2019 (12) TMI 670 - AT - Income Tax

Addition on account of closing stock - HELD THAT - Material on record including the tax audit report, original return as well as revised return, we observe that the assessee has inadvertently mentioned the wrong figures of stock in the original return which has lead to corresponding increase in the net profit of the assessee resulting into high and unrealistic net profit, which was rectified by filing revised return on 29/03/2013. After examining the original as well as revised return along with tax audit return and audited financial accounts, we are of the view that there is an inadvertent mistake on the part of the assessee while preparing the original return which was correctly rectified by way of revised return on 29/03/2013. Moreover, the AO, in the remand report dated 24/03/2017 which was called for during the course of appellate proceedings before the CIT(A), submitted that after considering the details and evidences filed during the course of remand proceedings, the revised return of income ₹ 17,81,124/- appears to be correct. We are inclined to set aside the order of the CIT(A) and direct the AO to delete the said addition made on account of closing stock. Thus, this ground of appeal raised by the assessee is allowed. Allowable business expenses - HELD THAT - We have examined the orders of the lower authorities and also the remand report and observe that the disallowance was made purely on ad hoc basis without assigning any specific reason or giving any finding that the expenses were not incurred in connection with the business of the assessee wholly and exclusively. Disallowance made by the ld.CIT(A) needs to be restricted to 10% of the miscellaneous expenses and 5% of the labour expenses and gift to the parties and 5% of the travelling expenses. Consequently, the assessee gets relief of ₹ 71,625/- under the head miscellaneous expenses and under the head labour expenses , gift to the parties and travelling expenses . Accordingly, this ground of appeal raised by the assessee is partly allowed.

Summary

Issues Involved:
1. Addition on account of closing stock.
2. Ad hoc disallowance of expenses.

Issue 1: Addition on Account of Closing Stock

The primary issue pertains to the confirmation of an addition of ?3,11,53,876 made by the AO on account of closing stock. The assessee initially filed an e-return on 31/03/2012 declaring a total income of ?3,29,61,000, which was later revised on 29/03/2013 to declare a total income of ?17,81,124. The AO called for an explanation for the significant difference between the original and revised returns, which was not provided during the assessment proceedings. Consequently, the AO based the assessment on the original return.

During the appellate proceedings, the CIT(A) considered the remand report wherein the AO acknowledged the revised return as correct. However, the CIT(A) dismissed the appeal, noting the absence of a valid revised return and the lack of explanation for the drastic reduction in total income. The CIT(A) highlighted discrepancies in the closing stock valuation between the original and revised returns, emphasizing the need for supporting bills, which the appellant failed to provide adequately.

After reviewing the material and considering the remand report, the Tribunal observed that the original return contained inadvertent errors in stock figures, leading to an inflated net profit. The revised return, supported by the tax audit report and audited financial accounts, correctly rectified this mistake. The Tribunal, therefore, directed the AO to delete the addition made on account of closing stock, allowing this ground of appeal in favor of the assessee.

Issue 2: Ad Hoc Disallowance of Expenses

The second issue concerns the confirmation of an ad hoc disallowance of ?9,29,167. During assessment proceedings, the AO requested detailed information on major expenses exceeding ?50,000, which the assessee did not provide. Consequently, the AO disallowed 20% of the total expenses, amounting to ?2,40,39,080.

Upon appeal, the CIT(A) restricted this disallowance to ?9,29,167 based on a remand report. The report indicated that certain expenses, such as traveling and miscellaneous expenses, were not fully supported by vouchers/bills, justifying a partial disallowance.

The Tribunal, after reviewing the orders and remand report, noted that the disallowance was ad hoc and lacked specific reasons or findings that the expenses were not incurred for business purposes. The Tribunal decided to restrict the disallowance to 10% of miscellaneous expenses and 5% of labor expenses, gifts to parties, and traveling expenses, providing partial relief to the assessee. Consequently, the disallowance was reduced, and this ground of appeal was partly allowed.

Conclusion:

The Tribunal allowed the appeal concerning the addition on account of closing stock and partly allowed the appeal regarding the ad hoc disallowance of expenses. The final judgment directed appropriate adjustments to the assessed income, providing relief to the assessee.