of ?73,77,700/- on account of variation in the purchase of cloth not shown in the audit report.
2. Compliance with the directions given by the Hon’ble ITAT for furnishing bills and vouchers.
3. Whether the CIT(A) ought to have upheld the order of the Assessing Officer.
4. Whether the order of the CIT(A) should be set aside and that of the Assessing Officer be restored.

Issue-wise Detailed Analysis:

1. Deletion of the Addition of ?73,77,700/- on Account of Variation in the Purchase of Cloth Not Shown in the Audit Report:
The Revenue challenged the deletion of the addition by the CIT(A) of ?73,77,700/-, which was due to a discrepancy in the presentation of the audit report. The Assessing Officer (A.O.) had reduced the loss by this amount because the quantity of cloth purchases was incorrectly transferred from trading purchases to manufacturing consumption without a corresponding monetary adjustment. The CIT(A) found that this discrepancy did not affect the Profit & Loss Account and thus deleted the addition.

2. Compliance with the Directions Given by the Hon’ble ITAT for Furnishing Bills and Vouchers:
The ITAT had previously remanded the case back to the A.O., directing the assessee to furnish relevant bills, vouchers, and a certificate from the Chartered Accountant certifying the bona fide mistake. The assessee complied by submitting the original bills, copies of accounts showing transfer entries, a total quantity account of cloth, and a certificate from the Chartered Accountant. Despite this, the A.O. maintained the addition, which the CIT(A) later deleted.

3. Whether the CIT(A) Ought to Have Upheld the Order of the Assessing Officer:
The CIT(A) did not uphold the A.O.'s order, stating that the mistake was bona fide and did not impact the Profit & Loss Account. The CIT(A) found that the value of the grey cloth purchased was correctly accounted for in Schedule "K" and that the discrepancy was merely a presentation error without any financial impact.

4. Whether the Order of the CIT(A) Should Be Set Aside and That of the Assessing Officer Be Restored:
The Tribunal examined the records and found that the error was a bona fide mistake with no impact on the overall expenses claimed or debited in the Profit & Loss Account. The Tribunal agreed with the CIT(A)'s detailed and reasoned order, concluding that there was no loss to the Revenue and thus no basis for the addition. Consequently, the appeal by the Revenue was dismissed.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, recognizing that the error in transferring the quantity from purchase to consumption without a corresponding monetary adjustment was a bona fide mistake. The Tribunal found that this mistake did not affect the overall financial results or cause any loss to the Revenue. Therefore, the appeal filed by the Revenue was dismissed, and the order of the CIT(A) was affirmed.