2021 (12) TMI 1207 - AT - Income Tax

Unexplained investment in closing stock u/s. 69 - difference in the quantity of closing stock as per software - CIT(A) deleted the additions - HELD THAT - As when there is no difference in the quantity of closing stock as per software, addition cannot be made towards unexplained investment in stock merely because there is difference in price of certain items in Jilaba software, more particularly when assessee has explained such difference in price - CIT(A) in his appellate order for AY 2012-13 had given a categorical finding that all the showrooms of the assessee were subjected to search and all the stock in various showrooms were valued by the departmental value and hence all the stock on the date of search was in the possession of the department and was subjected to valuation by the departmental valuer. Any discrepancy found as a result of this exercise was offered as additional income in its return of income for AY 2015-16 by the assessee. Assessee had also submitted a letter from the Jilaba manufacturer which clarified that the value of purchase/stock cannot be obtained from Jilaba data as purchases were not entered in the Jilaba system. As during the assessment proceedings, the assessee had also submitted a letter from the Jilaba which clarified that if column is used to find the value of stock, then it may be wrong as the is only an approximate value calculated based on the gold rate, wastage/making charges given at the time of tagging. While selling it, there may be a discount on wastage/making charges and also the gold rate may change. So, we cannot consider the column for the calculation of stock value. Apart from that, it is not calculated based on the purchase cost. So, we cannot consider it as stock value. AO had made addition only on the basis of the addition made by the then AO, as the assessee could not give details of stock as per Jilaba software.AO has not brought on record any defects in the books of accounts nor has pointed out any unrecorded sales/purchases. We further, found that during the year under consideration also the assessee has obtained bank loan against the stock and the said stock has been verified by the bank by appointing independent auditors. AR has also pointed out that the AO has misrepresented the fact by mentioning that Assessee Company stated that till implementation of GST, the 'Jilaba' software was in use. - after introduction of GST, the said software was removed from all the systems. We also find force in the argument of AR that once the said software was stopped being used after the search due to its shortcomings and was also removed from all the systems, it was not possible for the assessee to give required details of stock as per Jilaba software - we found that the ld. CIT(A) has passed a well-reasoned and speaking order discussing all the facts and circumstances of the case, therefore, we do not find any reason to interfere or to deviate from the findings so recorded by the ld. CIT(A), accordingly, we uphold the same.- Decided against revenue.

Summary

Issues Involved:
1. Deletion of the addition of ?33,18,94,091/- as unexplained investment in closing stock.
2. Empowerment of AO to make additions under Section 69 without rejecting books of account.
3. Validity of AO's findings regarding the Jilaba software's representation of purchase price.
4. Submission of a letter from Jilaba manufacturer clarifying stock value.
5. Basis of stock valuation by AO and its evidentiary support.
6. Admission of additional evidence by CIT(A) in violation of Rule 46A.
7. Rectification of inadvertent credit of ?5,14,29,709/- for A.Y. 2015-16.
8. Reliance on ITAT order for A.Y. 2015-16 and pending appeal in Bombay High Court.
9. Adjudication of appeal pending decision of jurisdictional High Court.

Issue-wise Detailed Analysis:

1. Deletion of the addition of ?33,18,94,091/- as unexplained investment in closing stock:
The Revenue appealed against the CIT(A)'s deletion of the addition made by the AO. The AO had added ?33,18,94,091/- as unexplained investment in closing stock based on the Jilaba software data. The CIT(A) and ITAT found that the AO's addition was based on assumptions and not supported by discrepancies in the actual stock quantity. The ITAT upheld the CIT(A)'s decision, noting that the AO failed to point out any defects in the audited books of accounts or any unrecorded sales/purchases. The Jilaba software's data was deemed unreliable for stock valuation as it was primarily used for inventory management and sales facilitation, not for accurate purchase cost representation.

2. Empowerment of AO to make additions under Section 69 without rejecting books of account:
The CIT(A) held that the AO is not empowered to make additions under Section 69 without rejecting the books of account. This was supported by the fact that the AO did not find any defects in the assessee's books of accounts, which were duly audited and maintained in Tally ERP software. The ITAT concurred with this view, emphasizing that the AO cannot make additions based on assumptions without rejecting the books of account.

3. Validity of AO's findings regarding the Jilaba software's representation of purchase price:
The AO's findings that the Jilaba software's sale value column represented the purchase price were refuted by the assessee and the Jilaba software manufacturer. The CIT(A) and ITAT found that the sale value in the Jilaba software was not the purchase price but an approximate value subject to discounts and daily price changes. The AO's interpretation was deemed erroneous, and the addition based on this interpretation was deleted.

4. Submission of a letter from Jilaba manufacturer clarifying stock value:
The assessee submitted a letter from the Jilaba software manufacturer, clarifying that the value in the software was an approximate value based on gold rates and making charges at the time of tagging, not the purchase cost. This letter was considered by the CIT(A) and ITAT, supporting the deletion of the addition made by the AO.

5. Basis of stock valuation by AO and its evidentiary support:
The AO's stock valuation was based on the Jilaba software data, which was not reliable for accurate stock valuation. The CIT(A) and ITAT found that the AO did not provide any evidence of quantitative discrepancies in the stock or any unrecorded sales/purchases. The addition was based on assumptions and not supported by evidence, leading to its deletion.

6. Admission of additional evidence by CIT(A) in violation of Rule 46A:
The Revenue contended that the CIT(A) admitted additional evidence in violation of Rule 46A. However, the ITAT found that the CIT(A) had considered all relevant facts and evidence, including the letter from the Jilaba manufacturer, which was submitted during the assessment proceedings. There was no violation of Rule 46A.

7. Rectification of inadvertent credit of ?5,14,29,709/- for A.Y. 2015-16:
The AO had given credit for an addition made in A.Y. 2015-16, which was already deleted by the ITAT. The CIT(A) and ITAT found that this credit was not justified as the addition had been deleted, and the AO's action was based on incorrect assumptions.

8. Reliance on ITAT order for A.Y. 2015-16 and pending appeal in Bombay High Court:
The Revenue argued that the CIT(A) should not have relied on the ITAT order for A.Y. 2015-16 as the Department had filed an appeal in the Bombay High Court. The ITAT found that the CIT(A)'s reliance on the ITAT order was justified as it was the prevailing decision, and the pending appeal did not affect its applicability.

9. Adjudication of appeal pending decision of jurisdictional High Court:
The Revenue contended that the CIT(A) should have kept the adjudication of the appeal in abeyance pending the decision of the jurisdictional High Court. The ITAT found that the CIT(A) was correct in proceeding with the appeal based on the existing ITAT order, and there was no need to keep the adjudication in abeyance.

Conclusion:
The ITAT upheld the CIT(A)'s order, deleting the addition of ?33,18,94,091/- made by the AO as unexplained investment in closing stock. The AO's addition was based on incorrect assumptions and not supported by evidence. The books of accounts were duly audited, and no defects were found. The Jilaba software data was not reliable for stock valuation, and the addition was rightly deleted by the CIT(A). The appeal of the Revenue was dismissed.