2019 (11) TMI 197 - AT - Income Tax

Addition by applying G.P rate of 6.39% on alleged short stock - HELD THAT - AO accepted the working and the explanation of the assessee (and has not gone by the valuation carried out by the survey team) and basis the same, where he has held that physical stock is less than the book stock by ₹ 34 lacs, which should actually be ₹ 31,96,346 (₹ 1,99,71,757 less ₹ 1,67,75,411), we donot see any infirmity in the order of the AO. The argument of the ld AR that instead of 25%, where 15% average variation is taken, there would not have been any difference cannot be accepted for the reason that the assessee was duly provided the opportunity by the Assessing officer to explain the difference and thereafter, even before the ld CIT(A) and before us, no such working is submitted to support the 15% average variation. The physical stock being less than the book stock effectively means out of book sales to the extent of ₹ 31,96,346 and applying gross profit so declared by the assessee @ 6.39%, the addition comes to ₹ 204,246 (as against ₹ 217,260 determined by the AO) which is hereby confirmed. - Appeal of the assessee is partly allowed.

Summary

Issues:
1. Addition of ?2,17,260 by applying GP rate on alleged short stock.

Analysis:
The appeal was filed against the order of the CIT(A) confirming the addition of ?2,17,260 by applying a GP rate on the alleged short stock. The assessee, engaged in trading pharmaceutical items, declared a total income of ?8,70,320. During a survey, physical stock was valued at ?1,10,87,117, but discrepancies were noted in the stock valuation process. The assessee claimed the stock valuation was flawed, citing errors in MRP-based valuation and incomplete item counting. The Assessing Officer estimated a gross profit on the short stock of ?34 lakhs at a GP rate of 6.39%, resulting in the addition of ?2,17,260.

The assessee contended that there was no stock shortage, attributing discrepancies to flawed stock-taking methods during the survey. The Assessing Officer rejected this argument, emphasizing that the assessee failed to challenge the stock valuation during the survey and provided a self-valuation later. The CIT(A) upheld the Assessing Officer's decision, noting that the assessee conducted the stock valuation with independent witnesses present.

In the appeal, the assessee reiterated arguments made before lower authorities, highlighting shortcomings in the survey team's stock valuation process. The Department defended the lower authorities' findings, asserting that the assessee failed to explain the stock difference adequately. The Tribunal reviewed the case, acknowledging the assessee's self-valuation and the stock discrepancy. After considering all submissions, the Tribunal confirmed the addition but adjusted the amount to ?204,246, based on the declared GP rate, partially allowing the appeal.

In conclusion, the Tribunal upheld the addition of ?2,17,260 due to the discrepancy in stock valuation, emphasizing the importance of accurate stock assessment procedures and the need for clear explanations in such cases.