2023 (2) TMI 967 - AT - Income Tax

Undisclosed investment in stock of brass vessels and utensils u/s.69 - As per CIT-A AO is erred in making further additions towards valuation of closing stock when the assessee has already offered additional income by increasing the value of closing stock as on the date of search - HELD THAT - If you go by figures of closing stock computed by the search parties as on the date of search at Rs. 15 crore and closing stock declared by the assessee in its books of accounts as per the return of income, which was at Rs. 18,68,25,000/-, then there is no doubt with regard to the admission of the assessee that it had declared additional income at Rs. 3.5 crores. The financial statement drawn by the assessee by splitting its trading account into up to the search and from the date of search to the end of the financial year clearly indicates that there is an increase in gross profit for the assessment year in consideration when compared to the previous year after inclusion of additional income of Rs. 3.5 crores to value of closing stock. CIT(A), after considering relevant facts has rightly observed that there is no documentary evidences to disprove the closing stock declared by the assessee as on 31.03.2013 on gross profit percentage, which is almost more than the gross profit declared in the previous financial year, while deleting additions towards value of closing stock. Therefore, no error in the reasons given by the CIT(A) to delete additions made towards undisclosed investment in stock of home appliances and electronics division and thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the revenue. Difference in value of closing stock of gold and jewellery division - Assessee is following weighted average method for valuation of closing stock right from the beginning - HELD THAT - We ourselves do not subscribe to the reasons given by the AO for the simple reason that the Accounting Standard has prescribed two methods for valuation of closing stock, as per which assessee can follow cost or market price whichever is less or weighted average cost method. The only prescribed condition in terms of provisions of section 145 of the Act is that, the assessee had to follow one method consistently without there being any change in method of valuation of closing stock. In this case, the assessee had followed weighted average cost method right from the beginning and has followed very same method for the impugned assessment year, except to the extent of valuation of closing stock as on the date of search for the purpose of declaration of income, where the assessee had followed six months average price and said method is as per the agreement between the assessee and the department. AO cannot change the method which was not recognized method as per the prescribed standards for valuation of closing stock, when the assessee has explained the valuation of closing stock by adopting weighted average cost price method - assessee had also explained the price adopted by the AO on the basis of its purchases as per which substantial part of purchases related to worn out jewellery from customers, which is having a different purchase price - AO is completely erred in substituting its own method of six months average price in place of weighted average cost method followed by the assessee to arrive at a closing stock valuation as on 31.03.2013. Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition towards undisclosed investment in stock of brass vessels and utensils under Section 69 of the Income Tax Act.
2. Deletion of addition towards undervaluation of closing stock of gold and jewellery division.

Detailed Analysis:

1. Deletion of Addition towards Undisclosed Investment in Stock of Brass Vessels and Utensils under Section 69 of the Income Tax Act:

The Revenue challenged the deletion of Rs. 3.5 crores added by the Assessing Officer (AO) as undisclosed investment in stock of brass vessels and utensils. During a search action under Section 132 of the Income Tax Act, excess stock of 22,833.72 grams of gold jewellery was found, and the managing partner admitted to an undisclosed income of Rs. 6,00,40,077/-. Additionally, a difference in the closing stock of electronics, home appliances, and metal wares was noted, leading to an offer of Rs. 3.5 crores as undisclosed income. However, the assessee did not include this additional income in the return filed, prompting the AO to make a separate addition of Rs. 3.5 crores under Section 69.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, reasoning that the assessee had already included the additional income in the closing stock value as on the date of the search. The Tribunal upheld the CIT(A)'s decision, noting that the AO's analysis was based on assumptions and ignored the explanation provided by the assessee. The Tribunal found that the assessee had indeed included the additional income towards the difference in the stock value in the financial statements, and the gross profit rate was consistent with previous years.

2. Deletion of Addition towards Undervaluation of Closing Stock of Gold and Jewellery Division:

The Revenue contested the deletion of Rs. 5,37,29,886/- added by the AO for undervaluation of closing stock. The assessee had valued the closing stock using the weighted average cost method, while the AO used the six-month average purchase price method, resulting in a higher valuation. The AO argued that the assessee's method led to a distorted profit figure and thus revalued the closing stock.

The CIT(A) disagreed with the AO's method, stating that the assessee had consistently used the weighted average cost method, which is an accepted accounting practice. The CIT(A) noted that the valuation method used during the search was a special case and should not be imposed for successive years. The Tribunal supported the CIT(A)'s view, emphasizing that the AO's method was not recognized by accounting standards and that the assessee's consistent use of the weighted average cost method was appropriate. The Tribunal concluded that the AO erred in substituting the assessee's method with an unrecognized one and upheld the CIT(A)'s deletion of the addition.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions to delete the additions made by the AO towards undisclosed investment in stock of brass vessels and utensils and towards undervaluation of closing stock of gold and jewellery division. The Tribunal found that the assessee had correctly included the additional income in the financial statements and consistently followed the weighted average cost method for stock valuation.