2022 (3) TMI 1138 - AT - Income Tax

Addition on account of under valuation of stock - addition made by the AO by increasing the cost of closing stock - the sale price declared by the assessee was determined after considering the DEPB effect whereas the assessee has not considered the DEPB effect while calculating the closing stock - AO made the addition which was subsequently deleted by the CIT(A), on the reasoning that there was no nexus between the valuation of closing stock vis- -vis the benefit received by the assessee in the DEPB - HELD THAT - It is the established practice that the closing stock of one year becomes the opening stock of the subsequent year. Accordingly if the AO increases the value of closing stock for the year under consideration then it is the duty to give the corresponding effect in the opening value of the closing stock. Thus there will not be any impact on the income declared by the assessee except the increase in the amount of income in one year and decrease in the amount of income in the subsequent year. On this reasoning as well, we are also not convinced with the findings of the AO - we are not inclined to interfere in the order of the Ld.CIT(A). Hence the ground of appeal of the Revenue is dismissed. Addition on account of lower gross profit - HELD THAT - AO has increased the amount of gross profit by 0.15% on the reasoning that the assessee was not maintaining the record with respect to the wastage generated in the processing of materials. The gross profit depends on various facts such as sales price, cost of purchase and other direct expenses. In the given case the AO has not doubted either on the sales price or the purchases vis- -vis stock maintained by the assessee. Therefore, in our considered view the amount of gross profit cannot be disturbed merely on the reasoning that there was a decline in the gross profit ratio in the year under consideration in comparison to the earlier year. Accordingly, we do not find any infirmity in the order passed by the Ld. CIT(A) and we, therefore, confirm the same. Hence, the ground of appeal of the Revenue is hereby dismissed.

Summary

Issues involved:
1. Valuation of closing stock without considering DEPB benefit.
2. Restriction of addition on account of lower gross profit.

Issue 1: Valuation of closing stock without considering DEPB benefit:
The Revenue challenged the deletion of an addition made by the AO for undervaluation of stock by ?2,28,68,440 due to the assessee not factoring in the DEPB benefit while valuing closing stock. The Ld. CIT(A) deleted the addition, emphasizing that DEPB proceeds offset costs to remain competitive internationally, and valuing stock at market price is warranted only if it's lower than cost. The Tribunal upheld the CIT(A)'s decision, stating DEPB doesn't affect closing stock's cost and noting the consistent valuation method followed by the assessee. The Tribunal dismissed the Revenue's appeal, emphasizing the lack of nexus between DEPB benefit and stock valuation, and the established valuation method.

Issue 2: Restriction of addition on account of lower gross profit:
The Revenue contested the CIT(A)'s restriction of an addition for lower gross profit by the AO from ?36,34,633 to ?3,00,000. The AO increased the gross profit due to a decline in yield and lack of wastage records. The CIT(A) restricted the addition, citing lack of evidence for profit suppression and arbitrary estimation by the AO. The Tribunal upheld the CIT(A)'s decision, noting no doubts on sales price or purchases and dismissing the AO's reasoning for increasing gross profit. The Tribunal confirmed the CIT(A)'s order, emphasizing the need for concrete evidence and lack of infirmity in the decision.

In conclusion, the ITAT Rajkot upheld the CIT(A)'s decisions in both issues, emphasizing the importance of consistent valuation methods and concrete evidence in assessing tax liabilities. The appeals filed by the Revenue were dismissed, and the Tribunal confirmed the CIT(A)'s orders.