2020 (6) TMI 204 - AT - Income Tax

Addition on account of over valuation of opening and closing stock - HELD THAT - If the assessee has overvalued its closing stock of the earlier assessment year which suggests that amount of profit was increased by that amount or the loss was decreased by the same amount of that assessment year. As such the effect of the closing stock of the earlier assessment year has already been given effect in that particular year which cannot be challenged in the year under consideration. The assessee before the CIT (A) has contended that it has valued its closing stock at the market rate being lower than the cost as per the Accounting Standard 2 notified under the Companies Act, 1956. The assessee in this regard has also filed valuation report of its closing stock as on 31 March 2012 which is placed on pages 101 to 104 of the paper book which was also available before the learned authorities below. But none of the authority has pointed out any defect in such valuation report. We are not convinced with the finding of the authorities below. Accordingly, we set aside the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Addition on account of under valuation of closing stock of Yarn - HELD THAT - All the necessary details were available before the authorities below and none of the authorities have pointed out any defect in such details. Besides the above, it is the established practice that the opening stock of one year becomes the closing stock of another year. On this reasoning, we find that there is no impact on the income of the assessee over a period of time. Assuming, the assessee has shown less value of the closing stock in the year under consideration which will eventually become the opening stock of the subsequent year at the lesser value having no impact on the income of the assessee. We also note that none of the authorities below have given direction to revise the value of the opening stock of the subsequent year. Thus in the absence of such direction, addition made for the year under consideration will again be taxed in the subsequent assessment year which is not desirable as the same income should not be taxed twice under the provisions of the Act. In view of the above we are not convinced with the finding of the authorities below - Direct the AO to delete the addition. Understatement of stock or unrecorded sale - HELD THAT - Onus lies on the assessee to justify based on the documentary evidence that the quantity of the sales return has been included in the stock register. But the assessee failed to justify the same before the authorities below including during the remand proceedings. At the time of hearing before us, a specific query was raised to the learned AR for the assessee to show us from the documentary evidence that the assessee has accounted for the inventory of the sales return in the stock register. But the learned AR failed to furnish any detail in support of his contention. Also perused the relevant pages of the paper book of the stock register but note that there was no such entry for the quantity of the sales return shown by the assessee. In the absence of documentary evidence and after considering the concurrent finding of the authorities below, we uphold the addition made by them (lower authorities). Accordingly, we dismiss the ground of appeal raised by the assessee. Disallowances on account of shortage of stock - losses in the production process but failed to file the supporting evidence - AO disregarded the loss claimed by the assessee - HELD THAT - Onus lies on the assessee to justify based on the documentary evidence that it has incurred the quantity loss during the manufacturing process. But the assessee has failed to justify the same before the authorities below including during the remand proceedings. At the time of hearing before us, assessee failed to show us from the documentary evidence that the assessee has incurred such loss in the manufacturing process. Thus in the absence of documentary evidence and after considering the concurrent finding of the authorities below, we uphold the addition made by them (lower authorities). Accordingly, we dismiss the ground of appeal raised by the assessee. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. See case of DCIT vs. JSW Limited 2020 (5) TMI 359 - ITAT MUMBAI

Issues Involved:
1. Overvaluation of opening and closing stock.
2. Undervaluation of closing stock of Yarn.
3. Understatement of closing stock or unrecorded sales.
4. Disallowance on account of shortage of stock.

Detailed Analysis:

1. Overvaluation of Opening and Closing Stock:
The assessee contested the addition of ?70,45,751/- made by the AO for overvaluation of opening and closing stock. The AO based this addition on the auditor's report, which noted overvaluation in both the current and preceding years, resulting in a decreased loss for the current year. The CIT(A) upheld the AO's decision, noting the assessee's failure to provide documentary evidence. However, the Tribunal found that the opening stock could not be revised without altering the closing stock of the preceding year, which the Revenue had not done. Additionally, the Tribunal noted that the valuation complied with Accounting Standard 2 and found no defects in the valuation report provided by the assessee. Consequently, the Tribunal directed the AO to delete the addition, allowing the assessee's appeal on this ground.

2. Undervaluation of Closing Stock of Yarn:
The AO observed a discrepancy in the valuation of closing stock of Yarn, leading to an addition of ?73,62,762/-. The assessee argued that the stock included various categories and provided a fresh inventory register. The CIT(A) upheld the AO's addition, citing a lack of supporting evidence from the assessee. The Tribunal, however, found that the AO had not considered the opening value of the yarn stock and that the valuation complied with accounting standards. The Tribunal also noted that the mismatch in stock quantity was explained by the different categories of stock maintained by the assessee. Given these findings, the Tribunal directed the AO to delete the addition, allowing the assessee's appeal on this ground.

3. Understatement of Closing Stock or Unrecorded Sales:
The assessee had debited its sales account for ?26,38,836/- due to sales returns but failed to add the returned goods back to the inventory. The AO added this amount to the total income, and the CIT(A) upheld this addition, noting the assessee's failure to provide supporting evidence. The Tribunal also upheld the addition, emphasizing the assessee's inability to demonstrate that the sales return quantity was accounted for in the stock register. Consequently, the Tribunal dismissed the assessee's appeal on this ground.

4. Disallowance on Account of Shortage of Stock:
The assessee claimed a shortage of finished goods valued at ?98,767/- due to minor variations in measurement. The AO and CIT(A) both rejected this claim, citing the assessee's failure to provide evidence. The Tribunal agreed, noting the lack of documentary evidence to support the claimed loss. As a result, the Tribunal upheld the addition and dismissed the assessee's appeal on this ground.

Conclusion:
The Tribunal allowed the assessee's appeal on the grounds of overvaluation of opening and closing stock and undervaluation of closing stock of Yarn. However, it dismissed the appeals concerning the understatement of closing stock or unrecorded sales and the disallowance on account of shortage of stock. The final order was pronounced in open court on 01-06-2020.

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