2020 (10) TMI 239 - AT - Income Tax

Addition on account of difference in stock - HELD THAT - The books of accounts at any point of time were not rejected by the AO. There was no denial by the AO that stock was lying outside factory premises and cold storages. AO has not pointed out any defect in the reconciled stock. CIT(A) has also not taken the cognizance of proper GP rate applied by the CIT(A). AO as well as the CIT(A) has not considered the actual material in consonance with the physical stock. The assessee had justified its difference through the documents which was at no point of time doubted by any of the Revenue Authorities. CIT(A) was not justified in directing the AO for making an addition on account of difference in stock for sustaining the same for ₹ 10,66,350/-. The appeal of the assessee is allowed.

Summary

Issues:
Appeal against CIT(A) order for Assessment Year 2014-15 - Addition of profit from undisclosed sale - Reconciliation of stock found during search - Rejection of books of accounts by Assessing Officer - GP rate discrepancy - Justification of difference in stock.

Analysis:
The appeal was filed against the CIT(A) order for the Assessment Year 2014-15, challenging the addition of profit from an undisclosed sale. The Assessing Officer had conducted a search and seizure under section 132 of the Income Tax Act, 1961, leading to the issuance of notices and assessment of income. The assessee disputed the addition of Rs. 10,66,350 related to the difference in stock found during the search compared to the books of accounts.

During the proceedings, the assessee explained that the discrepancy in stock was due to certain stock lying outside factory premises and cold storages, which were not considered during the physical verification by the Assessing Officer. The assessee provided a reconciliation of the stock found with the stock as per the register, showing a higher amount in the books of accounts. The Assessing Officer did not reject the books of accounts and failed to acknowledge the stock outside the designated premises.

The Authorized Representative (AR) argued that the Assessing Officer and the CIT(A) did not consider the relevant material provided by the assessee, including the justification for the difference in stock. The AR presented an illustration highlighting the impact on the Gross Profit (GP) rate if the Assessing Officer's version was followed, emphasizing the importance of considering all material facts.

After hearing both parties and examining the records, it was noted that the Assessing Officer and the CIT(A) did not take into account the actual material in line with the physical stock found during the search. The CIT(A) was criticized for directing the Assessing Officer to make an addition based on the difference in stock without proper justification. Consequently, the appeal of the assessee was allowed, and the addition of Rs. 10,66,350 was set aside.

In conclusion, the Tribunal ruled in favor of the assessee, highlighting the importance of considering all relevant material and justifications provided during assessments to avoid arbitrary decisions and uphold the principles of natural justice.