2022 (5) TMI 835 - AT - Income Tax

Addition u/s 69 - difference between opening stock of relevant year closing stock of preceding financial year - NP estimation - arguments against addition overlooking that both the years i.e. impugned year preceding year books of accounts of assessee were audited u/s. 44AB - HELD THAT - As during the assessment proceedings, at the very first instance, the assessee explained the cause of said inflation of opening stock and submitted that the assessee wanted to take loans from banks to repay the loan amount taken from SIDBI and just to satisfy the bank officials, he made such inflation in the opening stock without any malfunction. Therefore, we are satisfied that the assessee at the very first instance, told truth to the Revenue Authorities without any agitation or resistance. During the first appeal proceedings, the assessee submitted a detailed submission explaining the facts and circumstances and compelling situation to show higher figure of opening stock as on 01.04.2013. The assessee also submitted a chart there under showing GP and NP rates. On perusal of said submissions and the chart showing sales, GP and NP clearly observe that the net profit shown by the assessee is 1.44% of turnover which is lesser than the average NP rate of immediately preceding two years No addition has been made by the Assessing Officer on account of low NP rate, but he took up the amount of difference between the closing stock as on 31.03.2013 and opening stock as on 01.04.2013 to invoke the provisions of section 69 - merely because the assessee has shown higher figure of opening stock in comparison to the closing stock shown at the end of immediately preceding financial year, the Assessing Officer is not entitled to make any addition only on the basis of two figures without bringing out any adverse or positive material on record to show that the assessee actually made investment in the stock which was not shown as on 31.03.2013 including the closing stock but shown inclusive of opening stock as on 01.04.2013 - Assessee has shown low NP rate in comparison to immediately preceding assessment year which raises a situation of leakage of revenue. We reach to a logical conclusion that the Assessing Officer was not correct and justified in making addition in the hands of assessee merely on the basis of difference in the two figures, i.e., closing stock as on 31.03.2013 and opening stock as on 01.04.2013 - addition is required to be made in the hands of assessee on account of low NP rate. Therefore, the Assessing Officer is directed to make addition in the hands of assessee taking NP rate of total sale turnover as 2% of sales/turnover. The Assessing Officer is directed to recalculate the addition accordingly.

Summary

Issues:
1. Addition of Rs.39,50,000 due to difference in stock valuation between two financial years.
2. Challenge to the addition based on audited accounts under section 44AB.
3. Allegation of manipulation in stock figures by the revenue authorities.
4. Discrepancy in net profit rate and request for adjustment.

Analysis:
1. The appeal challenged the addition of Rs.39,50,000 due to the variance in stock valuation between the relevant and preceding financial years. The assessee argued that the inflation in opening stock was to secure bank loans and not for tax evasion purposes. The Tribunal noted the initial explanation provided by the assessee regarding the stock valuation difference and found it to be truthful and reasonable.

2. The assessee contended that both the relevant and preceding years' accounts were audited under section 44AB, highlighting compliance with legal requirements. The Tribunal observed that the Assessing Officer's addition solely based on stock valuation differences was not justified without concrete evidence of undisclosed investment.

3. The revenue authorities alleged manipulation in stock figures to inflate profits. The Tribunal examined the submissions made during the first appeal, where the assessee explained the reasons for the discrepancy in stock valuation. It was noted that the net profit rate was lower than the average of the preceding years, raising concerns of revenue leakage.

4. The Tribunal acknowledged the discrepancy in net profit rate and directed the Assessing Officer to recalculate the addition based on a 2% net profit rate of total sales/turnover to address potential revenue leakage. While ruling against the addition solely based on stock valuation differences, the Tribunal partially allowed the appeal, emphasizing the need to ensure revenue integrity.

This judgment underscores the importance of substantiating additions with concrete evidence and considering all aspects of financial discrepancies to maintain tax compliance and prevent revenue leakages.